Plagiarism Detector - Originality: Miroljub Hadzic

Plagiarism Detector - Originality
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[hs:ms:ss]:
28.2.2015 14:00:05
Zaed Mohamed PhD February2015(2).doc
H:\Doktorske\PhD Zaed Mohamed\Zaed Mohamed PhD
February2015(2).doc
79517
00:04:50
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<>
Referenced 56% / Linked 0%
Original - 39% / 5% - Plagiarism
Processed Resources List: [click below to open] Processed Ok:

228 Failed: 48
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Plagiarism\Reference\Original Distribution Graph:

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Detailed Document Analysis:

SINGIDUNUM UNIVERSITY Evaluation of turning conventional banks to
Islamic banks phenomenon Study the phenomenon on the Libyan banks
which intend to turn to Islamic banking Mohamed Muftah Ammar Zaed
Belgrade, 2015 Content Content 2 Introduction 4 Chapter 1: The origin of
Islamic banks and their characteristics 10 The concept of Islamic and
conventional banks 13 The characteristics of Islamic banks 17 Typical
products and services for Islamic banks 27 The development of Islamic
banks 39 Chapter 2: The phenomenon of turning conventional banks to
Islamic banking 46 The concept of transformation to Islamic banking 46
Procedures relating to Participatory Financing (PF) stocks and shares 63
Usury and interest 71 Riba 77 The operational costs of a bank 81 The
Libyaian model 82 The Pakistani model 82 The Siddiqi model 83
Educational loans 88 Housing loans 89 Investment and finance 95
Banking and loans 97 The Grameen bank movement 100 Private lending
101 Charity 102 Lending and borrowing Islamic approach 103
Government expenditure 110 Government bonds and treasury bills 111
Chapter 3: The origin of the phenomenon of turning conventional banks
to Islamic in some Libyan banks 116 The origins and evolution in Libyan
banking sector 116 Origin of the Islamic banking business in traditional
Libyan banks 133 Chapter 4: Principles and approaches to the transition
146 Principles to the transition 146 Prepare a strategy plan to transition
148 Coordinate with other risk services within the Bank 149 Prepare
plans to train workers 150 Islamic banks need to be gradient in the
application 152 The banks should be continuous and irreversible 155
Types and approaches of transformation 156 Chapter 5: The economists
views on the phenomenon of transformation 158 Islamic banking set to

expand 165 Opponents of Islamic banking 168 Chapter 6: The effects
and problems of the transformation 177 The effects of the phenomenon
of transformation 177 Improving the Quality of Services to Clients 178
Obstacles related to human resources 186 Obstacles related to
development of banking products 187 Proposal of a plan to convert a
traditional bank branch to the Islamic branch 189 Chapter 7: The field
study 197 Field design 197 Personal interviews 198 Methods of research
201 Data collection tool (statistical analysis) 201 Field study sample 203
Statistical methods 204 1. The arithmetic mean 204 2. Standard
Deviation 205 3. Test (t) 205 4. Cronbach alpha test ( ) to measure the
stability 206 5. Chi square test of independence 206 6. Simple linear
regression 207 Chapter 8: Conclusions and recommendations 208
Results of the study 208 Summary tables of the study 213 Analysis of
personal data Bank staff 213 Analysis of questionnaires 214 Conclusions
228 Recommendations 230 References 232 Introduction The advisory
opinion of the Islamic Research Academy in 1965 (which confirmed that
the bank interest of Usury is forbidden) was the catalyst for the
establishment of several Islamic banks and financial institutions that do
not benefit from that banking deal. Some people claim that the first bank
to provide its foundation in the law was Nasser Social Bank in Egypt, in
1971. Similar thing happened with the Islamic Bank of Dubai (United
Arab Emirates), which was established in 1975. It coincided with the
efforts of the Islamic Conference Organization in Jeddah (Saudi Arabia).
According to the statistics issued by the General Council for Islamic
banks at the end of 2004, the spread of this phenomenon in the Islamic
world reached the number of 267 Islamic banks, so to speak - over 48
countries in 5 continents. There are three countries that have turned the
entire apparatus banking mechanisms to work. These are: Pakistan,
Sudan and Libya.
Modern commercial banking is based on interest which is against the
Sharia (Islamic law) hence for all the believers in Allah (God) dealings
with these institutions do not suit well. Over the time role assumed by the
banking sector has become vital for the growth and development of
economies and societies (a jointly shared goal of humanity). A common
man who is believer of any revealed religion including Judaism,
Christianity and Islam is very much in a state of confusion. On one hand
is the very cherishing dream of development while on the other hand is
faith. Furthermore there is a reasonable number of experts who think and
propagate that prohibited riba means Usury (additional amount charged
on consumption loans) and not interest (additional amount charged on
production loans) being charged by modern commercial banks.
%4
Words#: 3790
In the financial sector banking services provided by the banks in Lybia

can be summarized as: The opening of current accounts and savings
accounts, fixed accounts. Opening of documentary credits and the
acceptance of foreign documents collection. The issuance of letters of
domestic security and foreign policy. Transfers to foreign nationals and
non-residents. Providing mortgage loans and loans and the granting of
social credit facilities. Contribute to the financing of development
projects and strategy. Provide advice and technical and financial studies
for clients wishing to obtain. Financing for investment projects and small
and medium enterprises. Sale and purchase of foreign currency of all
kinds. Card-issuing bank. Also contributed to the economic
development bank to finance some public projects, i.e. Great Man Made
River Project, draft residential lending, Abu Kemah the petrochemical
industry, National Council of Real Estate Investments, a number of
airlines as well as real estate investment companies. The phenomenon
of turning conventional banks to Islamic banking has been accompanied
by the phenomenon of the spread of Islamic banks in the second half of
this century. It started in Egypt in 1980, when the Bank of Egypt's first
Islamic branch was established in the area of Al-Azhar in Cairo. The
same bank reached the number of 29 branches later. According to the
statistics of Central Bank of Egypt on 30/8/2004, the total number of
branches for Islamic transactions of conventional banks in Egypt was 54,
while 12 banks still follow the traditional conventional banking. During
last years, especially with starting of financial crisis in 2008, this
phenomenon spread to many Arabic, Islamic and also Western
countries. We have acquired the phenomenon of traditional banks
offering Islamic banking on interest in a wide range of professional
economists, bankers, legal and broken up about it between supporters
and opponents. The owner of the phenomenon of the spread of Islamic
banks convening many conferences and seminars, the publication of
many of the references and the scientific literature on the phenomenon
of Islamic banking, but it is no longer a integrated scientific study - as
scientific - dealing with evaluation of the phenomenon of turning
conventional banks to Islamic banking and challenges facing this
phenomenon. Hence, the choice of the researcher of this phenomenon is
to be the subject of his research. The importance of study - the
phenomenon of turning conventional banks to Islamic banks is: To reach
a scientific explanation, find out the reasons that led to the rapid growth
of this phenomenon and the ways of the entire process of transformation
and To identify the pros and cons that will contribute to the study and
further on maximizing the pros and correcting the cons. Started some
conventional banks in Libya to provide Islamic banking services, due to
the lack of in-depth studies in this area, the researcher will attempt to
assess the transformation process. The problem of the study - the
problem with the study is the absence of in-depth study in assessing this
phenomenon, motives of transformation and their implications. The
hypotheses of study are: Expansion of conventional banks which offer
Islamic banking products and the desire of customers to have access to
these products. Based on the hypothesis that the bank owners pay for
the increased demand towards Islamic banking products, more open
banking units specialized in providing Islamic banking products, and to
provide banking products compliant with Islamic Sharia(h). The
multiplicity of motives of the feet of conventional banks to shift to Islamic
banking: based on this hypothesis is that there are differences in the
motives of traditional banks to shift towards Islamic banking, the motives
of nodular and motivations of marketing, different banks have different
motivations, particularly about the motive
shift kidney
towards Islamic banking, and banking products compatible with the
provisions of Islamic Sharia(h). Multiple entrances to the conventional
banks to Islamic Banking from one bank to another: based this
hypothesis on the basis of the absence of specific entries prepared in
advance by bank regulatory agencies or research centers, which strive
every bank in the adoption of the entrance, which he deems appropriate
to achieve its objectives. Exceeded the effects of turning conventional
banks to Islamic banking business decision makers to shift several
parties: based this hypothesis that the provision of Islamic banking at the
Bank traditionally requires the development in a variety of banking
products and the development of the fatwas legitimacy, manuals and
forms, and contracts of employment and the development of skills of
workers and the relationship with the central bank, and reflected the
effects of the shift on the edge of numerous - than makers decision to
switch - within and outside the Bank and the society, such as
shareholders, customers, employees, competitors and others. Objectives
of the study - Due to the lack of Islamic banks in Libya until recently,
studies in this area are rare. Some Libyan conventional banks have
begun recently to switch to Islamic banking. From here the view of the
researcher doing the study to help these banks to identify the measures
are necessary to turn to Islamic banks and thus enter the Islamic banks
to the Libyan arena to contribute to raising the level of dealing with
banks, many of the libyans do not prefer to deal with conventional banks,
considering that Libyan society is an Islamic society Islamic. The
researcher will try to reach the following results: Scientific goals: To study
and evaluate the phenomenon of turning conventional banks to Islamic.
To study the constraints faced by conventional banks at the
transformation to the Islamic. To propose appropriate solutions and

eliminate these constraints. Social goal: In the absence of previous
studies on the phenomenon of turning conventional banks to Islamic
banks, will try to researcher added in this area, and to enable the banks
are willing to shift to the knowledge of Islamic banking measures are
necessary to turn. Approach to the study - The approach will be
supported by: A desktop study: relying on references and scientific
sources, which address the subject of the study. A field study: through a
contact with a number of conventional banks offering Islamic banking
products. The researcher will design a questionnaire to collect
information and conduct personal interviews with a number of officials in
conventional banks that will show Islamic banks activities. - Personal
interviews with a number of workers in the banking and administration
that have been converted to provide Islamic banking service and those
who occupy leadership positions in those departments. - Design a
questionnaire and distribute a selected sample of those responsible for
Islamic banking in conventional banks. Sample of the questionnaire: 1 T he central bank would have to play a leading role in the development
of new financial instruments for the money and capital markets of an
Islamic economy. 2 - Most consumers selected an Islamic bank because
of religious motives. 3 - Islamic banking products will ensure that the
customer will secure long-term financing against fluctuation of interest
rates. 4 - Islamic financial institutions are facing various challenges and
difficulties in which the main and important is the lack of skilled and
trained professionals to fulfil the requirements of this fast growing
industry. 5 - Most important activity of banks is gathering financial
resources and allocates them to different economical parts. 6 Responsible innovation should assist in the transition of the industry from
being legally Sharia compliant, to demonstrating the impact of Sharia
compliant system on individuals and economies. 7 - Retail banking is
changing fast and over 20% of customers in Libya may have already
transitioned from conventional to mostly Islamic banking relationship. 8 Islamic
money market conducts a similar function of meeting the short-term
liquidity needs. Instead of interest, it allows Islamic banks to share
surplus capital on
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profit -sharing basis. 9 - The organization structure must also be

expanded by including a Shariah audit and review to enhance risk
management and compliance. 10 - Despite the numbers of investors
who are chasing Shariah compliant assets, it is not always easy to attract
them unless the business proposition is sound. 11 - Lack of required

development in financial markets forced banks to financial providence in
long and short periods. 12 - The major issues affecting growth of Islamic
finance is the shortage of quality human resources. For programming will
be used the Statistical Package for Social Sciences (SPSS) Limits of the
study - Due to the multiplicity of conventional banks that offer Islamic
banking and spread in the Arab and Islamic countries and Western, it will
only study the experience of some Libyan banks. One or more Libyan
banks will be chosen as the object of study in the field. Plan of the study
Introduction - The general framework of the study, background of the
study, the importance of the study, the reasons for selecting the topic, the
problem of the study, hypotheses of the study and objectives of the
study. Chapter I: The origin of Islamic banks and their characteristics In
this chapter we are going to tell something about concept of conventional
and Islamic banking, characteristics of Islamic banks and their
development. Chapter 2: The phenomenon of turning conventional banks
to Islamic banking In this chapter we are going to tell something about
concept of transformation to Islamic banking, origin and development of
the Islamic banking work in some Arab banks (Libya), about origins and
development of the banking Islamic work in some Western banks in the
field of banks and banking establishments and in the field of Islamic
investment funds. Chapter 3: The origin of the phenomenon of turning
conventional banks to Islamic in some Libyan banks In this chapter we
are going to tell something about concept origins and evolution in Libyan
banking sector and origin of the Islamic banking business in traditional
Libyan banks. Islamic banks all over the world have been facing a
number of challenges, and Libya is no exception. Islamic banks here
have not yet been successful in devising an interest - free mechanism to
place their funds on a short - term basis, and face a similar problem in
financing consumer loans and government deficits. Chapter 4: The
experience of some conventional Libyan banks in the transition to Islamic
banking Some traditional Libyan banks will start an Islamic banking
service before the end of this year and we will discuss the experience of
these banks. The measures in the process of transformation with be
followed, as well as the products that are developed and applied in the
banks. Chapter 5: Principles and approaches to the transition The mile
stone,
in growth and popularity of Islamic Financial Institutions (IFIs), was the
Conference of Foreign Ministers of Muslim countries (1973), where
decision of establishment of Islamic Development Bank (IDB) was taken
place.
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Principles to the transition, by our side of view are: 1 - Prepare a strategy

plan to transition. 2- Coordinate with other units within the Bank. 3Prepare plans to train workers 4- Be gradient in the application 5- The
banks should be continuous and irreversible. -Types of transformation 1 The Complete transformation 2 The Partial transformation - Approaches
to the transition 1- The approaches to the complete transformation of the
banking system units. 2- The approaches to turn the entire Bank to
Islamic banking. 3- The origin of the approach to turning traditional
branches to Islamic branches 4- The approaches to the establishment of
an Islamic feature in conventional branches 5- Entrance to provide
financing and investments using Islamic tools Chapter 6: The
economists views on the phenomenon of transformation (The arguments
of supporters and opponents)
While some analysts attribute the success of Islamic banking simply to
clients' desires that these institutions comply with religious injunctions,
most analysts predict expansion and growth well into the 21st century.
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But, speaking at present about globalization and assimilation of the

Islamic banks by the conventional ones, we consider being too early. As
more and more we hear about Ethical finance in the western world, we
should consider Islamic investments as a potential opportunity to the
conventional financial services. Chapter 7: The field study The area
of the study is the whole Libya where Islamic banks are operating under
the same legal, political, social and economic framework as conventional
banks. In order to make this research study more comprehensive the
author used both primary and secondary sources for collection of
relevant data and required information. The author used interview
method to collect primary data from respective professional bankers.
The author also collected data from secondary source because the
primary data was not sufficient to meet the requirement of
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this study. This chapter content field design, personal interviews with a
number of workers in the banking and administration that have been
converted to provide Islamic banking service and those who occupy
leadership positions in those departments, design of a questionnaire and
distribute a selected sample of those responsible for Islamic banking in
conventional banks, and analysis of the results of the field study. Chapter
8: Conclusions and recommendations This section will discuss the
experience of five Libyan Islamic
banks in achieving their objectives and measure the extent of their
success in transformation from conventional banks. This will be
accomplished through a study of their closing accounts and
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annual reports. In this section, we shall attempt to present important

evidence. Also we are going to present results of the study and test
hypotheses, and we are going to propose a plan to convert a traditional
bank branch to the Islamic branch. References - Literature review
Chapter 1: The origin of Islamic banks and their characteristics The
concept of Islamic and conventional banks Banks play an important role
in economic life, they are the basis of the modern economic system and
international trade cannot be conceived in isolation from it. But the
Libyan people and Islamic world people often believe prohibiting usury,
and it became a great embarrassment in dealing with banks because of
their dependence on an interest-based system. Here comes the role of
Islamic banks to satisfy the desire of Muslims from the Arab and Muslim
world and the rest of the world. However, Islamic banks, and that was the
purpose, they have a developmental purposes, commercial banks are
unable to do, they have a greater capacity to collect the savings of
middle-and low-income groups, and religious believers, poor and rich.
The Islamic banks in the direct investment, play an important role in the
development process,thea are of major importance for developing
countries. This comes to examine the importance and role of Islamic
banks in Libya in development and investment operations and
investment. It is known that Islamic banks played in financing economic
development even in theory. They did these banks turn or not? Or does it
work only for profit and do not differ in their role on the role of
commercial banks. The problem appears to be suffering from poor
investment financing clearly made it difficult to continue the process of
economic development, and has twice the funding for projects in various
economic fields in terms of the size of projects, and to intensify work
(Labour Intensive), as an alternative to the use of modern technology
based on capital intensity (Capital Intensive). Several studies have

pointed to the approval of projects funding often self-financing or
financed family and rarely to banks for financing. Hence, the problem
and reason for choosing the topic, why not banks and Islamic banks,
particularly in the specialized investment financing and long-term
investments that support economic development in Libya? The
continuous suffering faced in providing funds for development and
development was among the reasons for the search, the substance of
this problem. The Islamic Bank with all its sophisticated banking basics,
using the latest methods and techniques to facilitate trade, stimulate
investment, mobilization of domestic resources and promote economic
and social development is contrary to the Shariah. Since we live in a
Muslim Arab country, investment in financial and investment company
and the Bank are Islamically, is feasible from economic, social, and
national. The return on investment in such facilities is expected to be
high, so that these institutions attract a certain segment of people not to
deal with the regular banking institutions for fear of eating usury or give
him, because religious motivation. The investors to invest in Islamic
banks and investment companies and Islamic finance, there is no doubt
that bring them the advantages of financial return and profit and
beneficence, such investment will reduce the production cost for the
customers of these institutions, thereby lowering prices and increasing
investment, reducing unemployment, and consequently the well-being of
the community, but the investment in these projects will undoubtedly
require high administrative efficiencies so that they can manage these
facilities direct investments into projects feasible benefit and profit of
these enterprises and projects that use.
Islamic banking is banking based on Islamic law Shariah. It follows the
Shariah, called fiqh muamalat (Islamic rules on transactions). The rules
and practices of fiqh muamalat came from the Quran and the Sunnah,
and other secondary sources of Islamic law such as opinions collectively
agreed among Shariah scholars (ijma), analogy (qiyas) and personal
reasoning (ijtihad). Islamic
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banking (or participant banking) is banking or banking activity

that is consistent with the principles of Shariah law and its practical
application through the development of Islamic economics. Shariah
prohibits the fixed or floating payment or acceptance of specific interest
or fees (known as riba, or usury) for loans of money. Investing in
businesses that provide goods or services considered contrary to Islamic
principles is also haraam ("sinful and prohibited"). Although
these principles have been applied in varying degrees by historical

Islamic economies due to lack of Islamic practice, only in the late 20th
century were a number of Islamic banks formed to apply these principles
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to private or semi-private commercial institutions within the Muslim

community. To add the word
"Islamic"
to the financial institution engaged in traditional banks is not just a word.
And, where is Islamic banking fundamentals, principles and
mechanisms, providing the touch controls. Islamic laws differ
from the foundations of the traditional banking system. Islam is the
religion of faith and worship, transactions and morality in one and
indivisible, God has created. To worship him, and mocked him in the
Earth, and his ways of worship in the broad sense, and set him. It may
be appropriate to review the concept and creation of Islamic banks to
introduce the concept of the Bank. Traditional, then learn about
the characteristics of Islamic banks. Traditional bank knows that financial
institution, major fundraising. Deposits and fixed interest loans starting,
and then loaned to request more beneficial, and profit. The difference
between the benefits that bank offers banking services related to
borrowing and lending operations. The most important targets of Islamic
banks, are to: Provide Islamic alternative to traditional banking to raise
critical of Muslims. Comply with the provisions of the Islamic Shariah in
different operations, and follow the base of halal and Haram in it. The
provision of funds for business owners in legal way to support projects
economic and social benefit. Be equal with individuals and businesses.
Be solidary between the holders of surplus funds and entrepreneurs
touch benefiting (of those surpluses, by linking return on depositors
results recruitment and to those users profit aukhsarh, and not to cut risk
and throw a party without the other). Develop ideological and moral
values on transactions and installed the employees and customers.
Assist clients in performing the obligatory Zakat on or inspired, and turn
on participation in economic and social development. Islamic
banks and other financial institutions must comply with a variety of
principles besides avoiding interest. Islamic finance is based on four core
principles: Prohibiting usury, Avoiding speculation, Avoiding gambling,
Investing ethically. Interpreting each principle is more difficult than we
can imagine. Scholars spend their lifetimes learning about the intent and
the interpretation of sharia law. They often have differing opinions about
it. Making sure that Islamic banks comply with sharia isnt easy hence
the necessity of the sharia supervisory board. This board is the
backbone of an Islamic bank. It plays a vital role in establishing and
operating the bank. Islamic banks are different from conventional banks
because the former dont charge interest is accurate, but its only the
grainn of send in Sahara desert. That difference is just one of many ways
that the fundamentals of Islamic banking differ from those of
conventional commercial banking. The basic purpose for establishing an
Islamic bank is to promote and encourage Islamic principles.
Conventional banks are profit-making organizations that generally arent
based on religious principles. But, earning money is also primary function
of an Islamic commercial banks. Although the banks has a specific
religious purpose, it cant serve that purpose unless it also meets the
objective of earning money. A bank serves no purpose at all if it cant
stay in business. Islamic banks operate based on Islamic business law
(called fiqh-u-muamalat) for their basic transactions, and they also follow
the financial laws and regulations of the countries in which they operate.
Conventional banks likewise operate based on a countrys financial laws
and regulations, but they dont have contact with any religious body.
Islamic scholars recognize that money has value, but with limitations. For
example, money cant become more valuable simply because time is
passing. Still, the value of money can increase if its invested in a
project(s) that itself is increasing (in size, in success, etc.). For example,
when you deposit your paycheck in a conventional bank, your
relationship with that bank is one of creditor to debtor; the bank has a
responsibility to pay back your money with or without interest according
to your account contract. Similarly, the roles reverse when the bank
provides you with a loan. The relationship between a customer and an
Islamic bank is completely different; the debtor and creditor relationship
does exist at times in Islamic banking. To understand the relationship
between the customer and Islamic bank, you must know what contract
that relationship is based on. Investments in conventional commercial
banks are based on guaranteed principal and earning a fixed amount of
income. For example, say that a customer in a conventional bank
deposits $10,000 in a six-month term deposit. After six months, the bank
has a liability to pay back the customer the principal plus the interest rate
charged for six months. Even if the bank lost the money in an
investment, the bank is still liable to pay back all the money due. In
Islamic banking, the concept of investment is different. Although the
customer deposits the money in order to earn extra income for her
savings, her principal and returns arent guaranteed. Suppose the
Islamic bank loses money because of an unexpected business failure. In
this case, the bank isnt liable to pay the money to its customer. The
failure of an investment isnt very common in Islamic banks because the

banks are very concerned about their customers and make their
investment choices very
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wisely. If they didnt, soon thay would have any customers. It is simple
thing. The characteristics of Islamic banks In response to the desire of
the cross-section of the Muslims who had embarrassed in dealing with
traditional banks. This has helped the growing stream of Islamic
awakening in Arabic and Islamic States which maintained by Liberation
movements from Western colonialism with the beginning of the second
half of the twentieth century, witnessed the scene. Arabic and Islamic
intellectual efforts to consolidate Islamic economic thought as an
alternative to Western position systems. That moved to States with the
advent of the Arabic and Islamic colonization, which still leave economic
systems physical. That does not take into account Islamic values and
ethics. This intellectual movement was accompanied by the emergence
of
banks and financial institutions Islamic, to reflect removal of the Islamic
Economics in practice, it appeared the invitations and questions about
the legality of dealing with. Traditional banks based on the interest rate
mechanism as a tool for pricing the value of current and future value of
money. The decision of the Islamic Research Council in Cairo in 1385
Ah/1965 which affirmed that the benefits Bank of RIBA is haraam. The
subsequent global conferences of jurisprudence emphasize this effect.
Islamic banks are not different from other financial institutions, the only
difference lies in their description as Islamic. The Islamic banks have
enjoined on themselves to conduct their affairs within the limit of the
rulings of Shariah and to comply with its overall objectives. This
definition of Islamic banks would make our approach easy as we embark
on the research into the success factors of Islamic banks as financial
institutions. It must be realized that maximization of profit is the objective
of the highest priority for all investment institutions crated by private
individuals. Consequently, all private-sector financing institutions have
one fundamental objective: to make as much profit as they can.
However, profit maximization is a general proposition that must be
narrowed down and explicated in detail. Similarly, the criteria of every
component of this general objective must also be determined. In brief
those Criteria are as follows: Boosting all forms of deposits, improvement
in the quality of customer services, expansion the base of banking
services, protection of capital, provision of humanitarian and social
services, and the factors that raise the profit margin, or what is usually
called the rules of profitability management of an Islamic bank. In order

to actualize the greatest profit possible, there is a need to distinguish
between the long-term and the short-term. A bank, whether Islamic or
not, is concerned with making profit in the long-term without sacrificing
the short-term perspectives. Long-term profit is influenced by the growth
of deposits and other funds resource elements that give the bank the
opportunities to have profit-generating invested assets. Thus we must
consider the rate of growth of the various forms of deposits. An Islamic
bank normally has three types of deposits that determine its capacity to
raise the rates of shareholders return. These are current account
deposits, unrestricted investment deposits in savings and Mudarabah
accounts, and lastly, off-balance sheet deposits in investment funds and
special or restricted investment accounts. It is erroneous to think of these
deposits as independent of each other. Therefore, in marketing and
presenting any type of deposit to clients, its effect on other types of
deposits should always be taken into account. In fact, Islamic banks
must be able to measure this effect. Although Islamic banks do not
distribute returns to current account owners, the servicing of these
accounts, despite their cost, not only increases the rate of profit, because
the deposits are not subject to distribution as they are guaranteed, but
these demand deposits also increase the multiplier of assets/equity rate
which is reflected in the form even a greater increase in the rate of profit.
On the other hand, off-balance sheet deposits are considered an
attractive way to increase the number of clients in addition to being a
very important vehicle to increase the rate of shareholders returns,
because it increases the earnings from the agency activities, keeping in
mind that these earnings are less affected by investment risks to which
other banking earnings are subjected. Some Islamic banks may pay little
attention to the quality of services they offer to their clients especially if
such banks enjoy a position where it can exercise some monopolistic
control in the market. Many Islamic banks were once in this situation
when they were performing alone in their Islamic financial services
markets. Today monopolistic position is declining because of the
multiplicity of Islamic banks in many countries and the access of
conventional banks into the Islamic finance markets. Knowledge of
clients is based on continuous relation with them which is, to some
experts, the most important managerial rule: success in banking
services means the ability to interact with and relate to the clients
desires, anticipate her whishes, and offer services that are specific to
these desires and wishes. There are several parameters by which the
quality of banking services offered to a customer can be measured.
These include sounding out customers pleasure through intervallic
questionnaires, which are then analyzed and considered. There is also
computing the time it takes to carry out services and connecting that with
the record time. Another parameter is that which computes new
customers whom market staff can draw to the bank. This ratio increases
every time bank activities are restricted to current accounts, granting
loans and issuing credit cards. This means that bounty opportunities
exist for banks to attract new deposits and investments even without
expanding its client foundation. Only at the end of the last century that
many Islamic banks turned towards increasing the base of their services
by extending services of agency for investment such as creating
investment funds and special investment accounts. Protecting capital is
the most important considerations in maximizing profit in the long run
because evaporation and loss of capital not only cause banks to loose
new deposits, they also cause the loss of the means to achieve the very
objectives of their existence. Definitely, one of the significant elements in
capital conservation is the extent of the banks diversification of its
investments and the extent of synchronization between the maturity of its
investments and the maturity of its deposits. One of the common errors
in the circles of Islamic banking theorists is their continuous call for
financing through
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partnership (Musharaka) and non-voting equity (Mudaraba). Islamic

Financial Institutions (IFIs) are in use in the same world
where conventional banks are in service and make all those functions
which are expected from a financial institution. IFIs are assisting
business world by providing all the services required to run the economy
smoothly, however, the philosophy and operations are different. In this
section I will analyze the operations and products of IFIs in comparison
with traditional conventional banks. Any financial system is anticipated to
support in a row the economy by given the following services grouped in
two headings. Savings mobilization from savers to entrepreneurs and
second, provision of general utility services including transfer of funds,
facilitation in international trades, consultancy services, safekeeping of
valuables, and any other service for a fee. There is no limit on provision
of such services by IFIs as for the service is not against the Sharia.
There exists difference in mechanism of funds recruitment from savers to
entrepreneurs. Savings mobilization consists of two phases i.e.
accepting deposits and extending financing and investments. Deposits

are collect from savers from both type of institutions irrespective a bank
is working under conventional system or Islamic system. The difference
lies in agreement of reward. Under conventional system reward is fixed
and predetermined while under Islamic deposits are accepted through
Musharaka and Mudaraba where reward is variable. Under conventional
banking return is higher on long-term deposits and lower for short-term
deposits. Same is the practice in Islamic banking to share profit with
depositors. Higher weight for profit sharing is assigned to long-term
deposits being available to bank for investing in longer term projects
yielding superior returns and lower weight for short-term deposits which
cannot be invested in long term projects. The only difference in
conventional and Islamic system lies in sharing of risk and reward. Under
conventional system total risk is born by the bank and total reward
belongs to it after servicing the depositors at fixed rate while under
Islamic system risk and reward both are shared with depositors. Reward
of depositors is linked with outcomes of investments made by IFIs. Under
Islamic financial system only those IFIs will be able to collect deposits
who can establish trust in the eyes of masses hence leading to optimal
performance by financial industry. The second phase in savings
mobilization process is extension of credit facility to business and
industry for return. Both types of financial (banking) institutions, Islamic
and conventional, are providing financing to productive channels for
reward. The difference lies in financing agreement. Conventional banks
are offering loan for a fixed reward while IFIs cannot do that because
they cannot charge interest (according Islamic law). However, IFIs can
charge profit on investments, but not interest on loans. In conventional
banking three types of loans are issued to clients including short term
loans, overdrafts and long-term loans. Islamic banks cannot issue loans
except interest free loans (Qarz e Hasna) for any requirement however
they can do business by providing the required asset to client.
Conventional banks offer the facility of overdrawing from account of the
customer on interest. One of its form is use of credit card whereby limit of
overdrawing for customer is set by the bank. Credit card provides dual
facility to customer including financing as well as facility of plastic money
whereby customer can meet his requirement without carrying cash. As
for facility of financing is concerned that is not offered by Islamic banks
except in the form of Murabaha (which means IFI shall deliver the
desired commodity and not the cash) however facility to shop/meet
requirement is provided through debit card whereby a customer can use
his card if his account carries credit balance. Under conventional system
customer can avail the opportunity of rescheduling by entering into a new
agreement to pay interest for extended period which is not the case
under Murabaha. IFIs can claim only the original receivable amount
agreed in initial contract. Another practical issue under Murabaha is how
to deal with intentional defaulters. Different options are lying with IFIs
including to blacklist the defaulter for any further financing facility, to
stipulate in the contract that in case of default all installments will be due
at once, to stipulate in the contract a penalty shall be imposed but the
same shall not form income of IFIs rather it will go in charity. Working
capital is required by firms to invest in inventories and accounts
receivables and meet the expenses. As for inventory investment is
concerned that is provided by Islamic banks through Murabaha. As for
meeting of day to day expenses of business is concerned financing is
provided through participation term certificates where by profit of a
certain period (e.g. quarter, six month, one year) is shared by IFIs on
prorata basis. However financing through participation term certificates is
not as easy as a short term loan from conventional bank due to risk
involved for IFIs in the transaction. Firm seeking short-term facility from
IFIs has to prove the viability of the project/business to the satisfaction of
investor. For meeting the working capital requirements of nonprofit
organizations to date there is no arrangement under Islamic financial
system. Individual spending loans are also not issued by IFIs how ever
any individual of sound financial position can acquire anything for his
personal use under Murabaha financing whereby a certain %age of profit
is added on cost by IFIs. Murabaha financing is very useful for short to
medium term financial requirements of business/nonprofit organizations
and individuals. Murabaha financing is asset based financing and
anyone can request to an IFI for provision of an asset generally used for
Halal (lawful) purposes. By default under Islamic financial system IFIs
cannot lend cash for interest (only exception is Qarz e HasnaCharity
loan). One of the features of Murabaha is in case of delay in payment by
customer IFI cannot ask for extra amount as time value of money like
conventional banks. However penalty is imposed on defaulter if
stipulated in original contract of Murabaha duly signed by the customer
but same cannot be included in the income of IFI. This penalty must be
spent for charitable purposes. Under Murabaha scheme of financing
facility is linked with assets which leads to economic stability and creates
linkage between real and financial sector. It is not zero sum game
because utility is created through services and products and not by mere
building the blocks of wealth through dealing in paper money. Although
Murabaha is being used by IFIs successfully and have succeeded in
meeting short to medium term requirements of firms by providing a
successful replacement of conventional loans yet certain differences
exist in both type of financing. First is one cannot get cash under
Murabaha. Second asset is purchased by IFI initially then transferred to
customer hence IFI participate in risk. Third refinancing facility is not

available under Murabaha. Fourth in case of default price of the
commodity cannot be enhanced however penalty may be imposed if
stipulated in original contract of Murabaha however same cannot be
included in income of IFI. Fifth only those assets can be supplied by IFIs
under Murabaha whose general and/or intended use is not against the
injunctions of Sharia (e.g. supply of a machine to produce liquor).
Medium to long-term loans are provided for purchase or building of fixed
assets by firms to expand or replace the existing assets. Under Islamic
financial system requirement of firms and individuals are fulfilled through
Murabaha, Bai Muajjal and Istasna. Another financing option for longterm financing is profit sharing under Musharaka and Mudaraba.
Although financing under Murabaha, Bai Muajjal and Istasna is very
much look like conventional loans with the only difference of provision of
asset and not cash to client however differences exist in the contracts
which alter the nature of risks and returns. Financing under Musharaka
and Mudaraba is challenging for IFIs and firms as well. Under Sharia
based financing schemes firms have to prove the viability/profitability of
the project/business to the satisfaction of IFIs to get the finance because
risk of losing the amount is involved. Leasing is relatively new source of
financing whereby usufruct (the legal right to use and enjoy the
advantages or profits of another person's, or organization, property) of an
asset is transferred to lessee for agreed amounts of rentals. Under
leasing ownership may or may not be transferred. Same facility is
provided by IFIs under agreement of Ijara. Under Ijara asset is provided
to customer for use with out transfer of ownership for a specific period of
time in exchange for agreed rentals. Ownership of asset can be
transferred to customer through mutual agreement at the completion of
lease term. All ownership risks are born by IFIs during Ijara tenure.
Certain differences exist in the transaction under both systems. First is
rental under Ijara are not due until asset is delivered to the lessee for
use. Second additional rent cannot be demanded in case of default
except a penalty (if stipulated in original contract of lease) which is not
the income of IFI. Third during period of major repair rent cannot be
demanded by IFI. Fourth if asset is lost or destroyed IFI cannot claim
further installments hence all risks of ownership are born by IFI.
Agricultural loans include both types of loans short-term as well as longterm. Short-term loans are required by farmers for seeds and fertilizers
and long-term loans are required to develop additional lands and
purchase of equipments. Normally farmers return these loans after
selling the finished crops. Conventional banks are providing credit facility
by charging interest. Same facility is provided by IFIs to the farmers
under Bai Slam, Bai Murabaha Musharaka and Mudaraba. Under Bai
Salam cash is provided to farmers for purchase of seeds and fertilizers

however this is not loan rather purchase of finished crops to be delivered
by farmers. For purchase of equipments Murabaha facility is used and
for development of additional land Musharaka and Mudaraba is used by
IFIs. To get finance for land development farmers have to convince the
IFIs about profitability of the venture due to risk involved in the
transaction. Housing finance/mortgages is the more secured form of
financing for both conventional banks and IFIs. Under conventional
system loan is provided for interest while under Islamic financial system
facility is provided through withdrawing Musharaka. Under withdrawing
Musharaka house is purchased jointly by IFI and customer. IFI rents out
its share in property to customer for an agreed amount of rent. Share of
financier is divided in units of small denomination. Customer pays the
installments to IFI consist of rentals plus purchase price of a unit. Stake
of customer in property is increasing while of IFI is decreasing with
payment of every installment. Finally with the payment of last installment
stake of IFI reaches to zero and property is transferred in the name of
customer. Withdrawing Musharaka model can help out in avoiding the
real estate crisis (like of 2008) because, when market value of property
decreases, both IFI and customer suffers according to their share in
property and whole burden is not shifted on customer alone. Hijazi, &
Hanif have raised certain questions about the existing practice of IFIs
working in Pakistan and needs to be addressed by policymakers, Sharia
boards and management of IFIs. In order to maintain liquidity
conventional banks have many avenues including government securities,
shorter term loans and money at call and short notices, leasing
companies bonds, investment in shares etc. Interestingly mandatory
reserve maintenance by conventional banks with central banks is also
rewarded in the form of interest. Conventional banks can also create
liquidity by issuing the bonds against their receivables. Commercial
banks are also protected by central bank by providing liquidity in rainy
days for interest. Interbank deposits are also rewarded in the form of
interest by commercial banks. For IFIs avenues are very limited to create
required liquidity at the same time to earn some revenue by investing in
short term and liquid securities. IFIs cannot invest in government
securities, short term loans, bonds and money at call and short notices
because of interest based transactions. Mandatory reserve with central
bank is maintained by IFIs but they are not rewarded like conventional
banks. Looking towards central bank in rainy days to maintain liquidity is
also not as straightforward due to interest demand of central bank. IFIs
cannot demand interest on interbank deposits. As for investment in
market able securities are concerned again IFIs are not free to invest in
any equity security due to two reasons. First Halal business of the
underlying firm is required. Second financial operations of underlying firm

should be interest free. Keeping in view the dominance of conventional
banking and existing business practices one can conclude safely that a
very negligible number of firms meet both conditions. The much
appreciable job has been done by Almeezan investment management
limited (AIML) a subsidiary of leading Islamic bank in Pakistan (Meezan
bank) in this regard. A list of Sharia compliant securities is being
maintained and updated every six monthly out of which 30 companies
are selected for Kse Meezan Index (KMI). KMI was established in June
2008. IFIs can invest only in those securities which are declared Sharia
compliant securities through filtering of Sharia compliance criteria. Listing
here the major conditions to qualify a security as Sharia compliant is
worth mentioning as follow. Meeting of following tests is required to
declare a security as Sharia compliant. First the core business of the
company should be Halal (not prohibited by Islamic Law such as liquor,
pork and pornography etc). Second illiquid assets should be equal to
20% of total assets of the company. Shares of a company merely dealing
in liquid assets are not Sharia compliant hence IFIs cannot invest. Third
ratio of all interest based debts including preferred stock should be less
than 40% of total assets of the company. Fourth ratio of non Sharia
compliant investments to total assets of the company should be less than
33%. Fifth revenue from non compliant investments should be less than
5% of total revenue of the company and even then IFIs are required to
purify their earnings by spending this non compliant revenue as charity.
Finally market price per share should be greater than the net liquid
assets per share. Recently IFIs have created an avenue to meet their
liquidity requirement in the form of Skuks (Islamic Bonds) whereby
servicing is fixed like conventional bonds however such types of Skuks
can be issued against Ijara receivables. Under Ijara Skuks initially asset
is given on rent to the customer for an agreed period and rentals while
ownership remains with IFI. To meet liquidity requirements IFI issues
Skuks (bonds) to the investors equal to the value of asset, hence
ownership of the asset is transferred to Skukholders. While it is known
the rentals of the asset so the return on investment is predetermined and
known with certainty to the investors. Skuks of Murabaha cannot be sold
except at par being sale of loans. Other types of Skuks (Musharaka etc)
are not carrying fixed return although tradable in secondary security
market. Underlying principle in issue of Skuks is that illiquid assets
should dominate in the portfolio against which Skuks are issued. Under
Islamic financial system Skuks are ownership certificates and not mere
debt securities hence all risks and rewards are
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shared by Skukholders. Typical products and services for Islamic banks

Islamic banking
and financing has gained a foothold both nationally in Muslim countries
and internationally in the financial world. Regular degree programs are
also being offered at the university level in both the East
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http://www.sbp.org.pk/departments/ibd/lecture_8_related_reading_2.pdf
and the West.

Islamic banking is for all individuals regardless of their religious beliefs.
The most important difference between Islamic and conventional banking
is that Islamic banking must follow the Shariah. Islamic banking must
also avoid activities such as riba or gharar (excessive uncertainty). For
example, instead of charging interest on financing given out, Islamic
banks give financing based on musyarakah and will share
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any profit and loss. The common

Shariah concepts are as follows: Wadiah (Safekeeping) - Wadiah means
custody or safekeeping. In a Wadiah arrangement, you will deposit cash
or other assets in a bank for safekeeping. The bank guarantees the
safety of the items kept by it. Example: 1) Customer place money in a
bank and the bank guarantees to return the money to customer. 2)
Customer are allowed to withdraw the money anytime. 3) Bank may
charge customer a fee for looking after customerr money and may pay
hibah (gift) to customer if it deems fit. 4) This concept is normally used in
deposit-taking activities, custodial services and safe deposit boxes.
Mudharabah (Profit sharing) - Mudharabah is a profit sharing
arrangement between two parties, that is, an investor and the
entrepreneur. The investor will supply the entrepreneur with funds for his
business venture and gets a return on the funds he puts into the
business based on a profit sharing ratio that has been agreed earlier.
The principle of Mudharabah can be applied to Islamic banking
operations in 2 ways: between a bank (as the entrepreneur) and the
capital provider, and between a bank (as capital provider) and the
entrepreneur. Losses suffered shall be borne by the capital provider.
Example: 1) Customer supply funds to the bank after agreeing on the
terms of the Mudharabah arrangement. 2) Bank invests funds in assets
or in projects. 3) Business may make profit or incur loss. 4) Profit is
shared between customer and customer bank based on a preagreed
ratio. 5) Any loss will be borne by customer. This will reduce the value of
the assets/ investments and hence, the amount of funds customer have
supplied to the bank. 3) Bai Bithaman Ajil BBA (Deferred payment
sale) - This refers to the sale of goods where the buyer pays the seller
after the sale together with an agreed profit margin, either in one lump
sum or by instalment. Example: 1) Customer pick an asset customer
would like to buy. 2) Customer then ask the bank for BBA and promise to
buy the asset from the bank through a resale at a mark-up price. 3) Bank
buys the asset from the owner on cash basis. 4) Ownership of the goods
passes to the bank. 5) Bank sells the goods, passes ownership to
customer at the mark-up price. 6) Customer pay the bank the mark-up
price in instalments over a period of time. 4) Murabahah (Cost plus) - As
in BBA, a Murabahah transaction involves the sale of goods at a price
which includes a profit margin agreed by both parties. However, in
Murabahah, the seller must let the buyer know the actual cost for the
asset and the profit margin at the time of the sale agreement. 5)
Musyarakah (Joint venture) - In the context of business and trade,
Musyarakah refers to a partnership or a joint business venture to make
profit. Profits made will be shared by the partners based on an agreed
ratio which may not be in the same proportion as the amount of
investment made by the partners. However, losses incurred will be
shared based on the ratio of funds invested by each partner. 6 ) Ijarah
Thumma Bai (Hire purchase) - Ijarah Thumma Bai is normally used in
financing consumer goods especially motor vehicles. There are two
separate contracts involved: Ijarah contract (leasing/renting) and Bai
contract (purchase). The contracts are made one after the other as
shown in the next Figure. Figure 1. Ijarah Thumma Bai concept
explaination 1) Customer pick a car that would like to have. 2) Customer
ask the bank for Ijarah of the car, pay the deposit for the car and promise
to lease the car from the bank after the bank has bought the car. 3) Bank
pays the seller for the car. 4) Seller passes ownership of the car to the
bank. 5) Bank leases the car to customer. 6) Customer pay Ijarah rentals
over a period. 7) At end of the leasing period, the bank sells the car to
customer at the agreed sale price. 7) Wakalah (Agency) - This is a
contract whereby a person (principal) asks another party to act on his
behalf (as his agent) for a specific task. The person who takes on the
task is an agent who will be paid a fee for his services. Example: A
customer asks a bank to pay someone under certain terms. The bank is
therefore the agent for carrying out the financial transaction and the bank
will be paid a fee for its services. 8) Qard (Interest-free loan) - Under this
arrangement, a loan is given for a fixed period on a goodwill basis and
the borrower is only required to repay the amount borrowed. However,
the borrower may, if he so wishes, pay an extra amount (without
promising it) as a way to thank the lender. Example: A lender who lent
RM5,000 to a borrower on Qard will expect the borrower to return exactly
RM5,000 to him at a later date. 9) Hibah (Gift) - This refers to a payment
made willingly in return for a benefit received. Example: In savings
operated under Wadiah, banks will normally pay their Wadiah depositors
hibah although the accountholders only intend to put their savings in the
banks
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for safekeeping.
An Islamic bank normally has three types of deposits that determine its
capacity to raise the rates of shareholders return. These are current
account deposits, unlimited investment deposits in savings and
Mudarabah accounts, and lastly, off-balance sheet deposits in
investment funds and special or limited investment accounts. It is wrong
to think of these deposits as independent of each other. Although Islamic
banks do not distribute returns to current account owners, the servicing
of these accounts, despite their cost, not only increases the rate of profit,
because the deposits are not subject to distribution as they are
guaranteed, but these demand deposits also increase the multiplier of
assets/equity rate which is reflected in the form even a greater increase
in the rate of profit. On the other hand, off-balance sheet deposits are
considered an attractive way to increase the number of clients in addition
to being a very important vehicle to increase the rate of shareholders
returns, because it increases the earnings from the agency activities,
keeping in mind that these earnings are less affected by investment risks
to which other banking earnings are subjected. Some Islamic banks may
pay little attention to the quality of services they offer to their clients
especially if such banks enjoy a position where it can exercise some

monopolistic power in the market. Many Islamic banks were once in this
situation when they were acting alone in their Islamic financial services
markets. Today, however, the monopolistic position is weakening
because of the multiplicity of Islamic banks in many countries and the
entry of conventional banks into the Islamic finance markets. The
experience of American banks in the 70s and 80s, when there was
vicious competition among them, has taught an important lesson, even
though it is theoretically not new: Improved services to customers save
cost in the long-term despite their pressure, in the beginning stages, to
increase spending on training and rehabilitation. The principal reason for
this is that improved services create a motivating work climate and
environment for both clients and employees, which in turn increase
clients enthusiasm for dealing with the bank on one hand and the
productivity of the employees on the other. This improves the cost
effectiveness of the dollars spent on labor. It should be noted that
improving the quality of banking services does not only mean receiving
and responding to clients requests; it rather means the ability of the bank
to discover a client and to offer her a service she has not previously
used. This is a kind of commercial marketing of financial services in full
sense of the word as it is familiar in goods and services marketing. The
efforts expended by the bank in improving the quality of clients services
depend on the clarity of its vision on the market segment to which it is
directing its services. While it is neither morally wrong nor against the
principle of profit maximization that a bank should offer its big clients
special services that correspond to the level of profit it makes from
dealing with them and their financial transactions, experiences have
shown that banks that are able to improve the services they offer to
medium depositors and small traders can still make huge profits through
economies of scale. Clearly a bank can offer improved services to all
clients in addition to the higher segment of clients by offering all of them
an enjoyable banking practice. This can be achieved through the
following means: 1. Personalizing the banking services: by that we mean
making banking services individually tailored to every client such that he
feels a personal link with the bank he deals with. 2. Raising the
professional level of employees who deal directly with clients such that
they can offer professional services quickly and efficiently and gain the
clients confidence. 3. Strong concern in the investment department to
realize for investors -depositors or shareholder- a rate of profit higher
than other banks that operate in the same market serviced by the bank,
especially other competing Islamic banks. 4. Improving the working
environment and making it comfortable and enthusiastic for the bank
employees. 5. Providing social services that are noticeable by the
segment of the society from which the bank derives its clientele and staff.
The word noticeable should be underlined because the objective
behind services to the social environment is to raise profit and as such
the choice of the type of social services has a lot of impact on its returns.
Finally, raising the quality of banking services depends on improving
three elements: correct banking professionalism, knowledge of clients
and establishing personal rapports with them. Correct banking
professionalism is the first point of departure for creating confidence in
the bank and its employees. Improving professionalism therefore centers
on improving the bank employees knowledge and perfection of their
banking job, such that anyone of them can offer a professional, brief and
accurate explanation of all banking services that the client may have in
mind. It also focuses on the staff being able to carry out clients needs
quickly and accurately, which would make the client give generously her
confidence to and rely on the employee, and consequently on the bank
itself. Knowledge of clients is based on continuous relation with them.
There are several parameters by which the quality of banking services
offered to a customer can be measured. These include sounding out
customers pleasure through periodic questionnaires, which are then
analyzed and studied. There is also computing the time it takes to
perform services and linking that with the record time. Another parameter
is that which computes new customers whom marketing staff can draw to
the bank. The extent of success of the management of direct services to
customers as a whole can also be measured by the change in the
volume of market transactions the customers conclude with the bank.
Numerous studies conducted by research bodies with various
inclinations in America have shown that 80-90% of bank customers
material assets are kept outside the bank that customers deal with. This
ratio increases every time bank activities are restricted to current
accounts, granting loans and issuing credit cards. This means that ample
opportunities exist for banks to attract new deposits and investments
even without expanding its customer base. Only at the end of the last
century that many Islamic banks turned towards expanding the base of
their services by extending services of agency for investment such as
creating investment funds and special investment accounts. However,
what cannot be marginalized in contemporary banking is that the ability
of the bank to increase its deposits and other investment funds largely
depends on the activity of its financial engineering department. This is
what guarantees continued expansion of its deposits and as such it has
the capacity to constantly increase its nature of these banks is based on
new innovations in the art of banking that are far from the prominent
pillar of conventional banking operation: lending and borrowing. Inventing
a flow of investment products offers customers attractive alternatives that
induce them to move their material assets from other banks or from
outside the banking sphere to the Islamic bank, while, at the same time,
attracting new customers with new deposits. This constant modernization
process is both the foundation and the growth certificate for sophisticated
Islamic banking. In this view, financial engineering management
becomes the strong locomotive that moves banking marketing. Without
the engineering activity, marketing management cannot magnetize new
deposits on a permanent basis as to guarantee continuous growth for the
Islamic banks activities and profits. The gauge of increasing the base of
banking services is in checking the growth of non-conventional
investments, particularly off-balance sheet investments through the
agency contract with fixed or declining commissions. It can also be done
by measuring the growth of new innovations through reckoning the
volume of operations in the invented products. Protecting capital is the
most important considerations in maximizing profit in the long run
because evaporation and loss of capital not only cause banks to loose
new deposits, they also cause the loss of the means to achieve the very
objectives of their existence! Undoubtedly, one of the most important
elements in capital preservation is the extent of the banks diversification
of its investments and the extent of synchronization between the maturity
of its investments and the maturity of its deposits. One of the common
errors in the circles of Islamic banking theorists is their continuous call for
financing through partnership (Musharakah) and non-voting equity
(Mudarabah) that are both of a long-term nature, while the greater part of
the banks deposits are short-term deposits in current accounts and
short-term investment accounts. Although there are attempts to reduce
financing through Murabahah in favor of an increased financing through
Mudarabah and Musharakah, these attempts should take into account
that Musharakah and Mudarabah financing should not exceed the safe
limit in terms of proportionality with the sources of financing and their
maturities. In addition, protection of deposits requires setting of clear red
lines that should not be crossed with regards to the degrees of risks the
Islamic bank cannot bear, whether they are investment risks or foreign
currency risks. Even though it is clear that Islamic banks are moving
towards taking generally conservative positions towards investment
risks, some of them have landed investors and depositors into pure
failure because of the absence of these red lines and the weakness of
check and balance processes in the management style. One of the most
important Criteria in capital preservation is the structure and power of the
banks risk management department and its professional conduct that is
not limited to central bank guidelines and to what is usually known, in
conventional banking, as the rules of banking prudence, but should
include tying Mudarabah and Musharakah investments to long-term
investment deposits, setting red lines of potential risks and for checks
and balances rules in taking investment decisions. Such rules of
prudence must be applicable to even the CEO of the Islamic banks as
well as to other decision makers. There is no doubt that providing
humanitarian and social services to the local community increases the
bond between the bank and its local environment. This has a positive
effect on the volume of deposits and other banking transactions. We
should however note that banks are like other institutions in any society.
They are made up of a group of individuals dealing with people in a
particular social environment. There is no way that this group will not be
influenced by its social environment or affected by the ideas, concepts
and events that emerge in that environment. This is why banks
participate in many charitable works and set programs of participation in
charitable and social work, regardless of, and indeed above the
demands of the principle of profit maximization. Banks contribute to
public charitable works and set aside funds in their annual budgets for
such purposes. Islamic banks are also looked at to participate in the
charitable activities in their societies. In fact, that is more expected from
them than from conventional banks because they are governed by the
Islamic Shariah which requires the wealthy to contribute to social and
humanitarian works. Surely it is possible -and may even be better- that
the distribution of Zakah is left to the individuals -investors or
shareholders- to spend it on causes they consider closer to Allah, since
Zakah is a religious obligation, first and foremost. But it is erroneous to
think that good deeds are limited only to the enjoined Zakah. One of the
distinguishing factors of the Islamic bank is its commitment to Quranic
morals and values all of which are based on goodness, righteousness
and benevolence. Islamic banks must portray these values in the same
way as required of individuals. We must note that the social charitable
objective is distributive not productive by its very nature. In other words,
Islamic banks deal with their customers on the basis of fairness, justice
and kindness then spend money on the path of righteousness and
charity. Thus spending on charitable social objectives is a form of
redistributing net resources, even though the bank, purely for tax
purposes, categorizes such expenses as part of its public expenses. In
fulfillment of its Islamic character, the Islamic bank should always set
aside for righteous causes some money since it carries the banner and
ideals of the Islamic values. Since the prophet, pbuh, has promised
replacement for every spending and that money is not going to diminish
as a result of spending, then the means of substitution should be an
increase of customers confidence in the bank and their conviction about
its sincerity about the Islamic characteristics it declares. Consequently,
their interest in dealing with the Islamic bank is going to grow. Profit
increase above the existing levels with competing Islamic and

conventional banks is in the final analysis the final objective and the
quantitative criterion for measuring the success of any bank, in general,
and for the success of the Islamic bank in particular. Besides the role that
every human being or every group of people plays in participating in
righteous deeds in the society, of which the Islamic bank is expected to
do more because of its identity and character, any talk about non-profit
objectives is either a rhetoric about interim objectives that are mere
means to the primary objective or it is a form of marketing or public
relations propaganda that serves the objective of profit maximization.
The rules of managing the profitability of Islamic banks can be
summarized under the following six points: pricing of banking services,
cost/earning efficiency of banks operation, selecting high return
investments, reducing idle assets as much as possible, benefiting from
economies of scale, compliance with institutional process for the flow of
information to management to make timely decisions: 1. Pricing of
banking services: It is usual for new banks to seek to use the pricing list
of existing banks. But a bank that is keen on offering quality services
must set its own price list on the basis of analytical studies of its own
architectural cost, compare it with other banks, set its own fees to be
commensurate with the value of banking service provided and the
affordability of the proposed price to the average client (statistically it is
preferable to take the mode because it is the most frequent), and then
work to increase the price of banking services to the highest level
possible, without sacrificing the banks competitiveness. Pricing of banks
services includes setting the rage of charges on non-investment services
and determining the share of Mudarib/agent of the returns on
unrestricted, restricted and special investment deposits. 2. Cost/earning
efficiency: This is measured by the ratio of total expenses to total
earning. As the ratio decreases, so does the efficiency of every Dinar
spent by the bank. The Islamic bank can increase its profitability by
increasing the efficiency of its workforce, through constant training and
injecting joy and happiness in the work environment. 3. Selecting high
returns investments: Investment selection is linked to risk management
because, as it is known, an increase in the expected return is normally
linked to an increase in investment risk. But it is to a large extent also
linked to the bank size itself. The financial sector is like a jungle where
the fatter the prey the larger the predator animal that is needed to devour
it. The bank that enters the market with huge capital is able to find higher
return investments, in addition to it being able to instill greater confidence
in investors, thus making them to come forward to it with their
investments. It is not enough for the Islamic bank to start with high
investment; rather it should back such an investment with a strategy for
continuous growth, either through geographical coverage or through the

size of deposits and assets or through mergers or purchase of other
financial institutions. 4. Minimizing idle assets as much as possible:
Every bank needs cash reserves. Some of these needs are compulsory
while others are required by the rules of banking prudence. But Islamic
banks are known of having higher cash reserves for reasons, part of
which are technical caused sometimes by the banks relations with the
central bank, others for purely administrative reasons. The Islamic bank
can minimize idle reserves by reconsidering its managerial philosophy,
improving its style of applying the rules of banking prudence and seizing
the little opportunities available to use its cash assets to increase
income. 5. Utilization of economies of scale: This comes about by means
of increasing invested assets, because an increase in investment propels
the multiplier of the ratio of profit-bearing assets to equities towards profit
maximization. 6. Compliance with an institutional approach of information
flow to management to enable it to take timely decisions: Decision
making close to the time of implementation is one the elements of
making profit as well as the most important in safeguarding capital. The
time span between a need for a decision and when it is taken cannot be
reduced unless information reaches the management in an institutional
and regular manner. Banks in the Arab world particularly often aim at
getting information to the management by tying customers time directly
with the chain of getting to the management, such that her transaction
has to be signed by the banks senior management, rather than adopting
a method of delegating middle-rank management to conclude provision
of services to the customer, and then link up with the senior management
to ensure that the information reaches there at the appropriate time.
There is no doubt that the centralized style of management reduces cost
effectiveness and engrosses the top management in trivialities that take
up the time that is better devoted to planning and drawing up growth
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programs. The development of Islamic banks

Modern banking system was introduced into the Muslim countries at a
time when they were politically and economically at a low ebb, in the late
19th century. The main banks in the home countries of the imperial
powers established local branches in the capitals of the subject countries
and they catered mainly to the import export requirements of the foreign
businesses. The banks were generally confined to the capital cities and
the local population remained largely untouched by the banking system.
The local trading community avoided the foreign banks both for
nationalistic as well as religious reasons. However, as time went on it
became difficult to engage in trade and other activities without making
use of commercial banks. Even then many confined their involvement to
transaction activities such as current accounts and money transfers.
Borrowing from the banks and depositing their savings with the bank
were strictly avoided in order to keep away from dealing in interest which
is prohibited by religion. With the passage of time, however, and other
socio-economic forces demanding more involvement in national
economic and financial activities, avoiding the interaction with the banks
became impossible. Local banks were established on the same lines as
the interest-based foreign banks for want of another system and they
began to expand within the country bringing the banking system to more
local people. As countries became independent, the need to engage in
banking activities became unavoidable and urgent. Governments,
businesses and individuals began to transact business with the banks,
with or without liking it. This state of affairs drew the attention and
concern of Muslim intellectuals. The story of interest-free or Islamic
banking begins here. In the following paragraphs, we will trace this story
to date and examine how far and how successfully their concerns have
been addressed. It seems that the history of interest-free banking could
be divided into two parts. First, when it remained an idea; second, when
it became a reality -- by private initiative in some countries and by law in
others. We will discuss the two periods separately. The last decade has
seen a marked decline in the establishment of new Islamic banks and
the established banks seem to have failed to live up to the expectations.
The literature of the period begins with evaluations and ends with
attempts at finding ways and means of correcting and overcoming the
problems encountered by the existing banks. Interest-free banking
seems to be of very recent origin. The earliest references to the
reorganization of banking on the basis of profit sharing rather than
interest are found in works of Anwar Qureshi, and Mahmud Ahmad,
followed by others. They all have recognized the need for commercial
banks, but they proposed a banking system based on the concept
of Mudarabha - profit and loss sharing. In the next decades interest-free
banking attracted more attention, partly because of the political interest it
created in Pakistan and partly because of the emergence of young
Muslim economists. Works specifically devoted to this subject began to
appear in this period. Early seventies saw the institutional involvement.
Conference of the Finance Ministers of the Islamic Countries held in
Karachi in 1970, the Egyptian study in 1972, First International
Conference on Islamic Economics in Mecca in 1976, International
Economic Conference in London in 1977 were the result of such
involvement. The involvement of institutions and governments led to the

application of theory to practice and resulted in the establishment of the
first interest-free banks. The Islamic Development Bank, an intergovernmental bank established in 1975, was the result of this process. A
group of Muslim executives also set up the first private interest-free
bank, the Dubai Islamic Bank, in 1975 from several countries. Two
private banks were founded in 1977 under the name of Faisal Islamic
Bank in Egypt and the Sudan. In the same year, the Kuwaiti government
set up the Kuwait Finance House. However, small scale limited scope
interest-free banks have been tried before; one in Malaysia in the midforties and another in Pakistan in the late-fifties but neither survived. In
1962 the Malaysian government set up the Pilgrims Management Fund
to help prospective pilgrims to save and profit. The savings bank
established in 1963 at Mit-Ghamr in Egypt was very popular and
prospered initially and then closed down for various reasons. However,
this experiment led to the creation of the Nasser Social Bank in 1972.
However, the bank is still active; its objectives are more social than
commercial. In the ten years since the establishment of the first private
commercial bank in Dubai, more than 50 interest-free banks have come
into being. Though nearly all of them are in Muslim countries, there are
some in Western Europe as well: in Denmark, Luxembourg, Switzerland
and the UK. Many banks established in 1983 and 1984. The numbers
have declined considerably in the
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following years. Figure 2. Market share of Islamic banking in 2009

According to the statistics issued by the General Council for Islamic
banks and financial institutions in 2004, the number of Islamic financial
institutions worldwide Islamic Bank size 284 acts more than 261 billion
dollars, in addition to more than 310 banks traditionally Islamic banking

operations with the turnover amounting to more than $ 200 billion. This
development has been accompanied in the Islamic banking market,
which emerged in 1975 with the opening of the Islamic Development
Bank and Dubai Islamic Bank, a similar development in Islamic
investment vehicles offered to clients in banks of up to about 15
investment vehicle used by Islamic banks. Islamic
Banking is one of the worlds fasted growing financial sectors, rising 1520 % p.a. Asian Banker Research Group found out that growth rate is as
high as 26.7 % among the 100 largest Islamic banks. Islamic banks are
located in 50 countries worldwide and can be found in countries like
Algeria, Azerbaijan,Yemen. Major Islamic Banking hubs are Malaysia,
Bahrain, UK
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and UAE. The establishments of interest-free banking in lot of countries

had been done by
private initiative and were confined to that bank. In Libya and Pakistan,
however, it was by government initiative and covered all banks in the
country. The governments in both these countries took steps in 1981 to
introduce interest-free banking. In Pakistan, effective 1 January 1981 all
domestic commercial banks were permitted to accept deposits based on
Profit-and-Loss Sharing (PLS). New steps were introduced on 1 January
1985 to formally transform the banking system over the next six months
to one based on no interest. From 1 July 1985, no banks could accept
any interest bearing deposits, and all existing deposits became subject to
PLS rules. Yet some operations still allowed continuing on the old basis.
In Libya, certain administrative step was taken in February 1981 to
eliminate interest from banking operations. Interest on all assets was
replaced by a 4 % maximum service charge and by a 4 to 8 % profit rate
depending on the type of economic activity. Interest on deposits was also
converted into a guaranteed minimum profit. In August 1983, the Usuryfree Banking Law was introduced and a fourteen-month change over
period began in January 1984. The whole system was converted to an
interest-free one in
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March 1985. Sharia based modes

of financing which can create a real difference in the society are not
getting momentum in the operations of IFIs. Hanif, & Iqbal have identified
the hindrances (e.g. profit manipulation, riskiness of financing under
sharing, lack of awareness, widespread conventional banking, lack of
skilled human resources etc.) in the way of popularity of Sharia based
financing and concluded that existing accounting and business frame
work is not conducive for application of Musharaka and Mudaraba.
Islamic banks are doing business in a nonconductive environment which
makes operations challenging. IFIs cannot claim interest on their
balances with other banks, on mandatory cash reserve maintained with
central bank, cannot invest in government securities, interest based
bonds, cannot claim time value of money from defaulters, bear risks in
sale and lease transactions, can only invest in Sharia compliant
securities and not in all available equities and finally have to compete
with conventional banks in deposit servicing as well as
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in financing. But
by the end of December 2008, in more than 50 countries approximately
300 institutions was operating and they managed funds of US$ 951
billion. Persian Gulf Area is the centre of Islamic
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finance with a share of 82% followed by South Asia and Fareast region
13% and balance from all over the world including Europe, North
America and Africa (IFSL 2010). So for (June 10) six full-fledged Islamic
banks and 13-conventional banks with Independent Islamic Branches
are operating in Pakistan. On Figure 3 we can see the growth in assets,
deposits, and financial disbursements of IFIs working in Pakistan (SBP,
2010). Growth in Islamic banking industry in last six years is marvelous
in Pakistan. Figure 3 displays growth in Islamic banking in Pakistan.
Number of branches has increased from 17 in 2003 to 667 within six and
half years an average annual increase of 78%. Assets increased at
average annual rate of 76% while deposits increased at average annual
rate of 85% and financial disbursements and investments increased at
average annual rate of 66% during the period (12/03 - 06/10). Overall an
average growth of 76% per annum in the last six and half years (12/0306/10) was achieved by Islamic banking in Pakistan. Figure 3. Growth in
Islamic Banking in Pakistan Rs. Billions In spite of these difficulties
growth of Islamic financial system world over in general and marvelous
growth of 76% (average annual) in Pakistan in last six and half years
suggests a bright and promising future of this financing system. Two
issues at hand demands attention of policy makers immediately including
a separate law of Islamic banking to regulate the industry and
implementation of accounting standards issued by Auditing & Accounting
Organization of Islamic Financial Institutions (AAOIFI) for preparation of
annual reports of IFIs. Figure 4. MENA Islamic Banking Assets 2015
Chapter 2: The phenomenon of turning conventional banks to Islamic
banking The concept of transformation to Islamic banking Not only
provide Islamic banking, Islamic banking, has accelerated the number of
Traditional banks to offer Islamic banking products in forms and multiple
entries, this phenomenon has spread regionally In Islamic countries, then
moved to global banks in the West, especially in Europe and America.
The transition from a traditional banking based on the interest rate to
Islamic banking is based on the principle of participation in profit and
loss, and is a traditional bank in deal types of banking transactions in
violation of the provisions of Islamic law, and in particular dealing with
RIBA, either the desired mode shift is the replacement transactions
contrary to Sharia, as God of the authorised transactions letter,
to achieve justice among customers in the light of the purposes of
Islamic law. The transformation decision makers will meet to continue
ahead with the transformation plan until full transformation. The World
Bank (branches, departments) called a total transformation, others have
only been seriously challenged and some branches and/or departments
or some Islamic banking products without fully intenton switching.
According to specific plans, it is called a partial transformation. We have
several views on the definition of the phenomenon of Islamisation of
traditional banks (the phenomenon of transformation)
started providing Islamic banking in traditional banks in the form of an
independent Islamic branches, since dating idea Islamic branches of
traditional banks to onset of Islamic banks, when the idea began.
Creation of Islamic banks move from theory to practice in the early 1970s
of the century CE past some traditional banks offer banking products
Sharia compliant And when I realized the extent of uptake of
conventional banks Islamic banks and the growing demand for various
Segments of a community on Islamic banking products, then some
decided to enter this experience and create branches specializing in
Islamic banking. Islamic banking
is a very young concept. Yet it has already been implemented as the only
system in two Muslim countries; there are Islamic banks in many Muslim
countries, and a few in non-Muslim countries as well. Despite the
successful acceptance there are problems. These problems are mainly
in the area of financing. With only minor changes in their practices,
Islamic banks can get rid of all their cumbersome, burdensome and
sometimes doubtful forms of financing and offer a clean and efficient
interest-free banking. All the necessary ingredients are already there.
The modified system will make use of only two forms of financing - loans
with a service charge and Mudaraba participato ry financing - both of
which are fully accepted by all Muslim writers on the subject. Such a
system will offer an effective banking system where Islamic banking is
obligatory and a powerful alternative to conventional banking where both
co-exist. Additionally, such a system will have no problem in obtaining
authorisation to operate in non-Muslim countries. Participatory financing
is a unique feature of Islamic banking, and can offer responsible
financing to socially and economically relevant development projects.
This is an additional service Islamic banks offer over and above the
traditional services provided by conventional commercial
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banks. Islamic
finance is one of the fastest-growing segments of the worldwide financial
system, extending across the Middle East, South East Asia and
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Africa. It promotes, develops and applies Islamic principles, law and

traditions to financial, banking and business transactions and
encourages investment companies to operate in line with Shariaa Law.
There are almost 2 billion Muslims worldwide, a statistic that cannot be
overlooked even in the banking industry. However, Muslims have very
strict laws governing financial transactions. Islamic banking must adhere
to the laws of Sharia to be true Islamic banking centers. Sharia law is the
law of Islam. The rules concerning financial transactions are known as
Fiqh al-Muamalat. The most prominent of these laws are the laws
concerning the charging of interest or fees on loans or usury fees. This is
known as Riba. Islamic banking laws also forbid investing in financial
unknowns, such as trading in futures, and in businesses that participate

in ventures that are against Islamic principles. To comply with the laws
concerning interest, Islamic banks often require a large down payment
on property or goods being purchased. They may also require collateral
equal to the value of the transaction. Instead of granting
loans
in the conventional way, a bank will purchase the goods or property from
the seller and enter into an agreement with the buyer to sell it to them
at a higher price. Since this is an exchange of goods, not money, the
banks are allowed to enter into this transaction and make a profit. This is
known as Murabaha (cost plus) and is how all property is purchased
through a Sharia compliant bank. Islamic banks do not issue mortgages.
These transactions can fall under specific categories and practices. Safe
Keeping (Wadiah) is where the customer transfers funds to the bank to
hold (Keep) until their debt is repaid. During that time the bank is allowed
to invest those funds to generate a profit for the bank. The bank may
also charge a service fee for keeping the account safe during this period.
The bank is allowed to give a gift (Hibah) on the account in the form of a
monetary payment at the end of the term if it wishes. The bank, however,
must have all deposited monies readily available should the debt be
repaid and the deposit claimed. Mudharabah (profit sharing) is a
partnership that is formed between an entrepreneur and a bank to start a
business. The Bank will supply all the money necessary to start
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the business and as the business operates it will receive a set amount of
the profit until the initial debt is repaid. The bank will also receive as a
bonus, an additional %age of the profits until the loan is paid.
Musharakah (joint venture) runs on the same principal except there are
more than one business partner when the business is created. Each
banking institution employs a special governing board that makes sure
that all Sharia laws are complied with within the institution. This board
will review all practices and investments prior to a transaction being
finalized. They are also responsible for reviewing any potential
investments the bank may make to ensure they comply with investment
rules. While many of these practices may seem strange to western
bankers, Islamic banking has taken its hold in the Middle East. Deposits
into Islamic banking institutions have been growing between 25 and 40%
a year since 1975. Since the early 1970s, Islamic
Banking practices have been gaining popularity and showing steady
growth at an astounding rate of 10-15% annually in recent years, despite

the world-wide economic downturn. Islamic banks base all their rules and
regulations on the Sharia law of Fiqh al-Muamalat (rules of transactions).
Islamic banks are now located in over 51 countries around the world,
including the United States, and there are over 300 institutions that
qualify as Islamic Banking institutions. Islamic finance and investing
institutions are the largest growing sector in this industry, growing at 25
% in the year 2010. Acting in Accordance with Sharia Law in a New Age
of Islamic Banking One of the most distinguishing practices in Islamic
banking is the lending of money interest-free. Sharia law prevents the
charging of interest on lent money. To comply with these laws, Islamic
bankers have designed many different programs that allow for the
lending of money, making of bank profits and compliance with Sharia
law. Some Islamic banks found in Asia, most notably Bangladesh,
participate in micro-lending programs, but some banking regulators find
that this practice is not in accordance with Sharia law. Currently there are
no rules regulating Islamic banking. While many organizations have been
formed, such as the Union of Arab Banks, MENASA and the World
Islamic Banking Conference, to address regulation issues, there are no
set rules and regulations in place. At a recent meeting of MENASA
(Middle East North Africa South Asia) bankers a call was put forward to
enact common banking regulations that will encompass all Islamic
banking practices. It was stated that implementing a standardized form of
processes, supervision and regulations among all Arab banks will allow
for superior economic growth. It was also stated that the current
economic crisis that the world is facing is even a stronger reason for
these concessions. As world banks implement more stringent regulations
on banking practices and investments the Arab banking system may
suffer due to its inability to be compatible amongst itself was the theme
to this latest conference. Leaders agreed, but have yet to implement any
industry wide changes to the system. At this latest gathering of bankers it
was stated that a failure to become a system that works well together will
cause hardship in the Arab region. Economic development, infrastructure
and all facets of industry could be directly affected by the inability of
banks to all comply to one set of regulations. The recent Union of Arab
Banks conference had similar debate at their recent conference. The
Union, a leader in information regarding Islamic banking practices
encourages the development of a single set of laws for Islamic banking
practices to ensure that Sharia law is obeyed. With Islamic banking and
investing growing at such an expediential rate is easy to understand why
one set of regulations is necessary. It is estimated that nearly 200 billion
dollars a day transact through Islamic banking, a considerable amount
for such a new industry. With an estimated 2 billion Muslims world wide it
is easy to see that there is a huge potential for growth in this industry. A
single set of regulations guiding this industry is a surefire way to ensure
the continued growth of the industry as well as stability in the regions
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they serve. Introduced in the Middle East over 40 years ago, the Islamic
banking market today is worth in excess of US$1.1 trillion worldwide. As
a measure of its success and the demand for it, the Top 20 Islamic banks
in the Gulf region have grown by 20% in the last 18 months - compared
to an average of 9% for conventional banks. Today, many of the worlds
top Shariaa-compliant banks rely on Islamic banking solutions to offer a
full and competitive range of Islamic financial products to its customers.
At the heart of this growing sector sits the Islamic banking technology
architecture. Thats why it makes sense to partner with a proven, worldclass Islamic banking software provider able to offer solutions with rich
functionality. Functionality that enables you to build your business around
serving your customers ethically, reliably, securely, transparently,
sustainably and competitively. Generally speaking, all
interest-free banks agree on the basic principles. However, individual
banks differ in their application. These differences are due to several
reasons including the laws of the country, objectives of the different
banks, individual banks circumstances and experiences, the need to
interact with other interest-based banks, etc. In the following paragraphs,
we will describe the salient features common to all banks. All the Islamic
banks have three kinds of deposit accounts: current, savings
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and investment. Table 1. Differences between convencional and islamic

banks In
any economy, private investment occurs in two different ways: active
investment, where one or more persons put their own capital into a
project, manage it themselves and enjoy the fruits of their labour and
capital themselves; and passive investment, where the investor provides
the capital and receives a return but takes no further part in the
project. Broadly speaking, a passive investor has three options: one,
buy shares in a company and receive a dividend; two, buy bonds or
securities and receive interest; three, deposit in a bank and receive

interest. In an Islamic economy, active investment and the first option
are permissible while the last two options would be regarded
as riba (interest) income and therefore prohibited. On the entrepreneur
side, he may finance his project using his own capital, by selling shares
in his enterprise, or by borrowing on interest (from a bank or by issuing
bonds/securities). In an Islamic setting, the first two methods are
permissible while the last is not. For clarity the scenarios are depicted in
Tables 2 and 3. Type of investment Mode of investment Type of return on
capital Islamic position Active investment In own enterprise Profit or loss
from the enterprise Allowed Pass ive investment Shares in a company
Dividend (profit or loss) from the company Allowed Bonds/ securities
Fixed positive return (riba) Prohibited Bank deposit Fixed positive return
(riba) Prohibited Table 2. Investment options for capital-holders Type
of financing Mode of financing Type of return on capital Islamic position
Active finance Own funds Profit or loss from the enterprise Allowed Pass
ive finance Share capital Dividend (profit or loss) from the company
Allowed Bonds/ securities Fixed positive return (riba) Prohibited Bank
loans Fixed positive return (riba) Prohibited Table 3. Financing options
for entrepreneurs Both conventional and Islamic systems permit and
encourage active investment, which rewards labour and capital from
realised profits. Both also permit and encourage passive investment in
shareholder companies, which too reward capital from realised profits in
the form of dividends. In both cases any realised loss is borne by the
capital-providers. But any investment that brings in riba income or
financing that involves the payment of riba is prohibited in an Islamic
system. This leaves the Muslim passive investors who cannot or will not
buy shares in a company and Muslim entrepreneurs who do not have
their own capital or cannot raise share capital but need seed capital
and/or additional funds in a difficult situation. If not for their religious
convictions, they would resort to bonds and securities or fixed deposits
and bank loans. Since this category of investors and entrepreneurs form
a large section of the Muslim investor-entrepreneur community, it is
necessary to address their difficulty. This essay explores the options
available to this group within an Islamic setting. Participatory Financing
explained in the following paragraphs is a system developed to address
this special concern of Muslims. It is based on the ancient concept
of mudaraba. Mudaraba is an ancient form of financing practised by the
Arabs since long before the advent of Islam. It suited the Meccan Arabs
because of their location at the cross roads of the ancient trade
caravans. They themselves were merchants carrying goods north to
Syria in the summer and south to the Yemen in winter. They took goods
from their homeport to sell at their destination, and with the proceeds
bought other goods and brought them back to sell at home and/or to reexport to another destination. When a trading caravan is organised it
was the practice of the Meccans either to join it with their own goods and
money or to send such through agents who did the business on their
behalf. When a caravan returned home and the goods were all sold, the
mission was complete and it was time to prepare the balance sheet and
calculate the profit/loss. Traders who took their own money and goods
assessed the success of the mission by the profit/loss they made and
enjoyed the fruits of their labour or mourned their loss on their
own. Those who combined their fortunes with that of one or more of
their colleagues and undertook the project together had to go one step
further and divide the fortune or loss among the partners, according to a
pre-agreed pattern. The rules of this pattern had long been established
by custom and had been known by the name musharaka. The agents
who carried others goods and/or money had to give accounts to their
principals and claim their share of the profit/loss according to a prearranged pattern. This too had rules assigned by custom and was
known by the name mudaraba. When Muhammad (Peace be upon him)
began his prophetic mission he did one of three things with regard to the
practices of the Arabs: 1) if it involved the denial of the existence or the
uniqueness the one God (Allah) or associating anything or anyone with
Him or was against any command of God, he prohibited it outright; 2) if it
did not involve any such action he did not interfere with it; 3) if some
useful or essential practice involved some elements of the first, and if
that could be removed, he removed the offending elements and allowed
the modified version to be practised. Mudaraba and
musharaka belonged to the second group. Islamic financial institutions
assume the role of traders and use the modes of trade but remain
financiers. This metamorphosis is achieved by legal documentation and
some self-persuasion. It does not, however, convince many; and the
root of the problems faced by Islamic banking and finance today lies in
this split personality. The Mecca of 1400 years ago was a small city (of
possibly a few thousand inhabitants), practically everyone of any
significance was known to everyone else, and the assembling of a trade
caravan was a great public event that took place twice a year. The
Whos Who? of the financiers and the agents, their character and
abilities, who took what, what was sold for what price, what was bought
for what price and the sale price were all public knowledge. There was
little room for misbehaviour and the price for it in terms of social
ostracism was very high. Today, in the modern world, especially in large
cities, practically everyone is a stranger to his neighbour. Financial
affairs are strictly private. Who has money, who needs it, and to do what
are all generally unknown to any other. But the bank has become privy
to this information, including the amounts, and has established itself as

an intermediary between the owner of funds and the entrepreneur who
needs it. The reality today is that there are many Muslim capital-holders
who wish to earn an income from their capital but have neither the time
nor the skills necessary to embark on a project. They may range from
simple wage earners who have saved some money, pensioners, widows
or orphans who have received a knob sum payment, trusts and
institutions with whom some capital has been entrusted, to insurance
companies and individuals who have innate a fortune. The size of their
capital too may vary from hundreds and thousands to millions. They
need to invest their capital in a gainful undertaking, but may not know
any entrepreneurs who wish to go on board on a project and are looking
for financiers. Even if they find one, they may not have the necessary
skills to assess the viability of the project or the ability and integrity of the
entrepreneur. On the other hand, entrepreneurs who have feasible
project proposals may not know those who have the necessary funds
and are ready to invest in their projects. This is where, in the situation of
the present-day, the need arises for a financial liaison that could bring
the investor/financier and the entrepreneur together. Conventional banks
do perform this role very effectively and efficiently. Capital holders
deposit their funds with the bank, and entrepreneurs submit their project
proposals to the bank, the bank examines the business plan and if it is
satisfied that the project could bring in sufficient income to allow the
repayment of the principal and interest, and provided sufficient collateral
is also available, the bank advances a loan. The bank does not get
involved in the project; whether the entrepreneur/borrower makes a profit
or loss he pays the principal and interest on due dates, or the bank has
recourse to the collateral. The bank accepts the depositors capital,
guarantees its full return, and pays him an interest (or return on his
investment) at a fixed rate, and uses the capital to grant loans to
borrowers. But the interest rate given to the depositor is always smaller
than the rate the bank charges the borrower, and the difference goes to
cover its own expenses and profits. This seems to work very well if
people have no qualms about paying or receiving interest, despite the
built-in injustice to both the entrepreneurs and the depositors. But some
people are beginning to have qualms, and Muslims are prohibited from
earning an income in this fashion. Islamic banking is a response to their
concern an alternative method to address the need, minus the
injustice. Mudaraba is essentially an agreement between a financier and
an entrepreneur the principals. However, taking account of the
modern social structure and context, the pioneers of Islamic banking
brought in an intermediary between the principals and created a twotier mudaraba. This modified form of mudaraba was introduced into
conventional commercial banking in the form of Profit-and-Loss-Ssharing

(PLS) investment accounts and financing arrangements. The earned
profit (which is an uncertain and unpredictable return on capital) was to
replace the interest (a pre-determined fixed return) in the conventional
setting. This, however, was not acceptable to the conventional banking
authorities. Therefore, except in a few countries where rules were
relaxed or special banking laws were enacted, it was not possible to
establish and operate Islamic banks in most countries of the world. In
such countries Islamic financial institutions, which did not come under
deposit bank regulations, were introduced. In both cases, while the
deposit/investment side worked on mudaraba basis, mudaraba was only
one of several modes used for financing. Though a preferred one in
theory, in practice it became one of the least used. The most used forms
are modes of trade, and this has led to questions of morality and
ethics. In addition, Islamic banks are unable to provide all the financing
services expected of a commercial bank. One of the very serious
consequences of using modes of trade as modes of financing is that
Islamic financial institutions are confined to financing short-term trade,
and are unable to finance long-term projects in industries, agriculture,
services, etc. The latter are equally important, if not more, to any country
except perhaps for some few raw mate Dinars exporting countries which
import all other products. But this situation too cannot continue for
long. The question is: is there a viable alternative methodology? A
comprehensive new methodology has been developed in a series of
three books published in the last few years, and an overview of the
salient features of the new approach is given in a recent publication. In
Islam, there is a clear difference between lending and investing lending
can be done only on the basis of zero interest and capital guarantee, and
investing only on the basis of mudaraba. Conventional banking does
not and need not make this differentiation. But a system catering to
Muslims has to take this into consideration and provide for two subsystems one to cater to those who would lend and another for those
who wish to invest. The first sub-system would cater to those who wish
to put their money into a bank for safety and transaction convenience;
and the bank would provide all current account facilities and short-term
loans and advances. This is explained in a 1995 publication Interest-fr
ee Commercial Banking. The 1996 publication Participatory Financing
through Investment Banks and Commercial Banks describes the second
sub-system, where both investment and financing are strictly on the
basis of mudaraba. Though the title mentions only banks, the
methodology can be used by investment companies as well. In this
article we propose to bring out the salient features of the second subsystem. In the present era inflation is an important consideration where
money is involved, and this has serious consequences in a riba-free

system. An attempt at dealing with it in the context of banking and
finance is presented in the third book: Commercial Banking in the
presence of Inflation 1999. The central idea in the concept
of mudaraba is that two parties, one with capital and the other with knowhow, get together to carry out a project. The financier provides the
capital and plays no further part in the project; specifically, he does not
interfere in its execution, which is the exclusive province of the
entrepreneur. If the project ends in profit they share the profit in a prearranged proportion. If it results in loss the entire loss is borne by the
financier, and the entrepreneur gains no benefit out of his effort, which
was his part of the investment. There are many variations of this simple
model but this is the basic concept. Mudaraba is usually translated as
profit-and-loss-sharing but, as far as the financier is concerned, it is in
fact profit-sharing-and-loss- absorbing. In participatory financing, as
envisaged in the present discussion, there are three important additions
to this basic concept. One, there are many investors and many
entrepreneurs. Two, an intermediary comes in with whom investors
deposit their funds and the intermediary finances projects put forward by
entrepreneurs. In this investors-intermediary-e ntrepreneurs triangle, the
investor is essentially a sleeping partner. He provides capital and then
shares the profit or absorbs the loss. It is the responsibility of the
entrepreneur to present a good proposal, convince the financier that it is
viable and profitable, and provide proof that he is able, qualified and
experienced to carry out the project successfully. The intermediary is
both an entrepreneur and a financier. When he accepts funds from an
investor, he is an entrepreneur; and when he finances a project
submitted by an entrepreneur, he is a financier. Three, individual
investors and individual entrepreneurs have no direct contact/relationship
with each other. The investor does not know which project is financed by
his capital, and the entrepreneur does not know whose money is
financing his project a pool of funds from several investors finances a
series of projects from several entrepreneurs. When it comes to
profit/loss sharing too it is the net profit/loss from all the projects that is
shared among the investors (and the intermediary). The individual
entrepreneur, however, shares with his financier (the intermediary, in the
first instance) the profit/loss from his own project only. It is appropriate at
this point to state that in the above scenario, the financiers both the
investors and the intermediary operate purely on the basis
of mudaraba while the entrepreneur is free to choose any mode of
practice (such as murabaha, ijara, salam, istisna, etc.) appropriate to his
trade, business, industry, agriculture, etc. to run his enterprise. Thus the
proposed method simply avoids the need to devise dubious financial
instruments which have brought the very concept of Islamic banking and
finance into disrepute. This also nullifies the need for Sharia Boards in
these institutions. Another important characteristic of
ancient mudaraba was that it was a one-project, time-limited
contract. That is, the contract (between the two principals) began with
the assembling of a particular caravan and ended with its return each
new caravan started with new contracts, whether with the same partners
or with new ones. Today no trade caravans ply between distant lands,
assembling anew and dismantling each season; but businesses,
industries and all kinds of other enterprises are established and run on a
long-term basis. Therefore, in the modified version this time-limited,
single-project characteristic has also been removed. This enables the
basic concept of mudaraba to be applied to all kinds enterprises on a
long-term basis. The function of the intermediary is very important. He
is responsible for identifying good projects for financing as well as for
monitoring their progress and ensuring proper accounting and
auditing. But he (the intermediary) plays no part in managing the project
or in making policy decisions that is the exclusive domain of the
entrepreneur. The intermediary is a separate physical and legal entity,
independent of both the investors and the entrepreneurs. But he (she/it)
is an equal partner in every project he finances so that he has full legal
right to the physical and financial assets of all the projects and has full
access to all the books. This is very important, and it is here that
participatory financing differs from conventional financing practices; in
this respect it differs from the current practices of Islamic banks too. This
allows the intermediary to have a true picture of the health of the projects
at all times. He can then take any preventive or corrective action (in
extreme cases), and, in the event of failure of a project, he can recover
whatever is left of it. This possibility gives assurance to the investors
that their investment is safe, albeit within limits which they are aware of,
and that the profit and loss account given to them is reliable and
transparent. The fact that the investors confidence in the intermediary
and the intermediarys own profit depend on the number and size of
successful projects should ensure that the intermediary seeks out good
projects and closely monitors their progress. One important feature of
participatory financing is that the entrepreneur need not provide security
for the financing he receives. The project itself is the security, and the
intermediary, being an equal partner in the enterprise, is its
guardian. This should play a very constructive role in discovering and
developing new entrepreneurial and other talents in the society,
especially at the micro level, otherwise unearthed on account of the
unavailability of collateral/security. The proposed scheme provides for
two types of investments: one called Participatory Financing (PF) stocks
and the other PF shares. These are essentially stocks and shares in the
intermediarys PF scheme (which is a collection of all (or a group of) the
projects financed by the intermediary). PF shares correspond to unit
shares because every PF share contains a tiny portion of every project in
the scheme. PF stocks roughly correspond to fixed deposits in a
bank. The main difference between the conventional fixed deposits and
the PF stocks is that the return in the latter is computed from the profit
and loss statements of all the projects in the PF scheme (and the
profit/loss shared among the participants) at the end of the accounting
period. Therefore the profit/loss is a realized one, and not an anticipated
or pre-fixed one. Thus neither speculation, nor uncertainty, nor riba is
involved in the operation. But the PF stockholders will have to wait till
the end of the accounting period to collect their returns. The status of
each of the three participants in this scheme is as follows. The
intermediary (an investment bank or an investment company) is a
holding company with the legal status of a (public) limited liability
company. The investor may either hold a PF Share or a PF Stock. The
PF shareholders are like ordinary shareholders in the holding companys
PF scheme. The PF stockholders are like the time-deposit holders in a
bank. Each project is a partnership limited liability company where the
entrepreneur and the holding company are the two partners. PF shares
provide the equity capital for the PF projects, while the PF stocks cater to
the short-term cash requirements (which are normally met by loans and
advances from commercial banks). In essence, participatory financing
combines features of time deposits, business organizations
(partnerships, shareholder companies and holding companies), and unit
trusts on the one hand, and equity capital and commercial bank loans
and advances on the other. It makes use of well-known rules and
techniques of financing, company laws and accounting procedures. That
makes it easy to implement, but the combination of all these in one
single system within an entrepreneurial environment is a new
formulation. That makes it a challenging one, requiring new attitudes
and a comprehensive approach. The theory of participatory financing
has been fully developed and presented in the book. The depth of the
theory can be gauged from the details given in the appendices, one of
which is reproduced below (with slight explanatory modifications to suit
this article) to help better understand the system. The implementation of
this system requires the cultivation of new attitudes on the part of all the
participants. This is a tall order but is an absolute necessity if we are to
create a truly riba-free economy. It requires more from each participant,
but it also offers more both to the individual and to the society as a
whole. From the investor it requires the full understanding that he/she/it
may incur loss and that he will have to wait longer to know the results,
but it promises a truly riba-free income and possibly better profits. From
the entrepreneur it requires complete and accurate bookkeeping and full
disclosure of all his/her/its accounts and the sharing of his bounty with
his financiers, but it provides him with capital without collateral and the
guarantee that in case there is a loss he will not be required to make it
up, provided he had been honest in his dealings and his books will
substantiate it. The intermediary is both a banker and an
entrepreneur. As an entrepreneur, he too is required to be honest in his
dealings, and accurate and transparent as to his bookkeeping and
accounts. Bankers are trained to be very cautious, because their first
concern is to guarantee the safety of the funds deposited with them. But
in this system they are relieved of that concern because the investors
have agreed to take the risk, and therefore if they persist with the
bankers attitude they will miss many opportunities at the investors
expense. On the other hand, too much adventurism can bring about low
profits or even loss, and that may lead to the loss of customers. They
must have an entrepreneurs natural talent to spot profitable projects and
to avoid bad ones, and should develop it into a professional tool. The
intermediarys staff will have to be carefully picked and trained to bring
out inherent entrepreneurial talent. Such intermediaries will have ample
reward, as they will share in the profits. It requires a new culture, a
culture of entrepreneur-financiers and of professionally run partnership
companies. The system is heavily dependent on proper and accurate
bookkeeping, accounting and auditing. That requires the availability of
trained bookkeepers and their wide use, as well as professionally
responsible and well-trained accountants and auditors. They are the
bedrock of the system. The system requires a high level of integrity from
these personnel, and it is in the interest of all the participants in the
system to respect it. Substantial investment is necessary in the training
of such personnel, and legal protection is necessary to safeguard the
independence of the auditors. The comprehensive system presented in
the four books groups the entire spectrum of business activities into
three broad categories: at one end is the one-man-owned-and-operat ed
small enterprises, including the ones financed or supported by loans and
advances from commercial banks, and at the other end are the large
enterprises financed entirely by shareholders and managed by
professionals. In between are the proposed participatory-financed
enterprises. The size of the enterprise is an important factor in this
categorization, and the type of financing and the type of organization
must generally match the size. Presently in all developing countries to
which group most of the Muslim economies belong the distribution is
highly skewed towards the smaller end. To achieve a better and stable
economy, it is necessary to bring about a more even
distribution. The mudara ba principle is applicable to a range of

situations, from a simple local two-person partnership to a multiparty
international corporation. A shareholder company works essentially on
the mudaraba principle. But the participatory financing scheme
envisaged in this article aims at the middle section of this range. It brings
in the intermediary, and provides the investors with a unit trust type of
investment opportunity. The scheme is ideally suited to medium
scale new enterprises. However, it is possible to modify it slightly and
bring in some of the running businesses too into the participatory
financing system. This will help expedite bringing about the even
distribution mentioned earlier. This can be done as follows. There are
two possibilities. One, the enterprise is a running business and has no
debts, and wishes to expand its activities. In this case, first the present
worth of the enterprise (property, equipment, stocks, receivables, etc.
including goodwill) must be determined. This is the capital of the
enterprise in monetary terms. The investment bank/company brings in
the necessary additional capital, and both go into a partnership
(preferably by establishing a new private limited liability company) as
before. However, in the present instance the original enterprise has two
roles, as an entrepreneur and as a financier, while the investment
bank/company is only a financier. Accordingly, when the profit/loss is
computed, the financiers (both the enterprise in its role as a financier and
the investment bank/company) will first share the profit/loss with the
entrepreneur on mudaraba terms. Next, the two financiers will share
the financiers share between themselves in proportion to their capital
contribution. Finally, the bank/company will credit its share
from this project to the bank/companys PF pool of profit/loss. The
procedure from here on is the same as previously described. Two, the
enterprise is a running business and has debts owing to, say, a
commercial bank. In this case, the investment bank/company will pay up
all the debts and go into partnership with the enterprise, as in the first
case, with this amount as its capital contribution. In establishing the new
institution of mudaraba-based investment and finance, using the
participatory financing scheme as described above, it is preferable to
start with medium size running businesses. This will provide a stable
base for the new institution to test the theory and to gain experience. In
order to bring about a riba-free economy, the countrys banking system
has to be riba-free, its commercial enterprises have to be financed by
equity capital, and its investments have to be on a profit and loss sharing
basis. This article has dealt with investment and financing, and has
introduced a mudaraba-based system called participatory financing that
takes into account present-day realities. This is a new institution
specifically developed to address the concerns of Muslims. It has no
parallel in the conventional economy, but the individual tools and

techniques it uses are ones tested and proved in the conventional
setting. Thus, while re-invention of the wheel has been avoided, proving
the viability of the new institution and benefiting from it are challenges
specific to Muslims. It is for the Muslim intellectuals, professionals,
investors, entrepreneurs, and other concerned individuals, institutions
and organizations to take up the challenge. Procedures relating to
Participatory Financing (PF) stocks and shares In this part of work we
present working definitions of some terms and procedures, which can be
used as a basis for the development of an operational model. The main
purpose here is to indicate the many issues that should be addressed in
devising such a model. The definitions of stocks and shares have not
remained unchanged over time, the distinctions have become blurred,
and they have acquired different meanings and connotations in different
countries. For example, what were known as stocks in the UK are now
bonds in the USA, and shares have become stocks. The stocks and
shares under the PF scheme have much in common with the original
British definitions of the terms, but they have also some special
characteristics of their own. Therefore we have to define what we mean
by PF shares and PF stocks. Participatory Financing Shares are ordinary
shares in the company, which consists of all the PF projects the bank is
currently financing or hopes to finance in the near future. Funds
obtained by selling new PF shares are to be used as venture capital for
new projects. On account of the fact that every project will have a
gestation period, the company will not be able to post a profit or loss
statement on these projects until they become operational. Th erefore
PF shares cannot expect to earn a profit or loss during this
period. However, since different projects will have different gestation
periods and because the PF shares are not directly connected to any
particular project, we have to find a way of saying when a PF share
begins to earn a profit or loss. One way of doing it is for the bank to
determine a common average gestation period for the projects expected
to come under the PF scheme and to announce this period when the PF
shares issue is advertised. The shares will not earn any profit or loss in
this period of, say, one to three years. The PF shares will mature-at the
end of this gestation period. And all mature PF shares will be entitled to
a share in the profit/loss of all the operational p rojects of the
company. The dividend on these shares is determined on the basis
of the net returns of all the PF projects of the company operational du
ring the banks accounting period, say, annually. Profit and loss
accounting is done at the end of the year. Therefore the final dividend
awarded to PF shareholders is a realized profit/loss and not an estimated
or pre-fixed one. Hence there is no room for uncertainty, speculation
or riba. This is very important. PF shares are transferable and have no

termination points. PF shares will also have a stake in the assets of the
projects. However, since the investors have no direct connection with
any particular project, the claims of the PF shares are on all the projects
of the company. Thus, if, for example, a project ends and the assets
are sold off or the bank sells off its shares in a project (perhaps to the
entrepreneur or to an outside investor) the proceeds from such sales will
accrue to all the PF shares of the company (providing interim
dividends, additional PF shares or increasing their value). Whether the
PF shares are issued periodically, as and when necessary or are
available throughout the year, are all operational concerns and are
matters for individual banks decision. The bank may also consider
issuing separate shares to different groups of projects. In this instance
each group will come under the purview of a separate company.
Participatory Financing Stocks are funds deposited with the bank for a
fixed period of time, to be invested in their Participatory Financing
projects. The return on these investments are determined on the basis
of the net returns of all the PF projects of the bank operational during the
banks accounting period, as computed at the end of that period. And
the bank will use these funds mainly to advance further credits
to operational projects. In effect, PF stocks are like fixed-term deposits
except that neither the capital nor the return are guaranteed or fixed in
advance. The special characteristics of the PF stocks would be that: 1)
PF stocks will not bear any fixed rate of return or interest, 2) the return
will be determined at the end of each accounting period, and no attempt
will be made to make any estimates in advance, 3) PF stocks are for a
defined period, but they may be reinvested for another defined period, 4)
PF stocks have no priority claims over PF shares, and 5) PF stocks
share in profit and loss, but they have no claims on the assets of the
projects. Now we have to explain what we mean by projects and the
company in the foregoing paragraphs, in the context of participatory
financing. Also how the profit/loss from the projects is shared among the
participants. The dividend we have been talking about has one major
difference as compared to other conventional company
dividends. Unlike them, as seen above, the PF dividend can be positive
or negative. This needs some explanation, but it is important to note the
difference. Its computation and disbursement are also
different. Therefore we will examine them below in some detail.
The entire net profit or loss of this company will be first distributed as
dividends to all mature PF shares and all the PF stocks immediately
after the announcement of accounts. If the outcome is a net profit, it will
be credited to the account of the shares and stocks. No part of this profit
will be held back at this stage for future investment or as buffer against
future losses. That is, there is no a retained profit or reserves at this

stage. If the outcome is negative, it will, similarly, be debited from the
account of the shares and stocks. This is necessary because in the PF
scheme both the stocks and shares participate in the profit/loss of the
enterprises, unlike in the case of conventional companies where only the
shareholders participate in the companys profit/loss while the
stockholders (preference shares, bonds, debentures, etc.) capital and
return are guaranteed. Otherwise, if, for example, some (or all) of the
profits were held back, the PF shares would rise in value at the expense
of the profits of PF stocks. On the other hand, if a loss is realized and it
is compensated by previously held profits, the PF stocks will escape loss
at the expense of PF shares, which will fall in value. However, while the
PF shareholders and the PF stockholders will be treated equally in the
computation of their dividends they will find themselves in different
situations when it comes to the disbursement of it. If the dividend is
positive the PF stockholder will find his capital increased; but decreased
if negative. He is free to do what he will with his capital reinvest it or
take it away. On the other hand, the PF shareholders may not be so
free. For the bank may decide to retain all or part of the dividend due
to them. If the dividend was positive and part of it is held back, they will
receive some profit out of their investment and, at the same time, the
value of their shares would rise. If negative, they would receive no
profits and, in addition, their shares would fall in value. The net profit/loss
of each PF project operational during the accounting period is obtained
from its Profit and Loss account. The total net profit/loss of the
company is obtained by summing up the profit/loss of all the individual
projects. The problem is how do we distribute the profits among the
shareholders and stockholders? Do the stocks and shares have equal
standing? Suppose the answer is yes, then what is the relationship
between a stock and a share? Are they counted in terms of units or in
terms of currency? Some meaningful solution has to be found. One way
of doing it would be to first count the stocks in terms of units as we do of
the shares, and equate one unit of stock to one unit of share. Then
every unit of stock will earn profit/loss the same as one unit of
share. Now how do they stand in terms of currency? Is the price of a
stock the same as that of a share? Which price are we talking about: the
nominal value of a share, its market value or its book value? Without
going into the details of why the former two are not quite suitable, let us
settle down for the third the book value of a share and see how this
can be computed and fixed in advance. When the annual (or quarterly,
half-yearly) account is made up and the dividends are disbursed, the
shares of the company will have a book value as at the beginning of the
next year. The price of one stock in that year can be fixed equal to this
book value of one share. Thus the stocks in the company will be sold
in integer multiples, their unit price will be the same throughout the
current year (or accounting period), and every unit of stock will earn the
same dividend as a unit of share. The price of a stock, however, may
vary from year to year depending on the performance of the company
but will be equal to the book value of the share at the beginning of the
year and will remain the same throughout that year. Consequently, as far
as the computation of dividend is concerned, the company has a total
of this many units of shares and the dividend per unit is obtained by
dividing the total net profit/loss of the company by this number of
shares. This dividend per unit is then the same for both PF shares
and PF stocks. Inflation is currently a fact of life and it erodes the value
of capital as time passes. Since the capital involved in Participatory
Financing projects are long-term investments we have to take into
account the value erosion of capital in computing
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profit/loss.
In conventional banking, the bank charges the borrowers interest on their
loans and pays the depositors interest on their deposits. Both are called
interest, though the former is always larger than the latter. Interest is
also called usury. The Arabic word riba is often translated as both usury
and interest. This begs an interesting question: are they all the same? If
they are different, what does each mean? Muslims claim that charging
interest on loans is prohibited. If so, how does a bank meet its
operational costs? These questions bother many Muslims. In the
following pages we attempt to find some answers. Money lending is one
of the oldest professions in the world. It had been, and it continues to
be, practiced everywhere in the world in various forms. Before the
sophisticated arguments emerged, it was also universally despised. All
the major religions and cultures explicitly or implicitly prohibited
it. Documented and regulated bank lending is a recent (within the last
two centuries) manifestation; it grew out of documented lending by
private moneylenders at organized and individual levels. Much of this
documented lending involved borrowing by businesses and governments
for productive or public (often war) purposes. Recorded history is largely
confined to this period, and the economic theory and arguments are
mainly based on this history. It should also be noted that both the above
history and theory largely concern and emanate from Europe. It is
easily forgotten that money lending is a universal phenomenon and that
much of it goes unrecorded and invisible in most parts of the world even
today. The invisible lending has two important characteristics: it is a
private transaction between two persons, and the purpose of the
borrowing is mainly unproductive (useful or not). The purposes include
really urgent and necessary consumption needs (brought about by
calamities, illnesses, unemployment due to unexpected causes or
longstanding disability, etc.), avoidable consumption needs brought
about by vanity and extravagance, and necessary and/or adventurous
risky undertakings. The borrowers expectation to repay is based on
uncertain future good fortune, but the lenders generally take a dim view
of that expectation. Some lenders are motivated by pity and trust, some
ensure the safety of their capital by obtaining collateral, and others are
positively sure of the borrowers inability to repay and redeem the
collateral and look forward to confiscating it. These are the realities of
life in many societies, given the nature of man and his
environment. Most of the religious and cultural exhortations and
prohibitions of money-lending relate to the experience of this reality.
Lending and borrowing also takes place at different levels. There is
mutual lending and borrowing where colleagues, friends and relations
help each other, usually for short periods, and it is a two-way
traffic. There are the more fortunate ones helping out the less fortunate
in their difficulties by lending, out of compassion; the latter repaying the
loans with gratitude when good times return. There are the private
moneylenders who lend money at interest, but discreetly. Others are
professional lenders who lend their money openly at interest, whatever
the circumstances of the borrower. And there is the modern bank that
provides various other services in addition to money lending. In studying
and understanding the nature of lending and borrowing in todays
context, it is necessary to keep in mind the different backgrounds against
which economic theories, financial tools and religious/ethical guidelines
evolved. Hopefully such an understanding will allow modern mans
legitimate needs to be catered for more effectively and efficiently, without
causing personal or social hardships and disasters. In order to recognize
the influence, it is applicable to look at the purposes of lending and
borrowing. When the purpose of borrowing is to invest in a venture and
make a profit, it seems reasonable for the lender to ask for a share in the
price. For practical expediency, the reward (interest) is set in advance;
and for the safety of the capital security is demanded. Therefore,
charging of a reasonable interest, agreed upon by both sides, is seen by
many to be perfectly logical. On the other hand, where the purpose is for
consumption when one has for some reason or other lost his income, to
demand a fixed return where no return is produced is often regarded as
unfair. Especially so if the collateral demanded is the house in which the
borrower lives or land from the future produce of which he expects to pay
back the loan. Depending on the assumptions made at the beginning,
opposite conclusions can be arrived. There is nothing wrong with that,
but the problem begins when the resulting conclusion is applied
universally. All through the ages, moneylenders have used the first type
of argument to justify their profession. Ironically it is their application of it
to the second set of circumstances that created the ground for the
second type of argument. Western economic theories are mainly based
on the first type of argument. Religious and social objections to interest
are often based on the second. At different times in history different
circumstances and needs were predominant, and different groups
wielded political, economic or religious power. Earlier, when the Church
was in power and the misery of the poor and the unfortunate who
borrowed for consumption was in focus, religious dogma and prohibition
held sway. The needs of the traders and merchants for short-term credit,
their use of it to earn a profit and hence their ability to reward the
lenders, were practically ignored. But the need existed and the lenders
operated underground. Since the fourteenth century, however, trade
expanded and merchants became important in Europe. The big
moneylenders catered for this group and prospered. Their voice grew
strong, and their arguments came to be seen as reasonable. And they,

in turn, ignored the existence and needs of those who needed money for
non-productive purposes. Small moneylenders continued to service the
less well off, using the arguments of the former to justify the profession
but charging much more heavily and thus causing more misery. Over
time, the voice of the Church became weak, their arguments lost force,
and the poor were forgotten. But never did the different circumstances
cease to exist; perhaps they would never, for they are rooted in human
nature and the environment in which man is fated to live in. It is
unfortunate that this reality is not taken into consideration in devising
modern institutions. Banking operations are based on economic
theories, and they apply the resulting system to all situations; while the
social institutions have largely failed to take into consideration any
situations other than those that deserved charity. The particular aims
and objectives of the two groups (profit and greed versus pity and
service) have also contributed to this state of affairs. Usury and interest
Until a few hundred years ago any extra amount demanded by the lender
in addition to his capital was called usury. Early European philosophers
such as Plato (427-347 BC) and Aristotle (384-322 BC) condemned the
practice of taking usury. Aristotle compared money to a barren hen
which laid no eggs a piece of money cannot beget another piece of
money, he held. The Roman Empire, in its early stages, prohibited
charging of usury. The Christian Church prohibited all usurious
transactions. The famous incident in Jerusalem where Jesus Christ
chased away the moneylenders from the Temple was kept alive in
Church preaching. Though usury was practiced all over the Christendom
and elsewhere the Church was consistent and vehement in its
condemnation of usury. However, by the end of the thirteenth century
several factors appeared which considerably undermined the influence of
the orthodox Church. Eventually, the reformist group, led by Luther
(1483-1546) and Zwingli (1484-1531), agreed to the charging of interest
on the plea of human weakness. According to Encyclopedia Britanni ca
In Old English law, the taking of any compensation whatsoever was
termed usury. With the expansion of trade in the 13th century, however,
the demand for credit increased, necessitating a modification in the
definition of the term. Usury then was applied to exorbitant or
unconscionable interest rates. In 1545 England fixed a legal maximum
interest; any amount in excess of the maximum was usury. The practice
of setting a legal maximum on interest rates was later followed by most
states of the United States and most other Western nations. Thus,
beginning in the mid-sixteenth century, the prohibition on usury (in the
old sense) was legally removed in all Western countries. The
environment in which it took place, as evidenced by the above quote, is
noteworthy expansion of trade and demand for credit. Borrowers

were mainly the rich merchants, and they used the short-term credit for
buying and selling goods. And the moneylenders were lending their own
money and/or that of their wealthy clients. The borrowers knew how
much they could make using a given amount of credit, and they paid the
lenders a portion of this profit. This supplied the justification for
demanding the extra amount. But this justification for limited interest
under a particular circumstance was, in the course of time, stretched out
and applied in general. Support was forthcoming on other grounds
too. For example, Sir Francis Bacon (1561-1626) advocated, Since of
necessity men must give and take money on loan and since they are so
hard of heart that they will not lend it, otherwise there is nothing for it, but
that interest should be permitted. Now that the new moderate form of
usury interest was legal and moral, economic theories were
developed with this limit and justification as the base. Theories found
their way into textbooks, more theories were developed, and interest
became an integral part of economic theory. In practice, the theory was
applied universally whether the original conditions that justified the extra
payment existed or not. Practice reinforced theory and, once
incorporated into the foundations of economics, it is now difficult to think
of any economic theory or activity without interest being an integral part
of it. In 1545, the legal maximum interest rate in England was fixed at
ten % per annum, but it did not remain fixed for long. It varied from time
to time and from place to place, depending on the economic and political
circumstances. Eventual ly, the concept of maximum interest ceased to
exist, and usury as a word even went into disuse. Today, practically
everywhere, charging and paying interest is legal, no matter how much,
and it is acceptable both in theory and practice. If one possessed some
capital and had it at hand in liquid form (i.e. readily available for use), he
can make use of any opportunity that may come his way to make some
profit, using that capital. If that capital was held up elsewhere, he loses
the opportunity to make that profit. If someone else had borrowed that
capital and could not make it available to the owner when the opportunity
came his way, the borrower is expected to compensate the owner for the
profit he would otherwise have made. This is the opportunity cost of
money. This argument is valid, if the owner of the capital is a person who
is always on the look out for opportunities to make money and
prepared to take the risk of making or losing money on his adventures
and the only thing that would prevent him from doing so is the lack of
liquid capital at his disposal. This applies to many businessmen. But
moneylenders are generally not businessmen on the lookout for
business opportunities that involve risk they lend only when a good
positive return is assured. Therefore this argument of opportunity cost
does not apply to them. Time is money is the present-day business

slogan. It is so in the case of loans from a moneylender too since
interest on a loan is calculated in terms of time the longer the loan
remains unpaid the larger the interest to be paid. But how does the
simple passage of time add value to capital? Suppose there is a
shopkeeper. He has a stock of goods, and he sells them to anyone who
asks for any item and pays for it. He uses the collection to purchase the
replenishment as soon as possible because another customer may drop
in anytime and ask for the same product. If he does not have it in stock
when demanded he may lose the opportunity to make a profit. Since the
demand may occur at anytime, the longer the absence of an item the
greater the chance of a loss. Therefore a shopkeeper would rather hold
stocks of goods than cash. Now, suppose an item is sold on credit. The
money due is now not available to the shopkeeper to replenish his
stock. Consequently he may be unable to serve some of his customers
demands and thereby lose income and profit. In this case the longer the
credit remains unpaid the greater the loss the shopkeeper suffers. Here
is a case for time value of money, and if the shopkeeper has two prices
for the sale of the same good one for cash sale and another (greater
one) for credit sale there is some justification for it. But when the
argument is taken out of context and applied to money in general it loses
its justification. A moneylender does not operate like a shopkeeper. He
holds onto his money, earning no income and enjoying no time value
nor lost opportunity until a borrower turns up promising to pay a positive
interest. His money begins to enjoy time value of money the moment it
leaves his hands but not until then! Time value of money is not an
intrinsic characteristic of money; it is dependent on the context. It is
interesting and instructive to note that all the above theories were
developed in Europe before the invention of modern commercial
banks. But it is also necessary to note the circumstances in which loan
transactions of the merchants of Europe took place. Here the borrowers
often had equal (or even greater) clout with their lenders. This is
noteworthy. Furthermore, lenders lent their own money, and the
transactions took place mainly in a person-to-person conte xt. Borrowing
and lending was mainly for the short term, and the parties were known to
each other. The risk of default was minimal. So was the risk of failure of
the project for which the money was being borrowed, for in general credit
was requested only when a trading proposition was at hand, and the
gains were roughly known. Paper currency had not yet been invented,
and inflation, as currency depreciation, was still in the future. Economic
theories of interest evolved against this background. One consequence
was that interest was a single entity the extra amount paid by the
borrower to the lender. All economic theories treated interest as a single
entity. Though the environment has changed over time, and several new
factors have come into play, even new formulations treat interest as
a single entity. With the invention of the modern commercial banks, as an
intermediary between the depositor (the fund-provider) and the borrower,
two types of interests emerged. One, the interest the bank paid its
depositors, and two, and the interest it charged the borrowers. The latter
is always larger in magnitude than the former. To illustrate, keeping it
simple, the depositors may be paid 5 % while the borrowers are charged
15 %, and the difference is the due of the bank. That due to the bank
consists of components such as the real costs it incurs in providing the
service, a risk premium against possible defaults, compensation for
inflation and its own profits. Economic textbooks rarely refer to the
existence of the two types of interests. Nor does any theory of interest
treat it as consisting of several components. When these facts are taken
into consideration in devising a theory of interest, a way opens for
greater understanding of the working of banking and economics, and
provides transparent solutions to some knotty problems. We will return to
this later in this essay. Today, a fixed deposit in a bank is considered an
investment because it earns a return, and a loan is considered an asset
by the bank for the same reason. But they are both interest-earning
loans. Whatever the purpose, money is available only as a loan at
interest. The lenders (both the depositors and the bank) are not really
concerned about whether the money was invested in any productive
activity or consumed; neither is their return related to the result of any
productive activity in which their capital was used. Even when the loan
was intended for consumption or the investment resulted in loss, the predetermined interest must be paid. In contrast to this, in the Islamic
tradition, the distinction between investment and lending had been
clearly recognized and provided for, but unfortunately, in modern times,
its importance does not seem to have been fully appreciated and acted
upon. The Quran recognized two different sets of purposes for which
money was needed, and noted the two techniques used by capitalowners to cater to these needs. But the techniques must match the
purposes. The need of entrepreneurs for capital was recognized, and in
order to cater to this need investment of capital in productive
employment was encouraged, but it must be done on a profit and loss
sharing basis. Borrowing and lending (for productive or non-productive
purposes) were also recognized as legitimate need and technique, but
they should be done on the basis of mutual help without loss or profit
to either party. Besides these two, the Quran also recognized another
set of circumstances in which one may find himself/herself
circumstances which warranted leniency or pure charity. A borrower,
who borrowed with the intention of repaying the loan, hoping on better
future circumstances, may find that hope remaining unrealized wit hin the
expected timeframe. He needs leniency until better times return. Others
may find themselves in circumstances where they could not even
promise to repay. They deserve charity. The Quran encourages
leniency on the part of lenders, and recommends voluntary charity to
those who possess the means. To illustrate the position of the Quran, let
us take an example. Suppose a person at the time of the Prophet
(peace be upon him) in Mecca had some capital. He could earn an
income from it in one of two ways: by engaging in trade (buying and
selling) or by lending at interest. The Quran said: do the former and
avoid the latter, for they are not the same though some do argue so. At
this point, it is necessary to note that trade was the main occupation of
the Meccans at the time. But the principles involved are applicable to all
enterprises. Trade was practiced either individually or in
partnership. Partnership was on the basis of either musharaka or muda
raba. Musharaka is where both partners invested capital in a business
(trade) and jointly ran the business, and shared the resulting profit or
loss. A capital-holder who did not wish to engage himself directly in the
business opted for mudaraba, where he teamed up with an entrepreneur
(trader), provided him with all the necessary capital, and shared in the
profit of the enterprise at a pre-agreed ratio (or absorbed the full loss if
and when that occurred). So a capital-owner who wished to earn an
income using his capital but without directly engaging himself in an
enterprise was given only one option: go into partnership with an
entrepreneur on the basis of mudaraba (profit sharing and loss
absorbing). It is remarkable that the same choices exist even today: a)
put your money in a partnership company (with you as the sleeping
partner) or buy shares in a shareholder company; b) deposit in a bank or
buy bonds and securities. In the former you share in the profit and loss,
and in the latter you receive an interest income. By recognizing the
different types of needs and circumstances which naturally occur in any
human society and dealing with them using suitably different techniques,
the Quran seeks to prevent unpleasant consequences, rather than
seeking to find solutions after the damage is done. Riba The prohibition
of riba is clear. However, the Quran did not define it the same way it
had not defined gambling, theft or adultery. What was meant was
assumed understood. And the Prophet did not explain every possible
aspect of riba. Later on, Ulama have attempted to define the
word riba based on the practices obtaining at the time of the
Prophet. But unanimity of opinion had not been reached on all
aspects. Furthermore, since the reasons for the prohibition have not
been given in either of the two original sources, it is impossible to give a
new all encompassing definition of riba under any present or future
conditions. The difficulty arises mainly because of the existence of two

kinds of riba. One is called riba al-Nasiah and the other riba alFadl. The former relates to money-loans and credit transactions using
money, and was well known and widely practiced by the Arabs since long
before the advent of Islam (hence it is also called riba alJahiliyya ). Riba al-Jahiliyya is very similar to the present day interest on
loans and credit sales. The core concept is a loan at a pre-agreed rate
of interest. The variations include a grace period during which there is
no interest (similar to todays credit cards), regular interest payments till
the loan is fully paid (simple interest), and interest on interest and/or
punitive additions beyond the pre-agreed period. That this practice was
prohibited by the Quranic injunctions there is no disagreement. Riba alFa dl relates to commodity transactions and has been mentioned only in
the prophetic traditions. Here riba m ay enter when barter-exchanging
two different commodities, or due to differences in quality and/or quantity
in the exchange of the same species. In banking and finance, our
concern is with money and money-loans. Therefore what is relevant to
our discussion here is only riba al-Nasiah, and there has never been any
doubts or differences of opinion as to what it meant. The Quran has
prohibited the taking of this kind of riba in the strongest possible
terms. Its authorized i nterpreter the Prophet has said that
accepting, paying, recording and witnessing it are all equally
prohibited. On the other hand, the Quran also says, then ye have
your principal (without interest), thus entitling the lender to the full return
of his capital. Therefore, in order to comply with the prohibition fully and
without a shade of doubt, and in order not to infringe on the right of the
lender, a simple but comprehensive definition is popularly adopted: that
in money matters; any addition to the principal sum is riba. This also
accords with the definition of usury in other faiths. What is borrowing?
According to the above definition the additional amount paid to the lender
is riba and is prohibited in Islam. Does borrowing involve any other costs
besides riba? If so, who is to pay these costs, and is it riba? We
propose to answer both the questions by analogy, using a scene that is
played out all over the world, every day one equally true today as in
the time of the Prophet. Suppose a man (or woman) asked a friend of his
(or hers) to lend him (her) some money. The friend agreed. But the
friend (now the lender) lived in a distant place. So our man (now the
borrower) has to travel (say, by train) to the lenders place. It is
necessary to pay the train fare and it is the traveler who must pay
it. The traveler in this case is the borrower, and it is neither customary
nor fair to ask the lender to lend money as well as to pay for the train; nor
would one ask him to bring the money to the borrower. In fact the
borrower has to travel again to return the loan. It is obvious that the
borrower had to spend some money to obtain the loan, but that was
not riba by any stretch of imagination because the lender did not ask for
or receive any amount besides his principal. The borrower did spend
some extra money to obtain the loan, but that was paid to the train
operator, not to the lender. It is clear then that borrowers sometimes do
incur expenses in obtaining loans and they are not necessarily riba. On
the other hand, if the borrower and the lender lived in the same city or
village and met each other in the course of their daily activities, such as
in the market, the mosque, the work-place, the bath-house, the eating
house, etc., the question of travel and extra expense would not
arise. Similarly, if they lived close by and the borrower could reach the
lender by foot or by using his own transport such as a horse, camel,
donkey, bicycle, or car, the travel cost would be nil or negligible and
hence goes unmentioned. This is a person-to-person transaction in a
small geographical area. This occurs everyday in numerous locations all
over the world, and will continue to take place for all time to come. These
were also the situations in the small towns of Mecca and Medina 1400
years ago. It was against this background that the Quranic prohibition
of riba was promulgated. Even then, if, for example, the lender lived in
Mecca and the borrower in Medina, the earlier scenario would have
come into play and the lender would have had to incur extra expenses,
which were not riba. Let us now take our scenario a step
further. Suppose our borrower, instead of going himself to meet the
lender, employed someone else to do the job for him. He has to pay the
same train fare and, in addition, remuneration to the one he
employed. The latter is an intermediary a courier of money and he
is paid his costs and remuneration by the borrower. Again this has
nothing to do with the lender. Therefore it is obvious that these cannot
be regarded as riba. Now, let us go another step further. Suppose the
law of the land requires that for any money transaction beyond a certain
amount to be valid an attorney should attest it. The attorney has to be
paid. Who will pay the bill? Naturally it is the borrower. Similarly, if the
collateral for the loan has to be evaluated or its title checked, a payment
has to be made. Again it will be on the shoulders of the borrower. It is of
course, obvious that these are not going to the lender, and are therefore
nothing to do with riba. From the above we have come to the point that
there are at least three different kinds of costs incurred by the borrower
that are not riba. Now, suppose the borrower asks the courier to go to
the attorney as well to get the transaction attested and also to have the
title checked by a notary or attorney, and the courier agrees. This will
make the borrowing process easier and quicker, and the borrower need
to deal with only the courier; and he could pay all the costs to, and
through, the courier. Since none of the above costs are riba, and since
the lender did not demand any riba and the borrower did not pay
any riba and therefore the courier did not carry any, there is
no riba involved in the entire transaction. Yet it did cost the borrower
some extra money to obtain the loan. The loan was riba-free, but not
cost-free. Now, suppose this courier does a good job, the word spreads,
and more borrowers retain him to do similar jobs for them. He grows, he
no longer runs the errands himself but employs others, and as time
passes and the business grows, he employs his own attorney and notary
so that their work can be done in-house. Now he is an institution. His
couriers travel too many towns and cities; his institution is well known
and trusted. On account of the economies of scale his per-transaction
cost is reduced, and the borrowers find his charges cheaper compared to
employing a private courier; and more convenient too. As time passes he
discovers that there are borrowers and lenders in every location, and
even though a borrower in a particular location may be borrowing from a
lender in a distant location, since money is the same wherever it comes
from, the courier could give the amount to the borrower in a particular
place from the money obtained from the same location. This would
reduce his costs, transaction time, and transport risks. His services
become even cheaper. In course of time, borrowers and lenders discover
that they need not deal with each other directly, nor even know each
other, and that they could approach this courier institution for their
respective needs. Borrowers go to the courier to obtain loans, and they
can get from this courier more funds than they can from any specific
lender known to them, and trusting and willing. They are no longer
obliged to any particular friend-lender. The lenders now deposit their
funds with the courier, for safety and with the knowledge that their money
will possibly be used by others, including their friends, while they are not
in need of it. The courier assures the safe and full return of their funds
whenever needed. The courier no longer sends his staff to the lenders
and borrowers but they come to him. A bank is born! But this bank has
two unique features. One, its progenitor is a courier of money rather
than the moneylender of old as is the case with the conventional bank. It
started as a courier of money and remains a courier of money it is no
moneylender. Two, this bank is not involved in any riba transaction, and
the fee it charges the borrower is not riba. The operational costs of a
bank Presented below is a summary of the experiences of some
traditional banks fought understanding transfer towards, in some States,
such as Egypt and Arabic Kuwait and the United Arab Emirates. The
bank may charge a fee for its services and that it is not riba have been
based on common sense and general knowledge. Nevertheless, it is
good to know if there are any other supporting voices. Libya is one
country where riba is prohibited and which has a comprehensive law on
usury. Pakistan is another country where riba is prohibited. Let us now

look at the existing relevant. The Iranian model The Iranian model
provides for Gharz-al hasaneh who se definition, purpose and operation
are given in Articles 15, 16 and 17 of Regulations relating to the granting
of banking facilities: Article 15 Gharz-al-hasaneh is a contract in which
one (the lender) of the two parties relinquishes a specific portion of his
possessions to the other party (the borrower) which the borrower is
obliged to return to the lender in kind or, where not possible, its cash
value. Article 16 ........ the banks ... shall set aside a part of their
resources and provide Gharz-al-hasaneh for the following purposes:
(a) to provide equipment, tools and other necessary resources so as to
enable the creation of employment, in the form of co-operative bodies,
for those who lack the necessary means; (b) to enable expansion in
production, with particular emphasis on agricultural, livestock and
industrial products; (c) to meet essential needs. Article 17 The
expenses incurred in the provision of Gharz-al-hasaneh shall be, in each
case, calculated on the basis of the directives issued by
bank Markazi Jomhouri Is lami Iran and collected from the borrower. The
Pakistani model In Pakistan, permissible modes of financing include
financing by lending: (a) Loans not carrying any interest on which the
banks may recover a service charge not exceeding the proportionate
cost of the operation, excluding the cost of funds and provisions for bad
and doubtful debts. The maximum service charge permissible to each
bank will be determined by the State Bank from time to time. (b) Qard-ehasana loans given on compassionate grounds free of any interest or
service charge and repayable if and when the borrower is able to pay.
The Siddiqi model Siddiqi has suggested that 50 % of the funds in the
loan (i.e. current and savings) accounts be used to grant short-term
loans. A fee is to be charged for providing these loans. An appropriate
way of levying such a fee would be to require prospective borrowers to
pay a fixed amount on each application, regardless of the amount
required, the term of the loan or whether the application is granted or
rejected. Then the applicants to whom a loan is granted may be required
to pay an additional prescribed fee for all the entries made in the banks
registers. The criterion for fixing the fees must be the actual expenditure,
which the banks have incurred in scrutinizing the applications and
making decisions, and in maintaining accounts until loans are
repaid. These fees should not be made a source of income for the
banks, but regarded solely as a means of maintaining and managing the
interest-free loans. It is clear from the above that all three models agree
on the need for having cash loans as one mode of interest-free financing,
and that this service should be paid for by the borrower. A more
comprehensive and direct approach has been employed in Gafoor
(1995). Here, the usual interest charged by the conventional banks has
been taken and split into six distinct components, the purpose of each
component is determined, each is examined to see if it contained any
element of the prohibited riba, and then a formula is developed with
respect to each component in order to compute its value. It has been
shown that, of the six components only one is riba and all the other five
belong to the category of costs and remuneration. On account of this the
usual interest charged by conventional banks is called the cost of
borrowing. Its six components are: interest paid to the depositor, cost of
overheads, cost of services, a risk premium, profit (or remuneration to
the bank), and compensation for the value loss of capital due to
inflation. In normal commercial banking practice, the funds used for
lending are mainly derived through the savings deposits. The bank pays
a certain %age as interest to the depositors and recovers it from the
borrowers when it lends. This interest is the first component in our
model of the cost of borrowing. Of all the six components of the cost of
borrowing, only this component is received by (or paid to) the depositor,
in addition to his capital (deposit). In the general case, this component is
positive and is dependent on the interest rates the bank pays its
depositors. In the case of a Muslim community, this component
is riba because any addition to the capital has been defined to
be riba. Therefore, a Muslim depositor will not demand or accept this
component. Hence, this component will be zero in our version of the
model. The implication is that the bank will not collect this component
from the borrowers in order to pass it onto the depositors. Service are
cost involved in processing the application. This may include legal and
other charges paid by the bank for services such as the evaluation of the
collateral and checking its title, preparation of loan documents, postage,
etc. This cost is specific to the concerned loan, and therefore need be
borne entirely by the concerned applicant. This is an actual cost incurred
by the bank, and is independent of the size of the loan (except, perhaps
charges such as stamp duty) or the period of repayment. Therefore
there should be no objection to it on grounds of any resemblance to
interest (or riba). This goes to the maintenance of the bank, including
staff salaries and office expenses. This is unavoidable, but it is also
difficult to determine the exact amount used up by any given
loan. Therefore a method has to be found to charge an average
rate. What has been suggested is to compute the banks average total
running expenses per annum (p.a.) and divide it by the average total
assets of the bank p.a. to obtain a per dollar p.a. cost. Then this rate will
be used to compute the overheads cost due from the borrower. For
example, if this rate works out to be 1.5 cents per dollar per annum, a
loan of 5000 dollars paid over two years will entail an overheads
component of 0.015*5000*2 = 150 dollars. It may sound like the usual

interest rate, but we know why and how we arrived at it, and we know
that it is not riba but a cost necessary to maintain the bank whose
services the community, the depositors and the borrowers need. The
proposed bank is a commercial concern providing a service carrying
money from the lender to the borrower and back, keeping it safe,
receiving from and paying to both the depositors and the borrowers,
keeping accounts, buying and selling services from third parties (e.g.
hiring a lawyer for title checking), etc. The costs of these are taken into
account in the two preceding components. But, what about
remuneration to the courier-bank for arranging these services? Should it
do it without any benefit to itself, investing its own money, time, expertise
and effort? Is such remuneration riba? Obvi ously not. However, it may
give rise to concerns depending on how it is computed. If it is computed
as a %age of the loan amount there may be some room for doubts. But,
here it is proposed to be computed as a %age of the costs of the
services the bank provides (i.e. the services and overheads components,
seen above). Thus it is a legitimate remuneration or profit. What a risk?
The proposed approach has already introduced a radical change in the
perception of a bank from a moneylender to a money-courier. Now it
introduces another radical innovation in guaranteeing the capital of the
depositor by ensuring the full repayment of the loans now the onus is
on the borrower and not on the bank. Instead of the banks joining a
deposit insurance scheme, here the borrowers join in a loan default
insurance scheme. This is a collective insurance scheme designed to
compensate the bank in case of defaults, and to discourage delays and
encourage early settlements. The premium is proportional to the size of
the loan. But good behavior increases the credit rating of an individual
borrower and decreases his premium rate, and vice versa. The scheme
is to be run by a third party, and the unused part of the premium is to be
returned to the borrowers pro-rata. Inflation. It comes into this model in
two different forms: the general inflation affecting the costs (second and
third components), and currency depreciation affecting the value of
capital. The first is unavoidable, inseparable and legitimate. Therefore
we need not do anything about it. But the second is value erosion of
capital; in fact, an illegal and surreptitious tax on all cash holdings. In
fairness to the capital holders this loss must be compensated, so that
their capital is not eroded due to no fault of their own. This component is
the amount (in terms of currency) that needs to be paid to the capital
holders (depositors) in order to restore their capital to its original value.
The alternative approach presented above is a general model of the cost
of borrowing. In fact, it is a general theory of interest. Here the interest
charged by a bank is split into several components, which are all factors
every bank takes into consideration in determining its interest

rate. However, bringing them all into a comprehensive model is new. In
addition, each component is estimated separately and independently of
others. This too is new and innovative. In the process, each component
of the bank interest is shown to be originating from different
considerations. In economic parlance, each component is influenced by
a different set of economic variables. In turn, each component
influences another set of economic variables. This should lead to more
meaningful economic and econometric modeling and to a deeper
understanding of the working of interest in the economy. In this essay,
however, we will limit ourselves to a few applications of this theory to
situations that concern us. For the sake of simplicity we will assume
zero inflation in what follows. Person-to-person lending and borrowing is
something that takes place everywhere in the world, millions of times
every day, from time immemorial to the present. Its essential
components are: 1) The lender and the borrower are generally known
to each other (or are introduced and guaranteed by mutually trusted
acquaintances), meet in person, the transaction is hand-to-hand, and
any writing and witnessing is done without cost hence the second
component of the model is zero; 2) Since the lender and borrower are
generally from the same locality or live in close proximity the travel cost
to the borrower is insignificant, and since such transactions are also
infrequent there is no cost (such as employing an assistant on account of
the large volume of transactions) to the lender hence the third
component is also zero; 3) Since the second and third components are
zero, the fourth component (profit) which is a %age of the other two is
automatically zero; 4) The lender lends only if he is satisfied that the
borrower is able to and will repay the loan in full and in time (he is free to
deny a loan if he is not sure) hence the risk premium (fifth component)
is also zero; 5) In the absence of inflation, the sixth component is also
zero. Therefore, in a person-to-person lending/borrowing as described
above, all components except the first are zero. Hence, in such a
transaction, if the borrower has to make any extra payment to the lender
it can only be due to the first component being positive, and that
is riba. This was the case dealt with in the original injunctions, and this
had also been the case in all transactions till the advent of the banks,
and even today in millions of transactions outside the banking
system. Thus, in the case of a person-to-person lending, the cost of
borrowing - CoB interest, usury and riba all turn out to be the same and
equal. The model helps us to see this clearly and directly. We will now
compare our model to examine two types of low-interest lending
schemes to see if they involve riba. Educational loans Suppose, some
philanthropist sets aside a certain sum to help needy students. He could
proceed in several ways. Let us take three scenarios. 1) He could hand

out a certain amount to every needy student who applies until his money
is used up. This is an outright donation and a one-time operation. After
that he would not be able to help any more students unless he brings in
new funds. 2) He could do as before, but require the students to pay
back when they are employed. From the money so recovered he can
help more students. This is a loan scheme and a continuing
operation. But this would require the employment of a person to
disburse the funds, keep records, receive repayments and keep
accounts, etc. He needs to be paid and his office expenses met. We are
talking here about several years. Unless the philanthropist provides
fresh funds every year for the upkeep of the office, the original funds
would be used for this purpose as well and, eventually, the operation will
shut down. 3) He could proceed as above but require the students to
pay for the upkeep of the office as well, in addition to repaying the full
amount of the loan. This might be called a low interest loan
scheme. Since the original fund will remain intact, this is a sustainable
continuing operation. What is common to all the above scenarios is that
the philanthropist did not ask or receive any monetary benefit for
himself. In Islamic parlance, no riba was involved in any of these
operations. However, of the three schemes, only the third is
sustainable. In terms of the above theory, in the absence of inflation, all
components of the except the overheads component are
zero. Accordingly, though the cost of borrowing is positive, it is
not riba. In customary language, however, it is called
interest, albeit low. Un fortunately, Muslims take the word interest literally
and equate it to riba. In the process they lose out on the benefits of a
useful and sustainable system devised by a sympathetic and wellmeaning philanthropist. This is not being true to the faith or is the strict
practice of its rules, but refusing a helping hand due to ignorance. This
is not to say that the ordinary Muslim who wishes to be faithful to his
creed is wrong, but that he had not been given the knowledge about
what is meant by riba and what is meant by interest as understood today,
and that there is a difference. Showing this difference, however, is not
possible if interest is treated as one single item. Neither the bankers, nor
the economists, nor the Islamic scholars have been of help here. Hence
the need and relevance of the above model which sees present-day
interest as consisting of several components, only one of which is the
prohibited riba. The theory should help explain to the believing Muslims
that all that is called interest is not necessarily riba and provide them with
a tool to examine any interest to see if it contained riba or not. Its
practical application will enable to them to set up sustainable
endowments for useful purposes. Such an understanding and use of the
tool will also help them to examine and benefit from several so-called
low-interest loan schemes (which many currently reject out of hand),
without any qualms about getting involved in riba dealings. Housing
loans One such low-interest scheme which many good Muslims reject
and deny themselves an important basic necessity is the housing loans
organized by some well-meaning governments. Essentially they act
exactly like the philanthropist in the above example, and use the third
option in order to have a sustainable and continuing system. However,
on account of the large size of the loans, its long term nature (20 to 30
years to recover the capital in monthly installments) and the geographical
spread of the coverage, the Government will prefer to make use of the
well established infrastructure of the banking system. It is cheaper, more
convenient and reliable than setting up one for this single purpose. The
Government simply deposits a certain amount of money with a bank,
gives the specifications as to who qualifies etc, and leaves the rest to the
bank. The Government does not require any interest on its deposit but
the bank must make sure that the original capital remains in tact (and is
used again and again to give fresh loans) by ensuring proper loan
recovery. The bank may also recover from the borrowers all its own
processing costs. This arrangement brings about the low-interest on the
loan and ensures the continuation of the scheme. The fact that it is called
interest and, more importantly, that it is (seemingly) coming from a bank
frightens off Muslims. If we apply our model to this scheme we will see
that no riba is involved in this loan, since the real lender (the
government) does not demand or receive any amount in addition to its
capital. What is recovered from the borrower is the operational costs of
the bank. In this case too, both the CoB and interest are positive and
equal but they are not riba. In addition to the individual person-to-person
lending and the philanthropic long-term lending by individuals or
Governments as seen above, one could also think of the members of a
small community helping each other in a collective manner. Suppose the
members of a small community decide to set up a savings and loans
society. Members deposit their savings with the society in order that
other members who need some loan for a short period could be helped
from this fund. This is a mutual fund; a depositor at one time may
become a borrower at another time and vice versa. Members are free to
withdraw some or all of their deposits if and when they want (or at short
notice). No depositor demands or receives any amount in addition to
his/her capital. Assume that this society is a non-profit organization, and
that the members are known to each other and trustworthy and therefore
there is no room for default on loans. Assume also no inflation. In this
case all the components of the cost of borrowing, except the services
and overheads costs, will be zero. Even if the operations of the society
are run by volunteers, using some free office space, there may still be
some costs for stamps, stationery, transport, communication and so
on. Who pays these costs? Cannot ask the depositors for it! They
already do a favor by making their savings available to the borrowers
free of interest. Naturally the borrowers have to pay the costs. Here too
we see that even where the capital is cost-free the loan is not. It is ribafree but not cost-free. Again, the model enables us to see the difference
clearly. In this case too the CoB and what some might prefer to call
interest are positive and equal, but they are not riba. This should help
small communities to set up their own savings and loans societies and
serve their members in their needs, with clear conscience about not
getting involved in riba. Banks pay the depositors interest on their
deposits and charge the borrowers interest on their loans. Both are
called interest, but they are not equal the latter is always greater than
the former. Let us examine them in turn more closely, using our model of
the cost of borrowing and the definition of riba. Again, inflation is
assumed zero. In the first case, depositors are the lenders to the bank
and the bank is the borrower. The depositors receive an extra amount
from the bank as interest on their capital. According to our definition
of riba, this is riba. Let us call it the deposit interest. This is what the
bank pays the depositors to get their funds. Therefore, from the banks
point of view it is the cost of funds or its CoB. According to our definition
of riba, this too is riba. Hence, in this case, deposit interest,
banks CoB and riba are all the same and equal. As far as Muslims are
concerned this falls within the category of the prohibited, and there is no
doubt about it. In the second case, the bank is the lender and its client is
the borrower. The bank demands and receives interest from the
borrower. Call it the banks loan interest. But this interest consists of
the deposit interest the bank pays the depositors (whose money it lends
to its clients), and other components (which are costs incurred by the
bank, and the remuneration for its services). The bank collects both the
deposit interest and the other components from its borrowers, passes on
the former to the depositors, and keeps the rest for itself. While the
deposit interest is riba the other components have been shown to be
no riba. According to our model, then, the banks loan interest and the
borrowers CoB are both the same and equal. Both of them contain the
prohibited riba, but not all of either is riba. Consequently, when deposit
interest is zero both of them are free ofriba, and neither the bank nor the
borrower is involved in any riba dealing. Present-day banks loan interest
might also contain, besides the six components discussed above, an
additional component arbitrarily introduced by the bank which will then
qualify as riba. It may even turn out to be directly proportional to the size
and period of the loan. If present this component too should be
eliminated to make the transaction truly riba-free. In the foregoing

paragraphs we began with explaining the meanings of interest, usury
and riba. We traced their historical development, examined the
arguments for and against their practice, and worked out their
relationship to each other. And, we examined the Western and Islamic
views on interest, and the consequences of the separate attitudes. We
also looked at a new theory of interest that helped us to understand the
meaning of bank interests in some detail. This in turn helped us
to realise that while banks deposit interest was the same as riba, its loan
interest consisted of both riba and the operational costs of the
bank. This enabled us to devise viable lending systems without
becoming involved in riba. A note of caution is necessary at this
point. The conclusions about deposit interest and loan interest should
not be interpreted to mean that if the bank does not pay any interest to
the depositors its loan interest becomes riba-free and therefore
automatically acceptable, whatever its size. No, for it is subject to an
important condition. How each component of the cost of borrowing came
into existence was fully explained when formulating the theory and
therefore its implementation is based on the assumption that each
component will be separately estimated as explained earlier, and that
this will be done transparently. That is, the data necessary for that
estimation is routinely collected, the estimated coefficients (this includes
the banks profit/remuneration rate) are made available for public scrutiny
(and monitored by the Central Bank), and that each customer is routinely
given the value of each component making up his total CoB, unless this
transparency condition is appreciated and strictly adhered to the theory
is vulnerable to misunderstanding and misuse. The transparency
condition ensures that the profit rate is known, and any
hidden riba component is revealed. If a riba component is present it will
violate the riba-free assumption and will be illegal and morally
reprehensible. If the profit rate turns out very high (as will be the case if
this theory is applied to estimate it using present-day banking data)
market forces will step in to correct it, provided there are several
independent banks competing in a genuinely free market environment, to
the benefit of the borrowers. Thus eliminating another two important
aspects of riba exploitation and injustice. The benefits will trickle down
to the society through reduced costs, prices and, eventually, help curb
inflation. Reduced cost of borrowing will also help on-the-brink
enterprises to stand on
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http://en.wikipedia.org/wiki/Lease
firmer feet.
Today, a fixed deposit in a bank is considered an investment because it
earns a return, and a loan is considered an asset by the bank for the
same reason. But they are both interest-earning loans. Whatever the
purpose, money is available only as a loan at interest. The lenders (both
the depositors and the bank) are not really concerned about whether the
money was invested in a productive activity or consumed; neither is their
return related to the result of any productive activity in which their capital
was used. Even when the loan was intended for consumption, or the
investment resulted in loss, the pre-determined interest must be paid. In
contrast to this, in the Islamic tradition, the distinction between
investment and lending had been clearly recognised and provided for,
but unfortunately, in modern times, its importance does not seem to have
been fully appreciated and acted upon. The Quran recognises two
different sets of purposes for which money is needed, and notes the two
techniques used by capital-owners to cater for these needs. But the
techniques must match the purposes. The need of entrepreneurs for
capital is recognised, and in order to cater to this need investment of
capital in productive employment is encouraged, but it must be done on
a profit and loss sharing basis. Borrowing and lending (for productive or
non-productive purposes) are also recognised as legitimate need and
technique, but they should be done on the basis of mutual help
without loss or profit to either party. The need of entrepreneurs for shortterm (couple of weeks to couple of months) advances and loans (to
overcome cash flow difficulties, for unspecified purchases, miscellaneous

expenses, bridging loans, import/export credit, letters of credit, etc, etc.)
fall within the latter category. This is a very important type of financing
need for all running enterprises, but especially critical for small
businesses, which are the backbone of all developing economies, to
which category most of the populous Muslim countries
belong. Conventional banking deals with it very effectively by advancing
short-term loans, at interest. But Islamic banking and finance as
practised today has great difficulty in dealing with this need; in fact, it is
one of its major shortcomings. The Quran also recognises a set of
circumstances in which one may find himself/herself circumstances
which warranted leniency or pure charity. A borrower, who borrowed with
the intention of repaying the loan, hoping on better future circumstances,
may find that hope remaining unrealised within the expected
timeframe. He needs leniency until better times return. Others may find
themselves in circumstances where they could not even promise to
repay. They deserve charity. The Quran encourages leniency on the
part of lenders, and recommends voluntary charity to those who posses
the means. By recognizing the diverse types of needs and situations
which in nature happen in any human society and dealing with them
using suitably different techniques, the Quran seeks to prevent
unpleasant consequences, rather than seeking to find solutions after the
damage is done. In this essay we propose to explore the specifics of this
comprehensive approach in the context of the present-day world. But
there seem to be also some inherent characteristics that remain
constant. It is necessary to distinguish the latter from the former, and to
devise new methods and institutions that address the needs of these
inherent characteristics when circumstances change. The inherent
characteristics that remain constant are: 1) Need of capital-holders to
earn an income using their capital; the need of traders, merchants and
entrepreneurs for such capital; the latters ability to use that capital to
earn a profit doing their business; and hence their ability to reward the
capital-providers for their contribution, 2) Need for loans (for business
and personal use), and 3) Need for charity. Many of the verses of the
Quran were revealed to address specific questions or situations that
arose during the lifetime of the Prophet (peace be upon him) but the
general guidance contained therein is independent of time and
place. The messages should be understood in the context in which they
were revealed but the resulting guidance is for all time and place. The
Quran is no cookery book; it leaves the details to the humans, giving
them enough latitude to devise their own solutions according the
circumstances in which they happen to live in time and location. In our
present-day circumstances, we need to realise that there are
subdivisions within these major categories and that these need be dealt
with appropriately. Investment and finance This falls under the first
category, and to illustrate the position of the Quran in this case, let us
take an example. Suppose a person at the time of the Prophet (peace
be upon him) in Mecca had some capital. He could earn an income from
it in one of two ways: by engaging in trade (buying and selling) or by
lending at interest. The Quran said: do the former and avoid the latter,
for they are not the same though some do argue so. At this point, it is
necessary to note that trade was the main occupation of the Meccans at
the time. But the principles involved are applicable to all
enterprises. Trade was practised either individually or in
partnership. Partnership was on the basis of either musharaka or muda
raba. Musharaka is where both partners invested capital in a business
(trade) and jointly ran the business, and shared the resulting profit or
loss. A capital-holder who did not wish to engage himself directly in the
business opted for mudaraba, where he teamed up with an entrepreneur
(trader), provided him with all the necessary capital, and shared in the
profit of the enterprise at a pre-agreed ratio (or absorbed the full loss if
and when that occurred). In effect, a sleeping partnership. So a capitalowner who wished to earn an income using his capital but without
directly engaging himself in an enterprise was given only one option: go
into partnership with an entrepreneur on the basis of mudaraba (profit
sharing and loss absorbing). It is remarkable that the same choices exist
even today: a) put your money in a partnership company (with you as the
sleeping partner) or buy shares in a shareholder company; b) deposit in
a bank or buy bonds and securities. In the former you share in the profit
and loss, and in the latter you receive an interest income. In the
circumstances of the present-day world, investment and finance can be
dealt with efficiently by recognising the subcategories within this main
head and adopting appropriate techniques. The first need is easily
addressed in the form of sleeping partners and shareholders in modern
companies. Unfortunatel y, this type of modern company is rather rare in
the Muslim world, though it is actually the modern version of the ancient
practice of mudaraba. On the contrary, they play a major role in the
economies of the developed countries. Large-scale industries and
trading concerns, contributing to the real economy, were established
using such investment and finance. What exist in the Muslim world are
the one-person-owned-and-ope rated businesses and
enterprises. These are, of course, necessary but they have their
limitations. To advance, Muslims will have to follow the example of
others. The idea of sleeping partner and shareholder companies should
be promoted among Muslim financiers and entrepreneurs and such
enterprises should be set up and professionally run in all sectors of the
real economy. There is no choice, even though, in doing so, they will be
only regaining their lost heritage of 1400 years ago. Another
complementary form of investment option, also based on
the mudaraba principle, which caters to small capital-holders who would
otherwise resort to bank deposits and/or bonds, is presented in Gafoor
(1996). This can be operated by investment companies and investment
banks, and provides the investors with a unit-trust/unit-share type of
investment and will finance enterprises that are currently financed by
bank loans. This is a new concept and a comprehensive project
proposal is available at the authors website. This was developed as
a riba-free alternative to fixed deposit accounts and medium- and longterm loans in order to address the concerns of Muslims. But the
resulting product does not require the participants to be Muslims. It is
simply a responsible form of financing, operating under conventional
business laws. Hence it can be practised by anyone in any
country. This should go a long way in preventing businesses and
enterprises going bankrupt due to their inability to service bank
loans. And thereby provide stability to all economies.
Pure mudaraba partnersh ips between known parties at the local level
also should be promoted and popularised. This will help both the small
capital-holders and budding entrepreneurs, and will contribute to the
development of the local economy. This is another lost heritage that
Muslims should revive at the earliest opportunity. It requires trust,
honesty, integrity and professionalism. But advice and intermediation by
independent accounting professionals and bookkeepers should be used
to substantiate such trust by verifiable documentation. Banking and
loans This falls under category of lending and borrowing. Here too, by
recognising the subcategories within this head and adopting appropriate
techniques, we can deal with the needs very efficiently. The first thing
that comes to mind when one thinks of a bank is bank loans. But the
bulk of the work that goes on within a commercial bank (retail bank,
deposit bank) is transfer of funds, from one account to another within
the same branch, between branches of the same bank, between different
banks, between different countries, etc. Individuals use their demand
deposit (current) accounts to pay their bills and receive their
salaries/wages/pensions; businesses use current accounts to make and
receive payments for the goods and services supplied; government and
other entities use them to pay and receive their dues. This has become
a basic necessity in practically all countries, a backbone of all modern
economies and societies the more advanced a country the more
essential this service. It saves tremendous amounts of time and effort
for individuals and organisations in travelling and carrying the necessary
cash to and from each of their creditors and debtors. Thus its
contribution to the national economy and its efficient running is

immeasurable. Yet, this important service is provided by the banks, in
large measure, free of charge. Why free, and how is the operational
costs of this services met by the bank? For, on the one hand, this
transfer of funds from account to account without actual movement of
funds makes possible what is called bank credit creation (that is, the act
of lending more money than that available in the vaults of the
bank). Therefore, the bank encourages the public to use its services to
transfer funds by providing the service free. On the other hand, the costs
of the operation is recovered from the borrowers as part of the
interest. Thus, in conventional banking this essential service has
become intertwined with riba, in the form of interest charged on bank
loans and interest paid on bank deposits (which is the major source of
funds for the loans). This is unacceptable to the Muslims, yet they too
need the banking services (transfer of funds as well as loans) just like
everyone else. Islamic banking theory sought to resolve the problem by
offering the loans completely free of interest (or grudgingly with some
service charge) and meeting the costs of the services from earnings
made elsewhere (profits made from buying and selling, and other forms
of trade) using funds in the investment accounts. This has led to several
complications. A major problem is that this form of banking is not
workable under conventional banking laws and therefore cannot be
implemented, except in a few Muslim countries where special laws have
been enacted. In all other countries, banking services and loans have
been left to the conventional banks and Islamic banking has limited itself
to financing, tacitly calling itself Islamic Finance. Thus a riba-free (retail)
banking system is still to be designed and implemented. The question of
providing loans and all other banking services without involving in riba is
addressed in Gafoor (1995). This uses a general model of the cost of
borrowing and a courier-bank concept. A detailed discussion of this is
available as an article at the authors website. A comprehensive project
proposal is also available at the authors website. The proposed banks
will provide all banking services and are designed to operate under the
conventional banking laws and regulations. They will accept demand
deposits and ordinary savings deposits, and will use the funds in these
deposits to provide short-term and (some) medium-term loans and
advances. To be sure, this is only half of a modern bank, the other
half consisting of the fixed deposits and the long- and medium-term
loans being
given over to the participatory financing companies
and banks mentioned earlier. The need for and the advantages of such
a division and separation are given in the project proposal referred to
above. Again, though the system was developed in order to address
the riba concern of Muslims, the resulting product does not require the
clientele to be Muslims. It has been shown that when the bank is

constituted as envisaged here, the riba involvement becomes
insignificant and its removal will be hardly noticed by the clients. It
becomes simply a transparent form of banking that can be implemented
in any country, without any changes to the present banking laws. This
should be of special interest to Muslim communities living in non-Muslim
countries. Historically, all banks have in general served governments,
businesses, and the rich. For excellent guarantee and certain revenue to
service the loan are essential considerations in granting a loan. As time
passed on, the banking business expanded into the newly developing
middle class that had gradually acquired savings, properties and stable
incomes. Their savings made them welcome, and their properties and
stable (mainly wage) income made some of them eligible for small
loans. Legislation has been passed to safeguard the interests of both
parties, though by now the banks have emerged as the stronger of the
two. This is the case in the developed countries. In the developing
countries, with their low levels of literacy and economic development,
participation of the majority in the banking sector is very limited. They
have a long way to go. Yet, they too have need for credit, albeit in small
measure. But the conventional banks are not designed to cater to
them. Neither will the riba-free commercial bank we have presented
above be able to act differently. One little appreciated reason is that the
modern banks are not like their forerunners, the moneylenders of old
who lent their own funds. The modern banks handle, borrow and lend
other peoples money and are managed by professional executives who
are governed and constrained by legally binding rules and
regulations. They have very little personal discretion. That leaves a large
section of the population in the developing countries, and many small
communities in the developed countries, outside the banking
system. This is where the private moneylenders come in. They are still
alive and well, and ready to pounce. They usually know their clients, live
in the same locality, are very reasonable as to collateral, and are quite
accommodating no lengthy approval procedures either provided
the risk premium is set suitably high. It is difficult to beat them they
have survived many attempts but a try is still worth it. Massive efforts
at education and economic development at grassroots level are still
necessary to keep the unfortunate out of their clutches. In the meantime
and beyond, there is a need for institutions between the type of
commercial banks described above and the others to be described
below. It is possible to set up savings and loans societies at the local
community level to serve the needs of those not served by the
commercial banks. They can be organised and run along the lines of the
non-profit community lending discussed in the article, Interest, Usury,
Riba and the Operational Costs of a Bank, mentioned earlier. The

Grameen bank movement Community leaders can play a major role in
this project, and religious leaders should promote and support it,
because, being an alternative to private riba-based money lending, it is
an effective preventive strategy. There is still another section of the
population the un-bankable, who are either fully avoided by the
moneylenders or mercilessly exploited. These are the ones living on the
fringes of the society; their concern is daily subsistence. They are not
beggars, neither are they unwilling or unable to work. They often have a
useful locally marketable skill. They simply lack that very small capital
which can enable them to own the tools and the small stock of raw
mateDinars necessary for their trade. In dollar terms, the capital they
need is often less than the cost of a meal in New York or London. The
Grameen bank movement in Bangladesh has proved that such people
are bankable, and that with very little help they can be put on their own
two feet and enabled to regain their place in society with dignity. It has a
twenty-five year successful history, and its methodology has been
adopted in many countries around the world. So the tools are already
there. What is necessary in any community is to examine whether the
concerned community needs such a bank, and then to set about it. It
needs dedicated workers, but the results can be very satisfying. See
Gibbons and Sukor (1994) for its theory and practice. Private lending
Private person-to-person lending at interest is, and has always been, the
primary focus of all religious and social prohibitions. But the need for
such personal lending has always been there and will continue to be
there for all times. Often it is mutual (borrower today, lender tomorrow,
etc.) between known persons friends, family, colleagues,
etc. Sometimes, one may need to go outside this small circle, to
wealthier persons who are in no need of the supplicants help in money
matters. It is in these cases that the lender tries to derive some benefit
from the borrowers need, by charging interest. The ill effects of interest
in this transaction can be removed only by personal refrain by the
lender. This can be attained only by personal enlightenment or the fear
of accounting on the Day of Judgement. The revulsion of society to such
an act is also an effective restrainer. The work is cut out in this area for
the religious leaders and teachers of morality. The leniency and charity
recommended in the Quran, when the borrower is in straitened
circumstances, can be practised only in the case of private lending. For
a person can exercise such personal judgment and authority only on
his/her own possessions. All other cases considered above relate to
people handling other peoples property. The fact that private money
lenders were the forerunners of conventional banks, and that no banking
institutions comparable to the modern ones existed in Muslim history,
seem to have led todays Muslims to apply the Sharia rules relating to
private lending to bank lending as well. However, not recognizing the
difference between private lenders lending own funds and a bank lending
other peoples money, has created much confusion, false expectations
and some misuse by borrowers. Islamic scholars and banking
institutions could spare a lot of trouble by recognizing this difference,
declaring it and advising the borrowers and the general
public beforehand that no leniency or charity of this kind is to be
expected from banking institutions. Charity The money-related needs
discussed in the previous section (Banking and loans) concern a section
of the population that is able and expects to repay their debts, as well as
any expenses incurred in the process. But there is always, in any
society, another section of the population which simply cannot even
expect to pay their debts. They are poor, unemployed or unemployable
and have no or small and uncertain income; most often they will not be
given any loans and therefore will not even dare to ask for one, small as
it may be. They are the ones the society as a whole, and the able in
particular, are obliged to look after by means of charity. But this is the
area of private individuals and not of banking institutions. Conventio nal
banking wisely kept out of it; but Islamic banking, in its enthusiasm to
solve all problems with one tool, tried to deal with it too and got itself into
trouble. Like personal lending, charity too should be left to
individuals. They only have full authority over their own funds to use it as
they see fit. Charity is the third category of needs, and here too we find
subcategories that need be dealt with using different techniques. The
third need is recognized and charity is recommended in several places in
the Quran. (Here we are not talking of the obligatory alms-giving
called zakaat but of optional charity, which is called sadaqa.) This is a
personal affair. Those who have extra funds may give any amount they
wish to whomever they wish. This does exist and will continue to exist,
but people must be continuously reminded of its necessity and
merit. Personal charity should be encouraged at all levels. This is a task
especially of social and religious workers at the personal and community
levels. However, in the present crowded world where fewer and fewer
people know others at a personal level, there is also a need for
organized charity. Therefore, charity organizations catering to specific
needs, purposes, places or communities should be set up and run,
perhaps on the lines of modern Western ones. The Quran talks of two
types among the poor, the needy and the beggar
miskin and fakir. The needy are generally not known to the others
because they do not ask, but they may be in more straightened
circumstances than the beggar. This is one area where an organised
charity may be of great relevance on account of the (donor and receiver)
anonymity it can provide. Social and religious workers along with likeminded professionals should give some thought to
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this. Lending and borrowing Islamic approach Lending

and borrowing between humans has taken place since time
immemorial. People borrowed and returned implements, animals,
foodstuff, etc from their friends, neighbors and relations. They returned
the same after use or in the case of foodstuff consumed and returned the
equivalent when they came into possession of similar stuff. When
money came into being people borrowed that too and returned. It was all
on the basis of mutual help the borrower today may be the lender
tomorrow and vice versa. As time progressed professional
moneylenders appeared on the scene, and they demanded a fee for
the use of their money. This fee is now called interest, but till a few
centuries ago it was called usury. In Islam, interest or usury, which in
Arabic is called riba, is prohibited. Demanding, receiving, paying,
witnessing, and anything connected with these activities are all equally
prohibited. There is no controversy over this. Similar prohibitions exist
also in the religious laws of Judaism and Christianity. Although other
religions may not have written laws explicitly prohibiting usury, their
followers do eschew the practice of usury. In earlier times, lending and
borrowing was mainly between individuals, and what was meant by
usury in these transactions was commonly known and understood. In
money matters, any amount over and above the lent sum was defined as
usury or riba. The ill consequences of usurious lending the ruination
of individuals and families were witnessed at the local level and
therefore the community held the practitioners in contempt. But the need
for capital and loans existed and, in the absence of alternative solutions,
the usurious lenders became an indispensable component of the
society. They also exercised invisible power over their clients
resources. If the clients happened to be in authority, the power extended
to other areas as well; the greater the clients authority the extensive the
power of the lender. Kings and aristocracy needed money to pay war or
to live expensively. Moneylende rs were happy to oblige, not only for the
profit it brought them but also for the privileges and concessions they
could extract from their royal clients. Mining concessions, special trading
licenses, tax exemptions, lucrative contracts for public projects, land

grants, and personal privileges such as royal titles and appointments to
influential positions are just a few examples. These dealings were
carried out discretely and the public was generally ignorant of them. But
the citizens paid the price, one way or another. The most important
concession so extracted was the passing of the Usury Law. This law
introduced an innocuous term called interest and usury was defined as
high rate of interest. Usury was still prohibited, in deference to the
Church, but reasonable interest was made permissible. What is
reasonable and what is high was to be determined by the
parliament! Now that interest is legal, kings may lose their thrones,
soldiers may lose their lives, families may lose their livelihoods, but the
country must pay its debts with interest. Moneylenders extracted their
pound of flesh. In recent times, presidents and ministers have replaced
kings and nobles, and corporate and international financial institutions
the individual moneylenders. The same game, only new names and
wider settings. It is now global, the suffering is universal, and the
statistics are in the public domain. Yet, hardly anyone dares to point the
finger at the real culprit usury, whatever the legal name it may
assume. Neither are the real needs objectively looked at. Consequently,
no meaningful alternatives are offered. Governments, businesses and
individuals need money for various purposes. The methods of catering
for these needs must match the purpose for which the money was
needed. A mismatch can lead to disastrous consequences, but this
requires much thought and effort. Borrowing is an attractively easy
solution, and this is what the moneylender would recommend for all
situations, for it is the most profitable one from his point of view. When
the borrower is impatient or desperate and the only game in town is the
moneylender, borrowing from him is the only option and the
consequences are inevitable. To avoid disasters, then, we have to first
study the different purposes for which money is needed and then devise
methods most appropriate to each purpose. We have to provide more
alternatives. The moneylender has only one purpose and concern: his
profits and benefits. But the society has more and larger concerns, for it
is its responsibility to cater for and protect all its members, individually
and as a whole, those living now and those still to come. In this
connection, it is well to remember that all the basic rules, methods,
procedures and laws relating to banking and finance were either
formulated by the moneylenders themselves or they had a hand in their
design and/or execution. When the usury law was proposed, it was
argued that the merchants needed financing, they made profit using the
borrowed funds and, therefore, they had the ability to pay the financiers a
portion of that profit. The trouble was, once the law was passed, it was
applied to all situations whether the borrowed funds brought about a

profit or not. The Church had become too weak but still dogmatic, and
the merchants and moneylenders too strong. The Church could not
grasp the new need, brought about by the increased trade in Europe,
and failed to provide an appropriate solution. Nor could it argue
successfully to limit the application of the new law to trade financing
only. Neither did it demand that the law should not be applied to nonprofit-creating loans intended for basic consumption needs. It seems
that the Church granted the moneylenders a blank cheque on a platter,
by default by its all-or-nothing insistence on a complete prohibition
and by failing in this dogmatic stance. In Islam, the situation was
different. First, from the beginning of the history of Islam in the seventh
century, the (large-scale) merchants need for (additional) funds was fully
recognized and provided for. There were two ways in which a merchant
could finance his trade. One: two or more merchants could pool their
funds together and conduct the business together and share the profit or
loss according to their (financial) contribution. This was
called musharaka, similar to the present-day partnership company. Two:
a merchant could obtain his funds from one or more financiers and share
the profit with his financiers in an agreed proportion. But he has full
freedom in the conduct of his business, and any genuine financial loss
must be borne entirely by the financiers. This was called mudaraba,
similar to the present-day shareholder companies. Consequently, while
the riba-prohibition of Islam related to all lending and borrowing
operations, it took special note of the financing needs of traders and
businessmen as well as the investment and income generation needs of
those who possessed extra funds. It does not mean that riba is
acceptable in these cases; it is prohibited here too. But a different and
equitable solution was already available in Arabia when the Quran was
revealed; so it approved of it and went onto prohibit riba in all
cases. Therefore, the merchant-need-based and return-on-investmentbas ed arguments of Europe were not relevant or valid in the case of
Islam and Muslim lands. It is necessary to recognise this fact. That is,
the all-embracing usury-prohibition law of the Church and the ribaprohibition law of Islam are not exactly equivalent, despite the similarity
of appearances. Second, throughout the long history of Islam, Muslim
caliphs, kings and nobles have, by and large, kept away from borrowing
at interest. Even though many of them had their share of shortcomings
in common with their counterparts elsewhere their belief in after-life
and the strong words used by the Holy Book against the dealers
in riba kept them away from it. The same applied to all would-be
moneylenders as well. This saved the Muslim masses and the society
from many of the ills experienced by other societies, even though this
blessing goes generally unrecognised and unappreciated. Even under

colonialism they have enjoyed this benefit. However, it would be nave to
believe that there existed absolutely no riba-based lending and
borrowing, but it certainly was personal, local, small, isolated, discrete
and unorganised. Only in the second half of the twentieth century,
especially after many countries became independent, established their
own governments, and had to run the affairs of the country on their own,
that they began to experience the claws of interest through the banking
system. They needed the banking system because it provided the
various services needed by the different sectors of modern society. But
the moneylenders had developed it for their own benefit, based on the
all-embracing usury law. It did not make the differentiation the Quran
had made. Muslims had slumbered through the formative years of the
modern world, and failed to build on the head start they had and shape a
business and banking model to suit modern needs. Yet their desire to
comply with the commandments of their Creator did not die. Their
leaders and intellectuals have awoken to the demands of their
constituents, experiments with Islamic banking have begun, but there is
still a long road to travel. Let us state clearly what we mean by interest
and riba and then note the difference between lending/borrowing with
and without interest, usury or riba. Limiting ourselves to monetary
dealings only, any benefit demanded or received by a lender in addition
to the sum he lent is termed riba. This would, however, include both
monetary and non-monetary benefits. Interest, on the other hand, would
legally limit itself to monetary benefits only. It is useful not to forget this
difference and its significance. When a person lends without any benefits
to himself, he is bound to assess the ability of the borrower to pay back
the capital as well as to ensure that the capital is to be used for a
purpose that he approves of. It is also a condition of such borrowing that
the lender and the borrower are known to each other or that a reliable
mutual friend/relative/acquaint ance has introduced them. In such a
situation, there is an unspoken moral/ethical responsibility (and a sense
of shame and reluctance, otherwise) in asking, recommending or
granting such a loan. All these restraints are absent when the lending is
done at interest. The lender assesses only the borrowers ability to (or
the means to) repay the capital and the interest. A collateral is usually
demanded, and by the very nature of interest its dependence on time
the lender expects that he would eventually be able to acquire the
collateral at a favourable price. Both the interest and the possibility of
acquiring property at very low cost drive the moneylender to readily
accede to request for loans, as well as to encourage such
requests. Thus, when riba or interest enters the picture, the attitudes of
both the lender and the borrower head in a direction directly opposed to
the one prevalent in its absence. This riba-ind uced change of attitude
is remarkable, as are the opposing characteristics of the two
attitudes. One discourages debt, and the other encourages it. One
restrains expenditure on morally or ethically unacceptable items and
purposes; the other places no such restrains. One is open to social
control, the other not. One limits both the size of borrowing and its
frequency; the other encourages increase in both. One encourages
short-term loans; the other thrives on long-term arrangements. The last
two are very interesting. For since more and larger loans would bring
more profit to the lender, and he would try to acquire more funds. This
eventually led the moneylender to borrow from others at low rates of
interest and use the same funds to lend at higher rates, as if it were his
own. The banks credit-creation technique was also developed for the
same end. Furthermore, long-term loans provide a stable and steady
source of income to the moneylender. This and the availability of
increased funds led the banks to widen their reach and, in recent times,
to enter previously untapped areas such as housing finance and student
loans. Let us now examine the need for money in some detail. To begin
with, there are purposes that bring profit, and others that do not. Within
these two categories there are necessary, unnecessary and harmful
purposes. In the modern world one has to also make a difference
between the needs of individuals, business organizations and
governments. Let us take them in turn. When the borrowing is for
extravaganza or vanity, the borrowed fund produces no profit. Therefore,
if the borrower is unable to repay the loan and interest from his other
income sources, the interest would keep on mounting and the
moneylender would eventually confiscate the collateral. All religions and
sages throughout the ages have condemned extravaganza and vanity,
and have advised against it. The Quran has specifically prohibited
spending in vanity. Here the reference is to ones spending from his own
resources, and the onus is on the individual. As such, if one engages in
such spending using borrowed money, he is seeking his own doom. Yet,
by making the riba-prohibition applicable to both the lender and the
borrower, Islam seeks to protect people against their own selves. If there
is no borrower there will be no lender; if there is no lender there will be
no borrower. This closes all doors to doom. Thus there is no need to
find any other solutions to the apparent need of the extravagant. Housing
and education are real needs, and therefore their financing deserves
close attention. Building or purchasing a house is obviously a capital
acquisition. So is education, though it does not seem that
obvious. Capital acquisition has always been done using ones own
savings or wealth. It should continue to be so. House-owning leads to
individual and collective independence. In turn they add to national
wealth and well-being. This fact is recognised by wise governments and

they actively encourage private initiatives. Free education has produced
wonderful results in the twentieth century. However, the modern trend,
especially in the developed world, is to have them financed by long-term
bank loans. But unlike the loans for commercial purposes these loans
produce no immediate profit to the borrower. Yet, to a moneylender a
loan is a loan, and from his point of view these have some attractive
advantages, including a secured regular return guaranteed for a long
period. In many developed countries the fiscal laws encourage
borrowing and discourage saving/investment/capital acquisition by taxing
the interest/dividend received from the latter and granting tax exemption
to the interest paid on loans. These laws enable the banks to price the
products very attractively and encourage mortgages, but the subsequent
experience of the borrower and the effect on the nation are different. For
example, a house-owner who bought it on mortgage remains a debtor for
practically the rest of his working life and ends up paying several times
the original price. On the other hand, if he fails to pay his instalments on
time, he is kicked out as if he were only a tenant. A student forced to
take a loan for his education leaves college/university with a certificate
and a millstone round his neck. He may become a government
administrator, business executive, politician or any other, but he is still a
bonded man. And a bonded person cannot think or act
independently. Anyone whose parents are too poor or unwilling to pay
for his education, and himself refuses to be bonded, is denied higher
education. It is a national tragedy. These characteristics of housing and
education set them apart from other needs. Therefore these require
special treatment. Wars, in general, bring only death and destruction to
people and property never any profit. The winner and the loser are
both losers in the end. If a war is fought by borrowing money at interest,
win or lose the country will have to pay the debt with interest, and borrow
again to rebuild. Whether the war was an offensive one or a defensive
one, in the end, only the moneylenders celebrate on both
sides. Consequently, in history as well as in the present time
moneylenders have played an important behind-the-scenes role in both
beginning and prolonging wars. Only a total prohibition of riba on both
the lenders and borrowers and its adherence at all levels, especially at
the highest levels, could eliminate this factor in the war equation. Since
everyone is a loser in a war, it is in everybodys interest to avoid any war;
eliminating its financing by funds borrowed at interest will go a long way
in this effort. Therefore we need not seek any other solution to this
contingency. Government expenditure Government expenditure consists
of two types: capital and current. The funds for both are expected to
come from taxation. So a governments ability to acquire capital goods
to buy equipment and material and to build roads, bridges, schools,

hospitals, communication infrastructure, etc are dependent on, and
limited by, the tax revenue. However, the current expenditure, such as
salaries of government officers, supplies and maintenance, has priority
over capital expenditure. Often, like in the case of an individual, little is
left over from the tax revenue for capital expenditure. Consequent ly,
since all capital expenditure cannot be postponed indefinitely, there
arises a budget deficit. A budget deficit is financed by printing money,
borrowing, or both. Printing money leads to inflation, which is a tacit
form of taxing the population. Borrowing increases national debt and
interest payment. Credit creation by banks based on the new money
(printed or borrowed) increases inflation even further. Government
bonds and treasury bills Government bonds are one of the instruments
used for borrowing money. Since capital expenditure on infrastructure
does not produce any profit, borrowing at interest leads to additional
current expenditure in the form of interest payments. This in turn
requires curtailment of other current expenditure or further
borrowing. Government bond is big business; it provides those who
have money to spare with a great source of guaranteed return. But the
public debt it creates keeps mounting. So does the interest on it. And
the inflation generated by money-printing and credit creation add onto
the interest rate and lead to further increase of the public debt. Thus
once a government begins to spend more than its tax income, or fails to
tax sufficiently to cover its essential expenditures, it gets into a vicious
cycle of borrowing to spend and spending to borrow. To tax sufficiently
the country must produce enough, and taxes are always
unpopular. Borrowing is the easy way out and the country finally ends up
in the grip of the moneylenders national and international no matter
which party or person runs the government. The debt is open and legally
binding but the grip do this or return the loan, do that or no more loans
is unseen, undeclared and least understood, and hence more
hideous. It is a great mystery, though, that developed countries with very
large national debts keep on prospering, while underdeveloped countries
with much smaller debt burdens crumble under it. However, this is no
place to probe into that mystery. It is a time-honoured practice of any
individual to spend on his needs from what he has earned. If there is no
more money left, he either curtails his spending or postpones it till he
comes into sufficient funds. If his income is fixed and regular, such as
that of a salaried employee, and he finds himself short of money at the
end of the month, he must curtail his expenditure. Otherwise he will find
himself at a worse position next month because his income is not going
to increase next month, but the gap would have doubled. If, instead, he
borrows to bridge the gap he will have to borrow the next month and the
following month too an increasing amount every subsequent

month. Eventually he will have to borrow to eat, and pay the loan as
soon as he receives the salary and then borrow again for the expenses
of the next month. Suppose he borrows at interest, then he will be
bankrupt very soon on account of the interest payments, even though he
continued to work and earn. One could get out of this situation only by
earning more or selling some property and paying off all the debts and
begin to live within the income and spend only from already earned
income. Or by severely curtailing his expenditure, save and pay off the
debts, and by living within ones means from then on. In the case of
government current expenditure too, somewhere along the line, they
threw away the time-honoured practice of spending from realised earning
(collected tax) and began to borrow and spend, expecting to repay when
the tax revenue came in. This committed them to an interest payment
cycle. An instrument called the Treasury Bill was developed for this
purpose. This, in effect, is a three-month loan, interest paid in
advance. The funds are used to pay the current expenditure for the next
three months and the loan is paid from the taxes collected at the end of
the quarter. New treasury bills are issued every quarter, month or
week. The cycle goes on. An elaborate set of financial tools and
markets are built around this. So elaborate that no one remembers
when, how or why it started in the first place, or how it keeps
perpetuating itself. It is a given in Finance and Government, and theory
and practice have canonised it. Moneylenders (private individuals,
banks, financial institutions, insurance companies, pension funds, etc)
thrive on it, and a whole army of professionals service it. But the general
public pays for it, suffers the consequences, and is blissfully unaware of
what is happening to it. Enlightening the public further on this point is not
within the purview of this essay. In the above paragraphs, we saw the
Quran guiding us to recognise the existence of three different needs in
any society investment and finance, banking and loans, and charity
and pointing to the proper techniques for dealing with each of them. The
guidance is applicable to our present-day world too and the techniques
are already available. We need not re-invent the wheel. We need to
only recognise them and make use of them. It is hoped that our small
exercise in the foregoing pages has enabled us to identify the necessary
components of a comprehensive financial system for an Islamic
economy in todays context, and has placed them
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in perspective.
Islamic banking is rooted in the facts that riba is prohibited and trade is
permitted, and the profit resulting from trade is permissible income. By
extension, it was argued that interest, which is equated to riba, must be
replaced by profit. To achieve this, lending transactions must be
replaced by trading transactions. This simple concept is religiously
applied to all situations. Where the difference was not clear, legal
devices were adopted to dress it up as trade and profit. One may cheat
himself, but can you fool God? He may be amused by our poor
attempts, but does He approve of it? Whatever God does or does not,
others are laughing at us. Sincerity is supposed to be the bedrock of our
relationship with God. If we are sincere in our efforts to obey His
commands, He will certainly show us the right way. When the commands
were issued 1400 years ago, they were directly understood in the context
of the social and economic environment then prevailing, and their
application was easily achieved. Today, the environment has changed
and that makes the application seem difficult. But the solution is not
through legal devices, but through our studying and understanding the
new environment and sincerely seeking to apply the commands without
any adulteration. Trade and profit have their place, but it is not
appropriate for all occasions. We have to explore other options. If our
intention is sincere, He will certainly guide us to the right solution. By
looking at the needs of society, we can identify three different kinds of
needs investment and finance, banking and loans, and charity and
they each need be handled using a different technique. Moneylenders
offered one solution for all three needs because it was to their
advantage, but the society has to cater for larger concerns and therefore
must offer more appropriate solutions. The Quran points out these
different needs and presents us with different techniques to suit each
need. It is for us to translate them into present-day language and set
up appropriate institutions. Outlines of such institutions are presented in
another essay (see Meeting the Financial Needs of Muslims: A
comprehensive scheme). Other essays elsewhere expand on these
outlines. Properly dealing with lending and borrowing transactions
requires an understanding of the meaning of modern bank interests in
relation to usury and riba. In an essay entitled, Interest, Usury, Riba, and
the Operational Costs of a Bank, the history of interest, its relation to

usury and riba, the origins of dogmas and theories that prohibit or justify
its practice, and the meaning of interest in the modern setting of banking
are explored. It also presents a general model of interest in which
several scenarios from person-to-person lending to modern
commercial bank lending become sub-models. This enables one to
separate riba from the operational costs of a bank and thus to devise
a riba-free system of commercial banking that is both viable and
compatible with the conventional one. Inflation has become a fact of life,
it erodes the value of capital depositors savings, banks loans, cashin-hand. It has also been offered as an excuse for charging and
accepting interest. But the main cause of modern-day inflation is not in
the short-term supply-demand pull-push tensions, but in the long-term
effects of increased money supply. The basic cause of this increase is
the de-linking of the currency-gold relationship. It occurred gradually
over time, but the final blow was dealt in 1971 when the US dollar was
de-linked from gold and the promise to redeem every dollar for 1/35th of
an ounce of fine gold was withdrawn, reneging on the Bretton Woods
Agreement of 1945. US dollar was allowed to float (meaning more
dollars were printed without the constraint of the 35 dollars per ounce of
gold ratio), and the other currencies, which were all linked to gold
through the dollar, also started their free-floats, each in its own
pace. Today, at 350 dollars an ounce, gold is ten times more costly. It is
said that the price of gold has gone up; but the reality is that the currency
has depreciated that much. Re-linking all currencies directly to gold, and
strictly adhering to the agreed currency-gold ratio, is the proper solution
to this problem. But a global agreement on this is not going to occur
anytime soon. In the meantime savings, loans and cash-in-hand are
going to lose their purchasing power. To neutralise the effect of inflation
(due to currency depreciation) on capital, without recourse to increasing
the interest rate, a new mechanism is necessary. Such a mechanism is
presented in a book entitled, Commercial Banking in the presence of
Inflation. This mechanism is applicable in person-to-person lendingborrowing transactions as well. It is straightforward and not difficult to
implement.
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Chapter 3: The origin of the phenomenon of turning conventional banks

to Islamic in some Libyan banks The banking system is essential base
for the development of productive sectors in the national economy. The
importance of the role they plays is in the pool of savings in other sectors
and paid to the various investment channels through loans and credit
facilities. Banking services provided by them and to whole society as the
effectiveness of the role played by banks to be affecting a large extent in
the structure of the banking system, the degree of organization, and the
tasks entrusted to it and the powers conferred upon it. The banking
system for the national economy as the heart of the living, and influence
(goods of banking system) is as the blood, and it reflected the
seriousness and importance of the banking system for the national
economy, the renew of blood or creation of money is the function of the
banking system) as it plays a critical role within the national economy as
that the movement of economic activity is achieved through the banking
system. Libyas banking system under the Gaddafi regime was
dominated by a few state-owned institutions; most ordinary Libyans did
not use credit cards and their banking services were largely limited to
basic cash deposits and withdrawals, making it easier for Gaddafi to
keep control over the economy and society. The countrys new
authorities want to develop the financial sector and the central bank has
been looking to update a 2005 banking law which first allowed foreign
banks into Libya. The origins and evolution in Libyan banking sector The
banking activities in Libya began since the Ottoman period to establish
the first agricultural bank in 1868 the city of Benghazi (Aalbyian Alawal)
and the last city, Tripoli in 1906 and during the Italian occupation the
Italian bank opened branches as follows cantilena Bank 1912 Bank of
Italians in 1912, the Bank of Naples in 1913 in addition to the
establishment of two savings, one in Tripoli and the other in Benghazi
was the mission of the banks at that time confined to the opening of
credit to commercial and alostani Italian colonizers only at the beginning
of 1948 opened the British Barclays Bank branches in the other in
Benghazi and Tripoli, and was engaged as a commercial activity as well
as services that were performed British military administration in 1951
issued the interim government at the time Exchange Act No. 4 for the
year 1951, which was founded by which of the Monetary Committee,
which was responsible for the management and the issuance of Libyan
currency opened in the period 1951-1955 between the branches of the
following banks (Bank of Naples - Sychelna - Bank of Rome), which had
closed down the impact of Italy's defeat in World War II and opened in
the same period branches of the British Bank of the Middle East and the
Arab Bank, the Egyptian and Tunisian and Algerian bank. The opening of
eight foreign banks to bear the nationalities of different countries are:
UK / Italy / Egypt / Jordan / France, and mainly concentrated in the cities
of Tripoli and Benghazi and most of these banks was related to the
financing of trading operations, The Libyan National Bank began to
engage in business as a commercial bank and the Department engaged
in its work to central banking. It has been issued the Banking Act No. (4),
for the year 1963, which changed the name under which the National
Bank of Libya to the Central Bank of Libya. Begging of issuing money in
the Libyan was in March 1952 under the auspices of the Libyan currency
in 1954. In the absence of banks to Libya, because branches of foreign
banks have been established (National Bank of Libya) in 1955 under law
No. 30 and began formal activities in Tripoli in 1956, the bank take
"central"
place of the required section and established an independent release. It
also received all the assets of the Monetary Committee Jamahiriya
earlier. In the end of March 1956 and breaking news, in the second year
of its creation was a key to open a branch in Benghazi and Sabha in
December 24, 1958, issued its first banknotes and was named the
National Bank of Libya became the version, and became the owner of
that power alone and this made it the central character
"National Bank of Libya continued to exercise his functions until the law
on banks in the 20 tillage"
November "1958 was the first legislation to regulate Libby commercial
banking business in the country, and systems of credit policy, capital,
commercial banks, reserves and the liquidity ratio, despite this there
remained gaps law issued by the central banking authority in the
implementation of monetary policy according to the requirements and
conditions of the Libyan economy, making the role of the National Bank
of the Libyan role of improvement rather than executive. National Bank
has sought since the beginning of 1959 to alert foreign to the idea of
lapel by refusing to open new branches them, and with the participation
of Libyans in any branches of no less than 51% of the capital. Until the
mid-sixties banking was not for banking awareness, but for the parish,
together led to the spread of banking services in the system tight, and
remained members of the community for their ignorance of banking
services, which helped to spread awareness of the non-banking, and

hence the demand for banking services within the large cities, and
helped the non-proliferation of banking services because most of the
population were engaged in agriculture and grazing and some traditional
industries of the earth. Not only keep the Bank of Rome, Barclays, and
Naples, Arab banks were maintained these branches of foreign banks
refused to approved Although the separation of capital and reserves of
the main centers. It has also become each bank of the banking board of
directors headed by Libby while foreign managers oversee most of its
operations. During this phase, significant changes in the local and
international levels, namely those of targeted economic openness and
economic blocs and the subsequent policies of economic reform and
restructuring of the national economy and the trend towards encouraging
the private sector and its role in economic activity. And issued a set of
legislations and laws that allow individuals and cooperatives and joint
stock companies of collective work in various economic activities such as
trade, business, construction and services and the other came the
Banking Act, money and credit, the 1993 kept pace with these changes,
which allowed banks to open new domestic and allow foreign banks to
open branches in Libya, has been pursuing expansionary monetary
policy was the granting of credit facilities for craft activities productivity,
and by concealing the maximum interest rate on industrial loans and
agricultural to 6% and the establishment of an investment fund called the
fund shift of production, thus increasing the monetary expansion and the
rise of both excess liquidity and money supply. Then The Central Bank of
Libya to cut interest rates on time deposits held by commercial banks
has from 4% to 2.5%, to urge them to seek alternative investment
opportunities in the national economy, as the Central Bank of Libya to
reconsider in the maximum interest rates payable and the city, which was
in place in the previous phase to become effective as of November 24,
1994. The period since the end of the nineties of the last century, large
shifts in the various economic sectors, in particular monetary and
banking sectors, due to economic and monetary policies that have
adopted new methods for treating many of the obstacles and distortions
suffered by the national economy resulting from unfavorable conditions
at the local and international. This policy aimed at restructuring the
national economy, led by the banking sector, through laws and legislation
that addressed many issues and the provisions intended to expand the
ownership base and to create a production base, in addition to
maintaining the stability of the general price level, and activation of
economic activity, and was among the most important laws issued during
this phase of law for the year 2005 on the banks, which aims to promote
exploitative exchange Libya Central Bank. Figure 5. shows the structure
of the general banking in Libya. Figure 5. The structure of the general

banking in Libya Since the early nineties significant shifts in terms of
economic policy and particularly of the banking sector take a place and
these changes were aimed at restructuring work on all economic sectors,
including banking sector, and through the expansion of laws and key
legislation. The base of ownership broaden and participation of the
private sector is directly involved in the ownership of factors of
production and the practice of different economic activities from the
Banking Act and cash credit, 1993, and legislation, Law No. (21) for the
year 2001 on the economic activities in addition to some procedures and
other legislation that gave banks civil and commercial greater capacity to
deal in foreign exchange rates prevailing before adjusting the exchange
rate at the beginning of 2002. Afther that posts a stock market which
works to activate the tools of monetary policy, as well as a study to
merge some banks and some other banks also established a new
specialized bank, a rural bank, which began in the granting of loans to
professional and private loans to small and seasonal agriculture for low
income people to improve standard of living. It was also agreed to set up
and the establishment of a (with which commercial banks (Bank of
safety, the Bank of the beach, to meet the Bank, the Bank of the Arab
consensus). This is since the end of the nineties started user techniques
and new software for the banking sector and to participate in the
international telecommunications network as unit was set up
management control of financial information to banks, the mandate to
monitor and follow up on all the information that banks and test them in
relation to suspected illegal transactions of money or funds. The Central
Bank of Libya Also issued newly journey for the year 2002 on the
procedures against money laundering, which he stressed the central
bank to banks and other financial institutions through the notification unit
financial operations of any financial transaction, unusual targeting money
laundering and to report to the units of these cases and the
establishment of banks and bureau of change and other financial
institutions (and a financial intelligence unit to counter money laundering
illicit), and determine the name of the officer assigned as a staff member
(observer) in each of the branches of banks and other financial
institutions shall be responsible for direct contact with the Central Bank
to report cases of money laundering and suspicious cases and send
reports about it. It is worth mentioning that before initiating the Central
Bank of Libya has its activities in 1956, banknotes in circulation at that
time are those of the Committee on Monetary Jamahiriya, which was
established in the month (February) 1952 and began to issue currency in
the Libyan 24 (March 1952, and since the establishment of Central Bank
of Libya Until the present time, it was a number (11) version of banknotes
into circulation in Libya. where he was the first of these versions in late
1958, while the last of these versions is the sixth version after the
revolution, which debuted as on 10/07/2004 - 02/09/2002 the Bank put
on paper currency for circulation in the category of the twenty dinars on
the third anniversary of the founding of the African Union. The banknotes
currently in circulation consists of the following categories Session JD Twenty dinars - ten dinars - five dinars and one and a half and quarter
dinars, as well as banknotes based
Central Bank of Libya to issue coins of the following categories. 500
dirhams 250 dirhams, 50 dirhams, 20 dirhams, 10 dirhams, 5 dirhams
and the same time. The Central Bank was under the management of
state reserves of gold and cash will identify appropriate investment tools
and distributed geographically and by banks, currencies and determine
the ratios of the components of reserves of these currencies in
accordance with the developments in exchange markets and global
financial markets, providing the elements of safety, liquidity and return
the appropriate precautions and this allows the Central Bank of Libya
Banks foreign trade to retain assets within certain limits are subject to the
instructions of exchange to maintain the integrity of the banking system,
and the second table the size of the development of international
reserves and the most prominent components of these deposits. The
role of the Central Bank in promoting economic activity in the state is not
limited to its role in achieving monetary stability and to ensure that the
banking environment, monetary appropriate, and I'm also extends to
providing advice to the State in various aspects of economic life, and the
submission of proposals and recommendations for decisions and actions
related to economic affairs and finance, through studies and reports to
the competent authorities on the economic developments in the country,
also offers advice in what can be brought to the questions or queries in
various topics and economic issues. Reserves the Central Bank of Libya
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mandatory cash reserve imposed by the commercial banks as a specific

and deposits amounting to 15% on demand deposits and 7.5% on term
deposits and savings deposits. Reserves the banks also have a central
bank deposits exceed the requirements of this reserve to be used in the
payment of its obligations and the settlement of some local communities,
particularly with regard to the settlement of payments among banks on
through the clearing house. The deposit money banks at the Central
Bank as one of the last commercial bank has the power to grant special
loans to ensure any of its assets necessary to meet the needs in the
financial market in order to ensure readiness in cash or bank in the
country. Preserve the integrity of the banking system and the policy
regulating credit and banking to achieve the objectives of economic
policy in the stability of the general price level, the Central Bank to study
and analyze the financial situation of commercial banks, in order to
ensure the safety of their financial position and its commitment to safety
bank rates provided by law, as a proportion of compulsory cash reserve,
liquidity and legal and the rate of capital adequacy. The Central Bank
apply of the overall chip commercial banks and their subsidiaries in
terms of field inspection and control office, as well as check constraints
and banking records to ensure the integrity of their financial and
accuracy of the information you send to
the Central Bank of Libya, as well as provide appropriate banking
services to the public. Since the stability of the banking system at least
as important as monetary and financial stability, the Central Bank of
Libya is continuously developing and updating the methods of control on
banks to keep pace with the latest international standards. Denied
framework to enhance the safety of the banking law requires for the year
2005 on the banks, commercial banks, the application of international
accounting standards and financial disclosure, and the Central Bank of
Libya and followed to monitor the effectiveness of controls and internal
audit in banks. Law No. (2) for the year 2005 on combating money
laundering, in order to maintain the integrity and reputation of the
banking system locally and globally but in the context of promoting
competition in the banking sector, the bank has worked on the
liberalization of interest rates on deposits of commercial banks as of the
dates months (October 2005), also encouraged strong enough to
function. In the area of improving the environment for banking, the
Central Bank of Libya to the implementation of the draft National
Payment System-to-date basis in order to reduce risks related to liquidity
and settlement, the creation of a sophisticated mechanism for the
change and the settlement of financial instruments and securities, which
facilitates the operations of banks in providing fast service and safe for
all individuals and institutions of society. The role of the Central Bank of
Libya in the promotion of economic activity is not limited to its role in
achieving monetary and financial stability and to ensure that the banking
environment, monetary and appropriate, but also extends providing
advice to the State in various issues of economic policy, the governor of
the Bank is a member of the economic team, rectified by the bank in
various economic commissions and financial issues is to discuss certain
economic. The Central Bank of Libya submit proposals and
recommendations to state agencies for decision-making measures that
relate to economic affairs, finance, cash, through studies and reports
submitted by the designated points on the economic and financial and
monetary developments, as the opinion and advice as may be directed

to any questions or queries on various topics and economic issues, and
advising is provided by the UAE Central Bank also through participation
in conferences, seminars and International delegacies The board of the
Central Bank of Libya
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in 2007 announce a series of resolutions related to the banking sector: 1)

Liberalization of interest rates of civil rights. 2) Directing the compulsory
reserve ratio of the liabilities of the creative commercial banks. 3)
Authorize the Bank of Libya to issue certificates of deposit. 4) Identifying
controls hide recordings credit balances and loans for the purposes of
calculating the allocation of non-performing debt. 5) Report of the rule
regarding the social loans granted by banks. 6) Treatment outcome resubmit the foreign exchange to banks at the end of the fiscal year. 7)
Adoption of the Convention and the exchange of the Libyan dinar
Tunisian Dinar each in the other country. 8) Sale of shares owned by the
Central Bank of Libya in the capital of the Bank of the unit. 9) Adoption of
the merger important banking institution of some banks in the civil
address the implications of this integration. 10) Activate the control and
supervision of commercial banks through the control office and field. 11)
Authorizing the merger of Bank of the nation at the Bank of the Republic.
12) Determine the mechanism of the establishment of branches and
bank agencies and exchange offices and functions of each, and controls
transfer agencies to the branches. 14) Authorize the number of three
foreign banks to open new offices are in the Jamahiriya. 15) Report of
the rule regarding the rules governing the foreign mandates residents
and non-residents. 16) The adoption of Governing Council decisions
Libyan Foreign Bank to increase its contribution to the capital of the Arab
Bank for Investment and Foreign Trade (Abu Dhabi) and Arab Jordan
Investment Bank of Oman. 17) Establishment of the Libyan banks, and
the issuance of its statute. Commercial banks in Libya are the most
important financial institutions in the community they represent the
backbone of life in the currency markets, as it is a place to meet the
demand for money supply, commercial banks are only receptacles
collect the funds and savings for re-lending to those who are able and
willing to benefit from development and thus benefit the community in
general. "The banking system is what is not to institutions and laws and
regulations consist with each other to make up the rest of the commercial
banks and other financial institutions which operate as a liaison between
the savers and investors." The commercial bank was known as (the bank
that handles credit) and banks deposits, sometimes called the most
important and what distinguishes it from others is to accept demand

deposits and current accounts. Also known as the Commercial Bank (n is
the functions of mediation between the economic units of the surplus and
deficit economic units which mediate between the creditors and
borrowers. Commercial bank can be defined as that (a mediator between
those who have money and who need the money) as in the following
format: Figure 6. Session of the flow of funds As defined by others
describe it as (financial institution that you routinely accept deposits
payable on demand for specific operations and engaged in internal and
external financing, as Thatcher development processes of saving and
financial investment income and abroad and contribute to the
establishment of projects and the corresponding commercial banking
operations, that is also known as the Commercial Bank in accordance
with Article 50 of the Banking Law No. (4) for the year 1963, That each
facility accustomed to accept deposits in current accounts payable on
demand, or to order, and the granting of credits and the collection of
instruments drawn from the customers or giving them advances and
other banking business. The money is one of the tools and the credit
institutions which have a money is credit institutions or, more financial
institutions are the average, the area of its credit market or the financial
markets, and institutions that money is different from commercial banks
(for the written criticism and the Central Bank, for criticism of the legal
paperwork). Due to the uniqueness of these institutions from other
financial intermediaries, including the maker of liquidity, "it occupies a
place in the organizational structure of contemporary economic systems
and there are banking institutions and other non-Banking institutions to
meet the demand of interest on borrowing, and provide other financial
services, and credit structure consists of a society all of these
intermediary institutions banking and non-bank Due to the lack of Islamic
banks in Libya until recently, studies in this area are rare. Some Libyan
conventional banks have begun recently to switch to Islamic banking.
From here the view of the researcher doing the study to help these
banks to identify the measures are necessary to turn to Islamic banks
and thus enter the Islamic banks to the Libyan arena to contribute to
raising the level of dealing with banks, many of the libyans do not prefer
to deal with conventional banks, considering that Libyan society is an
Islamic society. There are several options for Islamic banking services:
One would be to allow conventional banks to open branches or so call
windows for Islamic finance; another would be permitting conventional
banks to become Islamic. Libya is also looking at introducing a special
licence for Islamic banking.
On January 6, 2013, the General National Congress went a step further
than most lenders expected: passing a law that not only introduced
Islamic banking but banned interest on financial transactions. The move

is popular with Libyas Muslim majority but for the nations lenders the
law is problematic, giving them just two years to become fully Shariah
compliant. By our oppinion Libya should be able to benefit from both
conventional banking and
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Islamic banking. 1- Jomhouria bank 2-

Sahara bank 3- Wahda bank 4- National
commercial bank 5- Umma bank Table 4. Islamic Banks in
Libya Those are some of state banks (Table 4), and they gives
customers special services for different categories, i.e. agriculturale
banking, loaning, development banking, trading banking, etc. In last
couple of years appeared and private banks. Jomhouria (The Republic)
Bank grew on the ruins of the branches of Barclays bank of England,
which opened its first branch in the city of Benghazi on 15/07/1943 then
Tripoli branch which opened in the same year in succession to open
branches in the Libyan cities until he reached the the number of
branches 17 branches remained the bank has a monopoly on banking
services for long, and acting as an agent for the treasury department and
the English had the authority to issue monetary authorities on behalf of
the English, these branches have been providing the service banking
colonial English as a primary objective and to achieve the objectives of
English bank to reap the profits. After the revolution of September the
great council issued a decision the leadership of the revolution on the
banks on 13/11/1969, which has committed banks operating in Libya to
take the form of Libyan companies to contributeto and not less
contribution to the Libyans for 51% of the capital, thereby turning
bank Barclays bank of Libya to the company central bank of Libya
51% wealth, then act no. 15.3 of 1970 on the p-nationalization of foreign
stakes in commercial banks, insurance companies and re-organize and
then share this nationalization the foreign partner Barclays bank of
England and the amount by 49% of the capital thus, the ownership of
Barclays bank branches in Libya and in full public ownership the central
bank of Libya became the bank under the name bank of the Jomhoria
(The Republic) with a capital of 750.000 Dinars offshore and the
nationality of the city Gheryan the great Jamahiriya. The total budget of
the bank
at the end of the fiscal year the amount of 1/12/1970 - 38.9 million and
employ a 17 million Libyan Dinars (LD) in loans and advances, as for the
deposits were constituted by 53.9% of the total budget value of any a

total of 21$ million LD and a net profit of the bank at the end of the
year fiscal 1970 the amount of p 346 thousand LD, and rate of return on
equity of 23% at the end of the fiscal year ended 31/12/1980 p total
budget bank of 934 million LD, and total equity of 30.1 million LD was the
volume of deposits in that period, 295 million, then 180
employment million in loans and advances and the number of bank
employees 900 employees distributors departments of the bank and its
branches, which amounted to 26 branches at the end of the year bank's
financial ended 31/12/1991 total budget amount 1.9256 billion LD, the
share of loans and advances which is which is equivalent to 25% of the
total budget as the total deposits in the amount of 635.6 million LD, and
total the number of bank staff 1959 staff spread over several
departments of the bank and 40 branches bank of geographicallydispersed in the great Jamahiriya , at the end of fiscal year the bank
ended 12.31.2000 amounted to 104.8 total equity of which 40 Million LD,
representing the bank's capital reserves, while the remainder Legal and
other reserves and the number of branches of the bank 60 branches at
the end of the
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period the number of workers to bank up to 3090 staff departments and

branches the bank. Within the framework of implementation of the
strategy adopted by the Central Bank of Libya to re- Restructuring and
development and modernization of the Libyan banking sector aimed at
improving Banking service at the local level and internationally, to the
conclusion of the Assembly Assembly of both banks (and Jomhouria
(The Republic) of the nation) on the approval of merging the two
banks In the consolidated banking entity, based on the decision of the
Board of Directors of Central. In the financial sector and the Bank arising
out of economies of scale in Terms of co and revenue, and administrative
restructuring in addition to increasing The scope of the new bank, which
opens a wide scope to the provision of loans to various Types. Can be
summarized banking services provided by the bank in: The opening of
current accounts and savings accounts, fixed accounts. Opening of
documentary credits and the acceptance of foreign documents
collection. The issuance of letters of domestic security and foreign
policy. Transfers to foreign nationals and non-residents. Providing
mortgage loans and loans and the granting of social credit facilities.
Contribute to the financing of development projects and strategy.
Provide advice and technical and financial studies for clients wishing to
obtain. Financing for investment projects and small and medium
enterprises, and for example, participation in the preparation of field

studies to establish a factory north of African carpets, as well as the
Africa Company for the beverage industry. Sale and purchase of foreign
currency of all kinds. Card-issuing bank. Contributed to the economic
development bank to finance some public projects. Today, Jomhouria
Bank is the largest bank in Libya and in the upcoming period will be
witness of major developments by the Central Bank of Libya. These
developments are related to new products and services, and, most
importantly, to housing loans, which will be given out to those clients who
want to buy houses that are built and ready to be sold. Furthermore there
are new banking services and initiatives, such as student credit-debit
cards. To date, Jumhouria Bank has already disbursed 150,000 cards to
students all over Libya. The development is a result of the memorandum
of understanding signed between the Central Bank of Libya and the
Ministry of Housing (MOU). The MOU deals with the finances available
to customers who wish to purchase a finished housing unit, ready to be
sold. Bank will ensure that the funds will be reinvested through
Jumhouria Bank into the housing sector. This will be accomplished by
allowing the customers to purchase the housing units through leasing
schemes and to benefit from less complex financing structures and
streamlined installments. Bank is ready to finance small and mediumscale projects (up to $500 million) in the event of a failure of the
governments guarantees to provide grants for those projects. The
largest bank of Libya is also involved in a discussion with the Libyan
power company about the option of financing renewable projects, such
as the new solar power plants (worth 1 billion Libyan dinars). Sahara
Bank was founded and started its activities during the year 1964 in mixed
capital contributed to the Libyan citizens with some foreign banks, and
under the nationalization of banks was decision to nationalize the foreign
partner's share during 1970. and P-Alt-ups. Bank. Libya Central Bank
has since its inception to provide banking services to its clients, where he
funded several institutions and public and private companies both
production and service in the form that enabled those entities to
implement Service programs for economic development in the country. In
the context of expanding the ownership base and maximize the role of
the private sector and open In front of him to invest in all economic
activities and its contribution to the implementation of plans. Economic
development, and in order to develop the banks and restructure in order
to achieve competition reflected in the efficient use of resources and
provision of banking services and financial Special serve the purpose of
the establishment decided to Central Bank of Libya to sell its stake in
Bank Deserts. Sahara Bank carrying out all banking, private banking and
commercial banks from which to accept demand deposits or for opening
of current accounts and the holding of loans and grants facilities,

discount and re-discounting commercial paper, as well as the work. of
foreign exchange and other activities set forth in its Statute. Given the
bank to achieve a profit in most years of his past, has been the
distribution of some those profits to shareholders and others are added
to the reserves, both that the text of the commercial law and should be
configured or reserves optional that are configured in order to strengthen
the financial position of the bank's capital has evolved Bank
nationalization since the decision to 21 million LD in 1995, have
63 Million LD in 2000. This has been the General Assembly of the Bank
at its meeting held on: 22/05/2005 as a result of the adoption of the bank
assess the findings of the Commission Estate Bank formed by the
brother/conservative number (80) for the year 1971. T P, corresponding
to 15/11/2003, also decided to raise the bank's capital to 126 million LD
on 12,600,000 shares with a nominal value of 10 LD of shares to be
distributed to the increase in capital in the form of shares in the bank
Mulheim. Sahara Bank branches and correspondents in breif: 1) Local
branches: The number of bank branches in various regions of the mass
(48) branches, and the Bank (7) and the agencies are open. 2)
Correspondents abroad: The Bank's large network of correspondents
abroad than the number (450) correspondent in around the world. 3)
Legal Form: Contribution to a Libyan company registered in the
commercial register under No. (2775). 4) Bank of the legal age for: (50)
years, renewable automatically. The statistics and reports of the Central
Bank to the total assets of the Sahara Bank which reach the 2,7 billion
Euros, in addition to being a full-service bank staffed by 1500 employees
and a market share of 17% loans, 22% deposits and serves the bank's
customers a network of 48 branches in Libya, and includes a list
of customers of the owners of large enterprises as well as private
companies, whether owned Libya or those owned by foreign bodies. This
important market position makes Sahara Bank and attractive way to
enter To the banking market in Libya, and the privatization process is
part of the re-formation of Sahara Bank in Libya's banking industry, is
currently being implemented. This program by some measures, which
include free regulations inking activities challenge the payment systems
and the establishment of credit bureaus. Where it was announced that
the bank (BNP Paribas) as a strategic partner for French Bank Sahara
after it has been chosen by the Central Bank of Libya became the first
bank Foreign activities and provides full banking services in Libya, in
accordance with the plan bank strategy, which aims to develop the
business and services in the area of Mediterranean Sea. The (BNP
Paribas) and in accordance with the Convention introduced the new 145
million Euros (200 $ million) to buy 19% stake, valuing the bank, which is
equivalent to 6.3 times the current times book value, as the Bank shall
be the responsibility of Operation and management, in addition to owning
the bank the right to increase its stake to 51% during the period ranging
between three to five years to come. Looking forward (BNP Paribas)
presence in the Mediterranean the most important one Priority
development, in addition to local markets in France and Italy. It features
as well as strong positions in each of the (Morocco, Algeria, Tunisia,
Egypt, Turkey). The duration of action (BNP Paribas) in the Gulf region
for more than 34 years where commenced its work in five Gulf countries
(Bahrain, UAE, Qatar, Kuwait , Saudi Arabia) also covers the needs of
customers in the Bank (Oman and Yemen). The number of worlds in the
bank in the region about 480 staff, and headquarters are located the
main regional management in Bahrain, which is the regional center for
Bank (BNP Paribas) in the Gulf. The (BNP Paribas) the most important
European banks in the banking sector and financial and join the list of
top 15 bank in the world, and the number of bank staff to 142 thousand
employees worldwide in more than 85 branches around the world, and
has a strong presence in most leading financial centers, In addition to the
strong presence in business centers in Europe, The (France and Italy) of
the most important domestic markets in retail banking services, The U.S.
markets of the most important markets at the bank, and which Growing
significantly in the presence of bank, in addition to the Asian
markets, covers (BNP Paribas) three key sectors: Investment banking
institutions, Wealth management and services and Retail banking. Two
years ago (2012) a number of employees at a branch of Sahara Bank in
Benghazi have held a demonstration outside the bank to protest against
its use of interest. They demanded that the bank start using Shariacompliant banking methods. According to the Libya Herald, none of
Libyas major banks are Sharia-compliant, but the Governor of the
Central Bank believes demand for Sharia-compliant banking is so high
that it may become an important part of Libyan banking. Speaking at an
Arab banking conference in Kuwait at in September 2012, he said that
specific rules governing Islamic banking in Libya would probably be
implemented very soon. Libyas 2005 banking law set out the basic rules
and regulations governing Islamic banks. In 2007,
BNP bought a 19% share in Sahara, one of Libyas largest banks. At the
time it was thought to be a shrewd move. Sahara would get muchneeded access to technology and expertise, and BNP would gain access
to the Libyan market, which seemed to be opening up and burgeoning
with promise. However, this partnership proved to be problematic.
Relations were difficult between the Libyan employees and the imported
management, who came to Libya with unfamiliar ideas and salaries that
were much larger than those of the locals. BNP ended up pulling out its
management team when revolution erupted in 2011 and the security

situation deteriorated. Now, two years later, the executives have still not
been replaced and there is no timeframe for the banks return to Libya.
BNP declined to comment on its Libyan joint venture, but according to
Sahara there were problems from
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beginning. The Umma bank (Formerly was Banco di Roma) was

established on 14 April 1907 under agreement between the Government
of Italy and the Government of the Turkish Sultan, in the late era of
Turkish rule before the invasion of Libya. On 13 November 1911 a
"Revolutionary decision" (Libyanization decision) was issued which
required the names of all the Commercial banks in Libya to Arabic
names. In accordance with the law, it became Umma Bank, instead of
Banco di Roma. On 22 December 1970 the Revolutionary Command
issued another law "the Nationalization Decision" which demanded that
all the foreign banks shares were nationalized and became completely
owned by Libya. The Libyan Agricultural Bank is an agricultural
development bank operating under special law and owned by the Libyan
government. Established in 1957, it provides advice and guidance on
agricultural problems, advances loans to agricultural cooperatives, and
generally assists in developing Libyas agricultural community. The Bank
operates one city branch from its headquarters in Tripoli and another 27
branches throughout Libya. The Bank is also a member of the Near
East-North Africa Regional Agricultural Credit Association (NENARACA)
based in Amman, Jordan. The bank provides in-kind and in-cash shortterm, medium and long-term agricultural credit to individual farmers,
agricultural cooperative societies and agricultural companies.
Additionally, it mobilizes individual and group savings in rural areas. It
cashes checks issued by customers and provides guarantees to
depositors or borrowers. The bank also subsidizes prices for various
agricultural inputs and purchases crops at prices exceeding the
prevailing market prices, reselling them to customers at reduced prices.
100% of the Banks loan portfolio is allocated to the agricultural sector.
Origin of the Islamic banking business in traditional Libyan banks There
are several steps to develop a replacement as are: the macro level,
direction, and geographic locations of the demand for service and as a
result of this selection is divided by the market and the wishes of the
customers and learn how awareness of the competitors. The bank
contains an internal analysis identify the sources of bank finance and
knowledge of the bank in the selection of a specific number of sections of

the market that the bank intends to provide banking services to new or
existing. Finally, analysis of competitors, which is to specify the strengths
and weaknesses of the bank and its light is excellent as a whole to
determine the purpose or intensity of certain banking, and link those
concepts with the analysis procedure of the bank it is direct and focus
the strengths of the service to target market segments, it is through the
integration of the three types of analysis the above-mentioned are as we
analyze the market, competitors and internal environment of the bank
and therefore we have a list of replacements, which are components of
banking services offered in this market, and determine the willingness of
the customer adoption of these services. Bahtp linked to the work of
marketing, we note that based. Marketing must be able to develop a
specific marketing plan of action is linked to expectation of the estimated
profits, and could therefore benefit from all the previous steps that lead to
the development of work specific marketing of the bank, to take into
account all the above considerations to the plan and take into account
the initiation and guidance towards the development of service or action
plan reached by the bank. One of the important goals of the process of
developing banking services to increase productivity of the bank and
through the use of technology applications submitted in various banking
services over the adequacy and effectiveness of the Bank's
performance, through the speed of service delivery, through the precision
in the implementation, and significant savings through the use of models
in stock used in the various traditional methods for the implementation of
banking services, it all eventually lead to increased productivity of the
bank. The progress of technology and information-gathering instruments
and regulations in particular, has led to a revolution in the management
of banking services, the technology is not only improving the current
banking services, but also a source of many new banking services,
deserve information systems, including communications, special
treatment in the search for competitive experience through technology
and automation systems, has also opened up information systems and
database systems for an entire area and new services, including banking
services, new technology advanced, especially in the field of information
processing, new What They need to deliver training and education of
these new concepts for the efforts of clients in how to use those services
(i.e. ATMs). There is a wide gap between the implementation of different
processes using paper from the hand or by using electronic means on
the other hand, can also note that there is a big difference in costs, with
regard to process checks, for example, the use of electronic means in
implementing the various phases of this process, to reduce their own
costs to the extent possible, while raising costs significantly by using a
traditional party that relies on the use of paper. There is also several
areas of the use of technology in the development of banking services
and increase its efficiency, using advanced computer systems, which
Imam be able to find a service or group and advanced services, which
may be able to find a service or a more complex banking services so that
they are most important to customers and especially representatives
Corporations, including - in addition to the use of sophisticated
communications systems between the various branches of banks on the
one hand and points of distribution of these services Neshanic to reduce
the costs of these advanced banking services and raise efficiency. As
previously stated that the bank always worked to reach for new banking
services to ensure the survival and continuation and growth, and is
dangerous when the Bank is working this, on the other side and even if
we assume that it is easy to make several new services. How many of
them can made success? That a new service needs to make the effort,
as well as sufficient time to provide it with conditions and in spite of all
this may be successful, or part of success. However, the risk of failure
and the list of high rate of new banking services, in general, to reach
both the amount of new products or services is not easy due to several
reasons: 1) With the technological development are based services we
meet the multiple needs of difficult to discover new things, but, of course,
not impossible valhajat Import new show and will continue for the
emergence of life. For example, although Told him the service of ATM
One study showed that it needed to develop, since 80% of the use is for
the disbursement of cash and banks should consider how to use them in
the provision of other Services and advertising activities and services for
the World. 2) The shift of competition on the market without control room
fully but requires market segmentation and divides it into segments, and
therefore aim to provide the new service is usually sold to achieve the
largest share of a particular segment the market and not cover the entire
market, which means, of course, sales and profits even less The bank
was able to maintain his position in the market for a long time. 3) It is
imperative for the new service to achieve saturation of the consumer or
the client give him adequate benefits at the same time achieve adequate
profit to the bank, has increased the restrictions on banks regarding the
availability of certain . Features in the design of new services due to
government intervention and the role of banks for the economy of power.
4) There is a problem of the high cost of a new service, in fact, does not
include the cost is borne by the bank in order to deliver this service, but
also the cost of services or other ideas that have been excluded at any
stage of the development of new service. 5) There is a problem the
number of services that fail as the probability of success is less than the
probability of failure. Using the profit criterion for judging the success or
failure of the service can be the distinction between three cases: when
they do not or have enough income to cover the new service, variable
costs and thereby achieving a complete failure of the service. Second, as
this partial failure of the new service, and clear, when revenues cover
variable costs and fixed costs with a profit margin of slightly less than
revenue achieved by the investment bank's other investment
alternatives, are considered failures of this relatively to some extent.
Supported this trend and one of the studies carried out in a Scottish
Bank, which recommended the importance of evaluating any new
technology service accurately and adequacy of which must be a balance
between revenue and cost, while giving importance to the degree of
experience informs the consumer and the possibility of dealing with
technologies. 6) The short duration of the success of the new service,
Faith after passing the service to all stages of development, the success
achieved by competitors may be attracted to the tradition is usually the
bank or its products, leading to influence the degree of success of the
new service to the Bank. There are many studies about the causes of the
failure of new products, for a study in Greece discuss the reasons for the
failure of new services and to identify and select the most appropriate
strategies to be followed by banks to develop the service and
compensation for the failure which cares about its customers. As it
demonstrates the problems earlier, the obstacles faced by the
department when comparing the risks of development of services, or
access to new services and the risks and problems of the new service,
and supports the trends and the desire for development is always the
importance of developing services to reach new services try to reduce
the risks involved in this process, and can be achieved through the
effective regulation of the development process and technical
development and can say that the evolution of banking services has
become an important activity in any bank in order to survive in the
market to be able to compete. The development of the banking system is
a key objective to attach the greatest importance in the present as an
issue that is crucial in the future of the economy, so we can not activate
the role to be played by the State and its various institutions, particularly
the Central Bank to activate this development as: 1 - Create a legislative
environment to suit the latest developments in international banking,
especially in light of globalization and global economic liberalization. 2 Acceleration of the enactment of Law Almujd banks, which aims to
ensure the proper functioning of the banking system and keep pace with
global trends and the development of the financial sector to support the
banking system and positioned to face foreign competition. 3 - The
speedy enactment of legislation on electronic payment systems that
govern the relationship between the parties to the process, along with
the setting up of a body to oversee the documentation of electronic

signature and resolution of any disputes that might arise between banks
and customers, as well as studying the establishment of specialized
departments for consideration in the conflicts of credit cards. 4 - To
develop and strengthen regulatory and supervisory role of the Central
Bank on banks to suit the many risks that are faced by banks in light of
the growing Ikabbalha to provide banking products developed, so is the
process of development in the light of the regulatory principles issued by
the Basel Committee in 1997 and undergone modifications. 5 - Work to
strengthen the rules of accounting and auditing banks. 6 - The need for
the central bank to provide the technical staff required quantity and
quality of the analysis of data from the banks of the survivor and to meet
the exact needs of the field inspection and continuing throughout the
banking system on the other. 7 - Cooperation between the organs of
banking supervision in different countries to ensure the subordination of
any foreign bank no matter how many of its branches and its subsidiaries
- for supervision and control necessary for the safety performance.
Declining traditional business of commercial banks, which rely on
accepting deposits and lending is declining in all parts of the world, in the
United States banks now accounts for 28% of the financial services
market, which is half of what you get twenty years ago. In Europe and
Japan and emerging countries this %age is still high, while the estimated
more than 80% in the Arab region has become dependent on banks now
provide a service or sell a product more than the provision of loans,
accounting for commissions from securities brokerage, currency and
corporate finance and management assets about 40% of the revenues of
U.S. banks. The expectation that a reduced role of banks as an
intermediary between depositors and borrowers in the coming period.
Integration has led banks to reduce the number 14500 Bank of America
in the mid-eighties to less Than 9000 bank now and technology has
helped in reducing the number of branches through the provision of
services, ATM and bank spokesman and now the Internet, finding
cheaper ways of non-bank branches to provide banking products to its
customers. To increase income, the banks specializing in areas that can
function better and took to provide complementary services to its
customers specialized financial markets, which includes the services of
asset management and brokerage services and other investment
services, and consider banks to successful returns compatible with the
risks associated with investing in those acts which are high yielding, but
also to have a big amount of risk involved in such acts. The phenomenon
of turning conventional banks to Islamic banking has been accompanied
by the phenomenon of the spread of Islamic banks in the second half of
this century. It started in Egypt in 1980, when the Bank of Egypt's first
Islamic branch was established in the area of Al-Azhar in Cairo. The

same bank reached the number of 29 branches later. According to the
statistics of Central Bank of Egypt on 30/8/2004, the total number of
branches for Islamic transactions of conventional banks in Egypt was 54,
while 12 banks still follow the traditional conventional banking. During
last years, especially with starting of financial crisis in 2008, this
phenomenon spread to many Arabic, Islamic and also Western
countries. Historically, conventional banks are
guided by the broad - based capitalistic monetary framework and
business environment, which is predominantly based on interest. Only
Libya, Pakistan, and Sudan, and Malaysia to an extent, are on the way
toward establishing an interest- free monetary and banking system on an
economy - wide basis. It is gratifying that the transition from an interest based banking system to an interest - free one has proceeded smoothly
both in Pakistan and Libya. Both countries have provided some legal
coverage to protect the interests of the Islamic banking sector. The
central bank s of both countries have been designed to guide, supervise,
and control the activities of the Islamic banks and financial institutions
under their respective national monetary and credit policies. In many
countries, on the other hand, Islamic banks operate without any proper
legal backing or provision, and face difficulties from the hostility of the
entire environment. Compared with the huge countrywide network of the
conventional banks, few Islamic banks have very limited influence on the
banking arena as a whole. The expansion of Islamic banking is
constrained, in particular, by the fact that the countrys financial markets
are all interest - based. In a country with majority of Muslim population,
where religious feeling is strong, the introduction of interest - free
financial transactions attracted people to save and invest with these
institutions. The increasing participation of the public is shown by the
rising deposits in Islamic banks. Financial procedure and the introduction
of products in line with the sharia have played an effective and important
role in mobilizing peoples savings, and to some extent drove
conventional banks to use the term profit instead of interest in their
declaration and various documents. Yet the growth of Islamic banking in
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Libya is still entirely dependent on private initiative. The Government has

not pursued the initiative to establish Islamic banks in the public sector,
or made any attempt to convert state - owned traditional commercial
banks into Islamic banks. Like other commercial banks, Islamic banks
mobilize deposits and produce loans. Their sharia - based mode of
operation, however, is very different from that of traditional commercial
banks. Islamic banks all over the world have been facing a number of
challenges, and Libya is no exception. Islamic banks here have not yet
been successful in devising an interest - free mechanism to place their
funds on a short - term basis, and face a similar problem in financing
consumer loans and government deficits. The risk in profit sharing
appears to be so high that almost all Islamic banks in Libya have
resorted to techniques of financing which bring a fixed, assured return.
As a result, there is genuine criticism that these banks have not
abolished interest but have only changed the nomenclature of their
transactions. Next, Islamic banks do not have the legal support of the
central bank, and lack the expertise and trained manpower to appraise,
monitor, evaluate and audit the projects that they are required to finance.
As a result, they cannot expand, despite having huge excess financial
liquidity. The implementation of interest - free banking in Libya raises a
number of macro - operational and micro - operational questions and
potential problems, of which a partial list follows: A) Problems Related to
Macro - operation of Islamic Banks Liquidity and capital Valuation of
bank assets Financial stability Ownership of banks Lack of capital market
and interest - free financial instruments Insufficient legal protection
Control and supervision by the central bank on the basis of the sharia
Lack of unified sharia rulings Absence of Islamic interbank money market
New banking regulations Accounting principles and procedures Shortage
of supportive and link institutions Shortage of skilled and trained
manpower in the sharia and banking Lack of cooperation among Islamic
banks The international financial and non - financial sectors lack of
familiarity with Islamic products and procedures Severe competition in
the financial sector Economic slowdown and the political situation of the
country Inadequate track record of Islamic banking Absence of
infrastructure for international Islamic trade financing Defaulting culture
of the borrowers Short - term asset concentration in the Islamic banks
Lack of courses on Islamic economics, banking and finance at the
educational institutions Lack of uniform operational procedure Lack of
specialized Islamic banks and non - bank financial institutions Lack of
consortium or syndication Lack of harmonization of Islamic financial
practices Lack of inter - country study on the practical operations of
Islamic banking Lack of secondary securitization market Lack of
coordinated research work on Islamic economics, banking and finance
No apex training institute for Islamic banks operation of Islamic Banks. B)
Problems Related to Micro - operation of Islamic Banks: Increased cost
of information Control over cost of funds Markup financing and corrupted
markup financing Excessive resort to the mudarabaha mode of financing
Utilization of interest rate for fixing the profit margin in Bay modes
Financing social concerns Lack of positive response to the requirement
of government financing Failure of Islamic banks to finance high return

projects Sacrifice of allocative efficiency Loss of distributive efficiency
Depression of profit Lack of fullfledged sharia audit Fraud, forgery or
corruption Minimum budget for research and development Poor working
environment Issuance of letters of guarantee (L/G) Minimum resort to
PLS modes of financing Lack of sharia manual or guidelines Islamic
investment risk analysis and measurement methodology Non exemption of stamp duty for purchasing property by banks Lack of
cooperation between Islamic banks and Islamic NGOs for extending
microcredit Lack of establishment of links with other training institutes
and sharia supervisory bodies Management laxity with sharia guidelines.
It is evident from the list of problems that much operational work and
research must be undertaken in order Islamic banks may flourish with
the highest quality and strength.
A review of the problems of Islamic banking in general, and in Libya in
particular, poses a challenge for the survival and promotion of the system
in Libya. The implication is not that Islamic banks should never be floated
within the conventional banking framework, but that the conventional
banking systems operational mechanism needs to be re-examined and
converted into PLS system, taking its beneficial impact on the economy
into consideration. As long as Islamic banks are to operate within the
conventional banking framework, however, the following
recommendations need to be considered. There seems to be a gap
between the ideals and the actual practice of Islamic banks in Libya. In
their reports, booklets, bulletins and posters these banks express their
commitment to the establishment of a just society free from exploitation.
A close study shows that little progress has yet been achieved. Though
this failure is attributed mainly to the pervasive influence of the
conventional banking system itself, the laxness of the promoters of
Islamic banking in realizing this objective is no less to blame. There
needs to be a thorough review of the policies pursued by these banks for
about a decade, and points of departure have to be identified in order to
redesign their course of action. The promotion of the image of Islamic
banks as PLS banks needs immediate attention. Strategies must be
carefully devised in order to promote the banks simultaneously as
Islamic and solvent. To this end, pilot schemes in selected areas must be
introduced, to test innovative ideas with profit and - loss sharing modes
of financing as a major component. Islamic banks should clearly
demonstrate by their actions that their banking practices are guided by
profitability as a major criterion, thereby establishing that only Islamic
banking practices ensures efficient allocation of resources and provide
true market signals through PLS modes. Islamic banks should
continuously monitor and disseminate the impact of their operations on
the distribution of income, primarily between the bank and the other two
parties, the depositors and the entrepreneurs, and then on different
income groups in society. These presuppose the establishment of a fully
equipped research academy in each Islamic bank. Islamic banks have to
be converted, step by step, into profit and - loss sharing banks by
increasing their %age share of PLS investment financing. To accomplish
this, Islamic banks ought to be selective in choosing clients for PLS
financing. They should establish a direct functional relationship between
the income of the depositors and the income of the bank and the
entrepreneurs. The relationship improves as the share of PLS bank
financing increases. Islamic banks can improve their allocative efficiency
by satisfying social welfare conditions in the following manner. First, they
should allocate a reasonable portion of their investable funds to social
priority sectors such as agriculture (including poultry and fishery), small
and cottage industries, and export industries such as shrimp cultivation.
Secondly, when the %age shares of allocation of investable funds are
determined among the sectors of investment financing, the criterion for
the allocation of investment funds ought to be the profitability of the
project. The criterion can be easily satisfied if more projects are financed
under PLS modes. In order to face the competition afforded by other
banks and Islamic windows, Islamic banks must bring their functioning in
line with modern business practices through the improvement and
expansion of dealings in the banking sector. Thus it is necessary for
them to provide comprehensive banking and investment services to
clients, and to simultaneously take advantage of modern technological
breakthroughs in areas such as electronic communication,
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computerization, etc. In spite of their recognition of the soundness of the

theoretical basis on which Islamic banking rests, some people criticize
Islamic banks for not being able to achieve their intended objectives due
to deviations in application. The criticisms leveled against Islamic banks
can be summed up in the following points: excessive resort to the
murabahah mode and the neglect of the other legitimate modes of
financing. This criticism is repeatedly leveled against Islamic banks and

although it is valid, yet, it is not a violation of the injunctions of sharia as
long as the murabahah contract is correct from the sharia point of view
and is free from intentional or nominal deception. Selling is a lawful
action and what Allah permits, man cannot prohibit. It would, however,
have been much better, if Islamic banks were able to distribute their
investments over various possible forms such as mudarabah,
musharakah, salam, advance-sale and leasing. This would have been
optimum from the viewpoint of the soundness of the work and dealings.
Utilization of the interest rate for fixing the profit margin in murabahah
sales is next point. Many critics blame Islamic banks for utilizing the
interest rate as a criterion for fixing the profit margin in the murabahah
sales. As a matter of fact there is no known way of avoiding the link up
with this criterion as long as Islamic banks are operating within an
environment where they coexist with traditional banks. But, what is
required of Islamic banks is to avoid exceeding the prevailing interest
rate or exploitating the clients through accounting methods which some
of them employ, which involve calculation of the absolute profit rate while
paying no consideration to the installments paid during the year.
Indifference towards the social aspects of financing Islamic banks that do
business within the climate of coexistence with traditional banks are
blamed for pursuing the traditional course that is being followed by the
conventional banks. They tend to concentrate on extending credit
facilities to well established commercial establishments which often
obtain credit facilities from both conventional as well as Islamic banks
without real commitment or attempt to free themselves from the
prohibited (means of finance). In this way, Islamic banks have in general
become a figure that is added to the number of traditional banks which
do business in the country concerned. No clear signs have so far
emerged on the role of Islamic banks in the promotion of new projects
needed by the society, like enabling those who have no property,
providing employment opportunities to all categories of people,
demonstrating the impact of Islamic investment on the solution of the
unemployment problem and assisting the State in confronting these
ever-increasing problems. Moreover, Islamic banks did not pay much
attention to the development of banking services in some socially
desirable directions, except in very rare cases. The entire realm of the
management of estates, trusts and orphanages, etc., has remained
outside the area of interest of Islamic banks, in spite of the fact that a
number of Western banks have, since the sixties, begun establishing
specialized departments for Estates and Trusts. Lack of positive
response to the requirements of governmental financing also is pint of
criticism. It is a well known fact that the modern state is always in need of
funds and resources to implement useful projects, such as the provision

of schools, roads, electricity and water and telecommunication services.
Generally, governments resort to issuance of treasury bills with interest
in accordance with the form used by conventional banks. Islamic banks
are required to enter into this field so as to prove their ability to play their
role in the financing of projects in a manner that conforms to the Islamic
system through the
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issuance of deeds of murabahah, musharakah, advance-sale, salam,

etc. Chapter 4: Principles and approaches to the transition
In the second half of 20th century liberation of Muslim world from colonial
powers almost completed and widespread renaissance of Islamic
ideology took its path in Muslim societies whereby the masses started
looking at the existing social systems through Islamic lenses and
proposed modifications and developments. The Muslim thinkers and
philosophers challenged the worlds ruling economic and social systems
and uncovered their weaknesses. Capitalism was examined and
criticized in detail due to its magnitude and general acceptability in
majority of leading societies of the world. Out of the four factors of
production (as described in Capitalism) reward of three is fixed and all
risk is born by the entrepreneur alone. In capitalism, capital is a factor of
production and hence deserves the fixed reward in the form of interest --a risk free reward. As the bank is dealer of money, and reward for using
money is interest according to capitalist system, so the prime source of
revenue and cost of funds to conventional banks is charging interest
through lending and accepting deposits for interest respectively. Interest
is the major driver of operations of conventional banks although other
valuable services including guarantees, funds transfers, safety of wealth,
facilitation in international trade etc. are also provided for reward and
form substantial part of income of banks. As the conventional banks are
established under the principles of capitalism and transect business by
charging interest, which is unacceptable (forbidden) in Islamic law, so
Muslims left with no choice except to establish their own financial
institutions under Islamic principles. Principles to the transition The mile
stone, in growth and popularity of Islamic Financial Institutions (IFIs),
was the Conference of Foreign Ministers of Muslim countries (1973),
where decision of establishment of Islamic Development Bank (IDB) was
taken place. Islamic finance has shown tremendous growth in last two
decades. By the end of December 2008, in more than 50 countries
approximately 300 institutions are operating and they manage funds of
US$ 951 billion. Persian Gulf Area is the centre of Islamic finance with a
share of 82% followed by South Asia and Fareast region 13% and
balance from all over the world including Europe, North America and
Africa (IFSL 2010). So for (June 10) six full-fledged Islamic banks and
13-conventional banks with Independent Islamic Branches are operating
in Pakistan. Growth in Islamic banking industry in last six years is
marvelous in Pakistan. Number of branches has increased from 17 in
2003 to 667 within six and half years an average annual increase of
78%. Assets increased at average annual rate of 76% while deposits
increased at average annual rate of 85% and financial disbursements
and investments increased at average annual rate of 66% during the
period (12/03 - 06/10). Overall an average growth of 76% per annum in
the last six and half years (12/03-06/10) was achieved by Islamic
banking in
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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1712184
Pakistan.
IFIs as for the service is not against the Sharia. However there exists
difference in mechanism of funds mobilization from savers to
entrepreneurs as described following. Savings mobilization consists of
two phases i.e. accepting deposits and extending financing and
investments. Deposits are collected from savers under both type of
institutions for reward irrespective a bank is operating under conventional
system or Islamic system. The difference lies in agreement of reward.
Under conventional system reward is fixed and predetermined while
under Islamic deposits are accepted through Musharaka and Mudaraba
where reward is variable. Under conventional banking return is higher on
long-term deposits and lower for short-term deposits. Same is the
practice in Islamic banking to share profit with depositors. Higher weight
for profit sharing is assigned to long-term deposits being available to
bank for investing in longer term projects yielding superior returns and
lower weight for short-term deposits which cannot be invested in long
term projects. The only difference in conventional and Islamic system lies
in sharing of risk and reward. Under Islamic financial system only those
IFIs will be able to collect deposits who can establish trust in the eyes of
masses hence leading to optimal performance by financial industry. The
second phase in savings mobilization process is extension of credit
facility to business and industry for return. Both types of institutions
(Islamic and Conventional) are providing financing to productive
channels for reward. The difference lies in financing agreement.
Conventional banks are offering loan for a fixed reward while IFIs cannot
do that because they cannot charge interest. IFIs can charge profit on
investments but not interest on loans. In conventional banking three
types of loans are issued to clients including short term loans, overdrafts
and long-term loans. Islamic banks cannot issue loans except interest
free loans (Qarz e Hasna) for any requirement however they can do
business by providing the required asset
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to client. Prepare a strategy plan to transition First and

foremost, newly formed Islamic banks and conventional banks interested
in opening Islamic windows need to maintain Sharia'h-compliance.
Banks looking to move into the Islamic banking market first need to
appoint a Sharia'h board or a Sharia'h counselor to ensure conformity
and minimize Sharia'h risk. These boards and counselors are carefully
selected by the hiring body based upon their reputation or experience
within a given market. This basic and necessary first step to branch into
the Islamic finance world is becoming more difficult as the industry grows
- Sharia'h scholars are currently spread too thinly across numerous
institutions. Compounding the present difficulty of finding scholars is that
there is no standardization of requirements for becoming a Sharia'h
scholar. Some estimates are that new Sharia'h scholars will not be
prepared for another five years, not nearly fast enough to accommodate
the supposed 15%-20% growth rate of the industry. The need for
standardization is also evidenced in the slender variations of global
Islamic banking. With the Muslim population accounting for nearly one
quarter of the worlds population, and expected to grow at a faster rate
than any other religion, and, with demand for Islamic products rising, the
availability of Shariaa-compliant banking, investment, and insurance
products continues to grow. The Islamic financial services industry is not
yet a single, thriving marketplace but rather a collection of markets, each
of which is at a different level of development and sophistication in terms
of product development, competition, and regulation. The industry faces
competition from a number of angles, not least from the conventional
financial sector. Well-established, Western-based global financial players
continue to open and expand operations in Muslim regions of the world
and have built infrastructures to enter markets, particularly in the Islamic
financial centers of Dubai, Bahrain, and Kuala Lumpur. They are using
their considerable operational, marketing, and technology skills to
produce and distribute Islamic financial products in direct competition
with indigenous financial institutions.
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http://211.253.40.86/mille/service/SAT/10000/IMG/000000005293/AliasgharArabi_thesis.pdf
Strategic planning is long-term planning that focuses on organisation as

a whole, what must be done in the long term (three to five years) to attain
organisational goals. The present study attempts to blend theoretical
knowledge and field experiences to determine impediments in
development of Islamic banking and find-out practical solution of the
problem. Incorporating insight of policy-makers in the banking community
is extremely important for the study. Based on the experiences of
developing interest-free banking system in other countries as well as in
Libya. The critical success factors for transition can to be identified as:
The Islamic spirit in present Islamic banking system and its importance in
developing a true Islamic banking system. Competitiveness of the
present Islamic banking system and its importance in developing a future
system. The state of present
supervisory and regulatory
system in supporting Islamic banking in Libya and its importance in
developing Islamic banking system in future. Coordinate with other risk
services within the Bank There are differing
opinions of how to apply or interpret and coordinate Sharia'h law
amongst the different banking services, notably between the Middle East
and Malaysia. The Islamic Financial Services Board (IFSB) is an
international standard-setting organization. One of their missions is to
promote the soundness and stability of the Islamic financial services
industry by issuing global prudential standards and guiding industry
principles. Outside of the Middle East, however these standards and
principles may not have as strong a hold. Both pure Islamic banks and
conventional banks operating Islamic banking windows also need to
address their risk. Not only do these institutions have to cover the same
risks as wholly conventional banks, but Sharia'h banks must cover
additional, unique risks, including: 1. Commodities and inventory risk
(from holding items in inventory either for resale, as terms of a
Murabahah contract or with intent to lease under an Ijarah contract), 2.
Legal and Sharia'h compliance risk (due to an additional set of laws and
rules, it is more likely that Sharia'h compliant banks will enter into
additional contractual agreements. In the event something should go
awry, the issue may end up being to a secular court unfamiliar with
Sharia'h law, exposing the bank to risk), 3. Equity position risk (from the
equity exposures in Mudharabah financing contracts), mark-up risk
(since Islamic banks use market rates as opposed to interest to
benchmark their product pricing, as a result there is a risk associated
with any changes to the benchmark rate), 4. Transfer risk (risk transfers
are normally done in Sharia'h as Bai-al Dayn (debt transfer) contracts.
Most Middle Eastern banks do not deem these contracts compliant), 5.
Segregation of Funds is not permissible for Islamic banks and
conventional banks maintaining Islamic windows allow funds from their
conventional banking operations (if they exist) to commingle with Islamic
funds
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per Sharia'h law. Prepare plans to train workers According to

Institute of Islamic Banking and Insurance (1999) one of the primary
objective of trainings in Islamic banking is building the knowledge and
human resource skills base that enhances competency of personnel
serving in this sector with genuine realization on the serious need to
undertake morality and professionalism into account in all business
dealings. However, in undertaking many training initiatives; the important
factor to be considered is the focus areas of training. In the case of
Islamic Banking, training is not just involving matters on operational
factors, products knowledge or other soft skills, but most importantly are
the knowledge on Shariah. Shariah knowledge is the fundamental and
imperative prerequisite prior to embarkment of Islamic banking activities
that creates differentiation of conventional banking. Quintessential of
Shariah knowledge by defining Islamic finance or banking as financial
service or product that is principally implemented in compliance to the
main tenets of Shariah. For Islamic community, Islamic banking is not
merely having an account or loan that is Islamic in nature but the people
of relevant institution should be well versed in Shariah knowledge as
well. Shariah, is define as a system of ethics and values covering all
aspects of life i.e. personal, social, political, economic, and intellectual
with unchanging bearings as well as major means of adjusting to change
as inseparable from Islams basic beliefs, values and objectives. In
practice, the advocator or provider of any training that involve Islamic
banking should not short
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change or sacrificed Shariah sentiment in undertaking of these training.

Looking again
at the four key policy of HRM, the three operational goals of commitment,
flexibility and high quality are all intrinsically linked to training and
development. Employees who are highly trained and whose career
development is effectively managed by the company show high levels of
commitment, flexible, invariably multi-skilled and able to produce
significant contributions to the quality of goods and services the company
offers, regardless of the level they operate. The roles of training
comprehend the required and acceptable level of competencies which
enable organizations to compete. In the mid-1990s a team of
researchers from Charles Sturt University and from the University of
Technology Sydney carried out two major projects that examine the
determinants of employer training. The research confirmed the growing
strength of association between training and human resource
development. The research confirmed the increasing strength of
association between the three classic elements of human resource
development individual career development, organizational
development and training. Many organizations today are shaping their
training towards fulfillment of individualized needs in order to
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enhance performance. Combination of training and development with

correct implementation and monitoring instill progressively the wealth of
human capital consisting of skills, knowledge and positive attitude. The
outcome is not merely capable workforce or quality human capital but as
well as a wide spectrum of career enhancement in which employer has
to honour. Additionally many organizations such as the banking sector
imposed and ensure certain %age of total employee gross salary is
budgeted for training. And on part of the employee; fulfilling certain
number of hours of job commitment towards training is part of
performance indicators. Ultimately the respondents are in agreement that
lack of Shariah knowledge causes difficulties to explain well to customers
and limit contributions to the company in Islamic products development
that initiate the need to undergo training and development. It is
concluded that the most sought after training to improve job performance
is the Shariah knowledge related training. Nonetheless the findings
conclude collaborative as well as continuous training is not the main
concern. The conclusion indicates that it does not matter who deliver the
training as well as consistent participation in training program rather the

outcome of possessing the knowledge is crucial. Islamic banks need to
be gradient in the application Conventional
banks operating Islamic windows must maintain a separate balance
sheet and financial books and participate strictly in Islamic compliant
investments. Funds intended for Sharia'h-compatible investments should
not mixed with non-Islamic investments in order to maintain the purity of
the Islamic transactions and banking practices. Conventional banks with
Islamic windows must maintain separate books and publicize that such a
practice has been indoctrinated within their institution. These base
requirements reveal that a conventional bank looking to break into
Islamic banking must do more than simply introduce Islamic banking
products to the portfolio or suite of products. The initiation of those
financial devices will require scalable, adaptable back- and front-office
treasury, cash management and core banking systems. These banks will
require cohesive, proven solutions that are capable of providing the
necessary levels of transparency to ensure the segregation of funds and
to establish a successful Islamic banking segment. To enter the rapidly
growing Islamic banking arena, these banks should look to a solution
provider that can offer a system that can provide the various banking
modules necessary to appease Sharia'h boards and scholars no matter
the region. As noted earlier, another contributing factor to the need for
unique and module-based core banking and treasury solutions is the fact
that there are currently a number of regulatory frameworks within which
Islamic banking is developing. These frameworks and rules can often be
contradictory and lead to difficulty in maintaining Sharia'h-compliance.
Standardization of Sharia'h-compliant rules on accounting risk
management, and corporate governance across the Islamic banking
industry is becoming increasingly necessary as there are a number of
different conditions to be applied in each region. Some organizations,
including the Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) are
reaching out and making an effort to bring regulation to the markets
auditing and accounting standards. Solutions providers need to cater to
these institutions in different ways; for example in certain regions data
needs to be segregated differently, while in another there may only be a
need to change terms within an existing solution (terms like profit
sharing may need to be inserted wherever there is a similarity to
interest). To serve as an example of the need for standardization across
the financial products themselves, there is a lack of consistency in the
accounting methods of numerous Islamic financial institutions resulting in
difficulties comparing the results and performance of one Islamic
financial institution to another. Speakers at the International Bar
Associations Islamic Finance in the Middle East conference on January

13, 2008 were nearly unanimous in their assertion that there needs to be
some level of consistency applied to Islamic finance laws across the
GCC countries which may be of aid in establishing regionally-accepted
regulatory standards. At a time when the conventional banking sector is
facing many challenges related to the credit crunch, (following
investments in sub-prime US housing mortgage loans which have since
collapsed) there may be even more migration to Islamic financial
services in certain countries, and more lessons to be learned for both
financial systems. The overall main driver in Islamic banking is Sharia'h
compliance, and the need for core banking, risk solutions and treasury
systems that can provide it. Islamic banking institutions that operate off
of systems that are approved by organizations like the IFSB are able to
focus more on what their customers needs are as opposed to constantly
confirming compliance. The entry of large multinational banks with
Islamic banking windows into Arab domestic markets is heightening
competition. The Financial Services Authority (FSA) stated in a recent
article that a move to principles-based regulation will provide the right
environment for Islamic finance to flourish in the UK. This international
push into the market has resulted in smaller Islamic banks beginning to
consolidate, cascading down into a need for smooth transitions that
maintain Sharia'h compliance. Demand for more expertise on Islamic
finance is increasing with the sustained growth that the industry is
experiencing. As institutions in Malaysia and Indonesia provide
benchmarks for that growth, new startup Islamic banks are in need of a
core solution that can support a complete set of Sharia'h compliant
products (Islamic deposits, lending, and derivatives instruments). Current
issues facing the Islamic banking community include the need for money
market instruments that are Sharia'h compliant. There is also an
immediate need for short-term money market investments and tools for
liquidity management, a space that could benefit immensely from the
introduction of new instruments. Most available conventional banking
instruments for liquidity management are interest based and therefore
not Sharia'h compliant. Until new products or solutions are developed,
this is going to severely hinder development of the Islamic inter-bank
money market. The solutions that are needed to serve the Islamic
banking community and its customer segment are completely unique.
The industry is seeking methods to temper its growth with treasury and
core banking systems that can handle the unique needs of Islamic
banking with regard to its rules and compliance with Sharia'h. Most
importantly, the focus is on finding treasury, risk management and core
banking solutions that meet the basic requirements and address risks
first. Conventional banks will need to readdress and reevaluate their
current systems in order to open Islamic windows and they must

streamline their existing operations running disparate legacy
departmental applications. An industry experiencing such consistent
growth is going to be in need of new solutions capable of consistently
and reliably delivering Sharia'h compatible results. Murabahah: Cost plus
financing, applicable in mortgages, car and corporate loans. Bai Inah: A
contract which involves the sale and buy back transaction of an asset by
a seller. The seller will sell the asset to a buyer on a cash basis then
immediately buy back the same asset on a deferred payment basis at a
price that is higher (or lower) than the cash price. The banks should be
continuous and irreversible An Islamic core banking system has more
stringent requirements than the conventional core system implemented
by a conventional bank. Conventional banks opening Islamic windows
will require a fair amount of customization; profit-rate parameters must
be set according to Sharia'h. It needs to be enhanced and tailored to
meet the needs and requirements of Islamic financial products. Such
enhancements include: 1. On the Deposit side, the system has to cater
to the different types of deposit products, including; Wadiah, Mudharabah
and Musharakah based deposits. It also has to handle profit sharing
between the depositors/investors and the bank. 2. On the Financing side,
the system has to cater to the different types of financing contracts
including; Murabahah, Musharakah, Ijarah, Salam and others. As an
example, the form of financing which is based on a buy/sell transaction
requires the system to handle the twostep process (the purchase of the
asset by the bank and the sale of it to the customer). It can entail the
upfront recording of unearned profit upon transfer from the funding to the
financing account. A core banking system has to consider the
computation of the selling price, rebates for early termination, grace
period, non-capitalization of charges and so on. 3. For risk management
and compliance solutions, both pure Islamic and conventional banks
should seek systems offering a centralized view of cash, liquidity and risk
across their institutions. Solutions encompassing these traits will lighten
the burden and improve decision-making while maximizing returns. A
fully featured solution should deliver a scalable framework combining
market, credit, stress and scenario-based risk management with Sharia'h
and Basel II compliance, in addition to reporting in a single, integrated
suite. As the Islamic banking market continues to grow with no visible
end in sight, there currently is and will continue to be a considerable
need for core banking, risk management, treasury and other systems
that can effectively manage the unique needs of this segment. Pure
Islamic banks and conventional banks with Islamic windows will need
approved solutions that they can consistently rely on to meet Sharia'h
counsel and board approvals, thus allowing their attention to have a
greater focus on customer needs and development of

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new instruments. Types and approaches of transformation Islamic

finance is a source of funding that complies with Islamic jurisprudence.
This source of funding has already been in practise in countries where
the majority of population is Muslim, however the importance of Islamic
finance has prevailed the global financial system recently. Although the
distinction between Islamic and conventional finance needs deeper
understanding, the main difference of Islamic finance can be attributed to
the Islamic idealism of creating a moral economy where profits come
from commerce or real transactions not from money lending or
speculative transactions. While the conventional finance helps directing
the flow of capital to investment opportunities that is supposed to provide
the highest return in the market, Islamic finance allegedly seeks socioeconomic optimality. Another principle of Islamic finance is that
investment is expected to produce an optimal socio-economic outcome
in line with Islamic norms. Transformation of conventional banks in to
Islamic banks can to be divided as folow: 1. The complete
transformation, 2. The partial transformation. Approaches to the
transformations can be different, i.e.: 1. The approaches to the complete
transformation of the banking system units. 2. The approaches to turn
the entire Bank to Islamic banking. 3. The origin of the approach to
turning traditional branches to Islamic branches. 4. The approaches to
the establishment of an Islamic feature in conventional branches. 5.
Entrance to provide financing and investments using Islamic tools. There
remains considerable potential for growth with some strategic quick wins
possible; retail specialization, regional diversification, transformation of
middle-tier conventional banks to Islamic banks. However, in terms of
profitability, Islamic banking industrys average ROE was 12% compared
to 15% for conventional in 2011. Multiple challenges relating to sub-scale
operation, asset quality, negative operating income from core activities
and a weak risk culture remain associated with Islamic banking industry.
Hence there is need for initiating wide-ranging transformation programs:
1. Regulatory transformation involving compliance risk, capital
optimization, integrated balance sheet management and liquidity
management. 2. Risk transformation around Shariah governance,
single data management framework, segment specific risk models and
fund transfer pricing capabilities. 3. Retail banking transformation
strengthening customer centric operating model, channel integration and
technology enablement. A well executed transformation program would

take 2-3 years to be implemented and embedded, and could improve
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Islamic banks profitability by approximately 25%. Chapter 5: The

economists views on the phenomenon of transformation (The arguments
of supporters and opponents) Prince Mohammad Saud bin Faisal,
chairman of the Geneva-based Dar Al Maal Al Islami (DMI) Group, said
that there are many misunderstanding about Islamic banking today. The
problem is that the questions are addressed not to Islamic banks, but to
so-called experts who have no idea what they are talking about. And we
have recently faced an unprovoked attack by the media which is
characterised by fabrication of facts. The question here is not one of
morality, but professionalism, and the protection of the interests of our
investors. Echoing Prince Mohammad's sentiment, Saleh Kamel,
chairman of the Jeddah-based Dallah Albaraka Group and of the
Bahrain-based General Council for Islamic Banks and Financial
Institutions (GCIBFI), said: "I wonder why only Islamic banks having such
(terrorist) accounts are under attack and defamation, while they are
ignoring accounts of charities frozen in other banks all over the world.
Islamic banks are neither charities nor terror facades. They are banks
operating under the supervision of central banks, receiving clients'
deposits and investing them... There are no surplus funds to finance
terror, nor are they corridors for circulation of funds among terrorists."
Dangers and challenges Iqbal Khan, chief executive officer of Amanah
Finance, the Dubai-based Islamic banking division of HSBC, added:
"September 11 is like any crisis - it has dangers and opportunities. This is
a difficult period, but I think the Islamic banking industry will come out
stronger." It seems that because of the complexities of the Islamic
banking sector and the guarded nature of Islamic banks, the rest of the
world views the industry with suspicion. Rather a few Islamic banks lag
far behind their conventional banking counterparts in publishing halfyearly reports, or quarterly reports, and they are notoriously secretive
about their investors. This reluctance to allow access to their business
activities has propelled them into the limelight - for all the wrong reasons.
But there are very good reasons for the Islamic banking industry to gain
global recognition. It is a completely home-grown entity with innovative
services and products pioneered by local and regional entities. The value
of Shariah-compliant accounts worldwide is estimated between US$200
billion and US$500 billion and is growing at an average annual rate of
10-15 percent. Still, Islamic banks are mindful that it is just a drop in the
financial ocean. While conventional banks are not under any imminent
threat, even within the region, of being upstaged by Islamic banks
anytime soon, virtually all major banks have opened Islamic windows.
Saudi American Bank and Saudi British Bank, for example, have opened
up Islamic banking windows, while international players such as HSBC
and Citibank have all launched Islamic banking units as well. Michael
Langton, director at Bahrain Institute of Banking and Finance, says that
despite the clout and financial muscle of international conventional
banks, it does not give them a clear advantage over Islamic banks. "The
way I see it, they are promoting Islamic banking. Islamic banks by and
large will continue to attract the lion's share; that's going to happen. It is
not in the best interests of large international banks to have a huge
Islamic banking window. The progress will be driven by Islamic banks."
HSBC recently launched its HSBC Amanah Finance division, focusing on
Islamic financial products. Chief executive officer of Amanah Finance,
Iqbal Khan said: "At the end of the day, Islamic banking is a marketdriven phenomena, it is educated, middle-class Muslims with a corporate
responsibility who are demanding it. The biggest challenge has been the
legal and regulatory framework around which we have to build Islamic
financial products. The laws are so onerous that it makes it expensive for
banks to launch a variety of products." But this has not dissuaded ANZ
Grindlays, Chase, Citicorp, HSBC and Morgan Stanley from introducing
Shariah-compliant products and services. The importance of Islamic
banking is also evident by the decision of major stock exchanges such
as the Dow Jones and FTSE to offer Islamic indices. V Sundararajan, a
senior executive at the IMF, notes that the Dow Jones Islamic Market
USA index had an annual return of 27 % from 1996 to 1999, compared
with 24 % for S&P in the same period. While current industry data are
unavailable, evidence from the International Association of Islamic Banks
suggests that assets managed by those banks have tripled in four years.
And, despite the recent short-term setbacks, the Islamic banking industry
is expected to emerge stronger than ever. But while external pressures
are critical, the industry itself has to withstand many internal challenges.
Regulating regulation Islamic banks argue that their industry is wellregulated, in fact over-regulated. "I think the regulations are enough,"
says Dr Jamil Jaroudi, group head investment banking at Shamil Bank.
"All the rules that apply to conventional banks apply to us as well. If you
find some malpractices in conventional banking, you also might find them
here; but it does not mean you enforce more regulations, because you
don't want to cripple and tie the hands of the bankers. The regulations
are up to speed, in some countries more than others definitely." Luma
Saqqaf, senior associate at legal firm Allen & Overy, adds: "There is a
common misconception that there are no specific rules or structured laws

in Islamic Shariah. This is inaccurate; the principles of Islamic financing
are well-known to those involved. The differences arise in the details and
practices. Similar differences exist in conventional banking. In terms of
statutory laws, most Arab countries, including the UAE, have recognised
Islamic concepts expressly in their laws, for example types of Islamic
musharakah are provided for in the UAE civil code." In the area of
regulation, the role of the Accounting and Auditing Organisation for
Islamic Financial Institutions (AAOIFI) cannot be overstated. The
Bahrain-based AAOIFI was established in 1991 by several major Islamic
financial institutions to regulate international accounting and auditing
standards for the industry. Although it does not have the authority to
enforce the standards it promulgates on Islamic financial institutions, it
does work closely with respective central banks and governments. And,
this approach has proved successful with the supervisory authorities in
Bahrain and Sudan, asking Islamic banks to adhere to AAOIFI's
standards in preparing their financial statements. Some Islamic banks in
other countries, for example, Malaysia and Saudi Arabia, have also
started to voluntarily use AAOIFI's accounting standards to prepare their
financial statements. Furthermore, international rating agencies have
also started to take AAOIFI's standards into consideration when rating
Islamic banks. Recently, Bahrain and Malaysia, who are both striving to
co-ordinate their Islamic banking efforts, signed an agreement of cooperation based on the AAOIFI. Both governments recognise the role of
AAOIFI in establishing appropriate accounting and auditing standards
pertaining to the operations of Islamic financial institutions and shall
endeavour to work towards adopting these standards and the promotion
of AAOIFI, specifically in relation to the Islamic Financial Services
Organisation (IFSO) and International Islamic Financial Market (IIFM).
Still, AAOIFI standards are only enforced on a voluntary basis, rather
than a compulsory one, and smaller banks in less developed countries
have been guilty of not following the rules to the letter. Ensuring that
these banks adhere to the rules presents a huge problem for the
industry, as there is no singular Islamic banking authority to set the rules.
But these issues, say many, are simply teething troubles in an evolving
industry. We must not forget that Islamic banking is only 30 years old.
There are so many issues to tackle, and to be up to speed with
developments in conventional banks is difficult for the smaller banks to
manage. But the big banks can be compared to international
conventional banks in the world. Bahrain has come closest to assuming
some authority in Islamic banking. The country is using its strong
financial infrastructure to launch a series of initiatives to boost the sector.
Working in conjunction with Malaysia, another key proponent of Islamic
banking, the Bahrain Monetary Agency is forming an Islamic ratings

agency. In addition, the Bahrain Monetary Agency (BMA) launched a
new instrument, Sukuk Al-Salam bills, as a short-term investor
opportunity for Islamic financial institutions. Other countries including
Pakistan and Bangladesh are now contemplating issuing similar
securities. More importantly though, the BMA has launched a money
market fund which it hopes will solve the incessant ill-liquidity issue faced
by Islamic banks, and many see this as crucial in taking the industry
forward. Islamic banks typically face large exposure to liquidity risk
because of asset-liability mismatches and underdeveloped interbank and
money markets. Lack of Shariah-compliant, short-term government
securities, such as treasury bills or commercial paper, complicate Islamic
banks' task of liquidity management. The proposed International Islamic
Financial Market (IIFM) would, once operational, improve the liquidity
management ability of Islamic banks. However, because of its
international characteristics, it is unlikely that the IIFM will replace the
need to develop local money centers and central banking facilities that
are necessary for an efficient liquidity management operation.
Furthermore, the long-term prospect of the IIFM would depend on the
ability of local markets to generate the needed critical volume of real
investment opportunities on which the financial securities will be based.
But other markets in and outside the Gulf are catching up. We expect to
see a lot of growth in Islamic banking in the Far East and notably
Malaysia and Singapore. Singapore office has reported an increased
interest in this type of financing and we are currently acting for a
Malaysian company in relation to the first securitization in Asia. Only
recently, we have been approached in relation to a potential project
finance transaction in Malaysia for approximately $200 million which will
be financed on an Islamic basis. Innovation is fuelling the development of
the Islamic banking sector, according to most analysts. But the industry
is slow on the uptake, particularly given that every new product is an
expensive proposition because of the legal and regulatory issues which
banks have to comply with before their introduction. Some banks are
pushing the industry into uncharted territory. First Islamic Investment
Bank is looking at offbeat investments in the United States, such as
coffeehouse chains to expand its horizons, while HSBC's Amanah
Finance unit has launched its HSBC Amanah Currency Fund as a wealth
management product for Islamic investors in close co-operation with
Kuwait Finance House and Dubai Islamic Bank. Similarly, Bahrain-based
Gulf Finance House has started work on a $40 million 4ibank based on
Islamic principles. According to Esam Janahi, chief executive officer of
Gulf Finance House, the new entity is a coin with two faces. Firstly, it is
an additional unit for other Islamic banks, and secondly it allows you
access to the products and services of Gulf Finance House. Many

Islamic services will be there in addition to a new range of Islamic
product funds, private equity. Bahrain Monetary Agency is already in the
process of developing the laws regulating Islamic banking in Internet
space. They have already done it and are in the process of going
through the channels to be approved. There are limitless horizons of
innovations open for Islamic banks, which are not available for
conventional banks due to their limited and fixed mechanisms. The
modes of istisna, mudaraba, musharaka and other modes combining
capital with effort, experience and craftsmanship, open wide spheres of
innovation, paving the way for introducing new finance instruments
following Shariah guidelines. Takaful and retakaful (insurance and
reinsurance) is another neglected area of Islamic finance. Mohammad
Ajmal Bhatty, chief executive of Takaful International, says that the global
takaful industry stands at $550 million, with around $1.5 billion of assets
under management. It is estimated that the global takaful premium could
grow to $7.4 billion in 15 years' time, at the rate of nearly 20 % growth
per annum. This is not an unachievable task when we have Malaysian
takaful business initially growing at 60 % per annum, and in the Middle
East it is growing at 10 %. The annual premium income of $7.4 billion
would generate approximately $27 billion of funds, and the takaful
system would ensure that the Islamic banking sector completely adheres
to the Shariah. The sector needs to develop the retail side, having done
very well in the wholesale banking side such as corporate finance and
investment management. The Islamic retail financial services sector is in
a void without a strong takaful system. A strong takaful system similarly,
needs retakaful. Without good and strong retakaful companies, the
takaful industry is feeding a major part of its income to the conventional
system. While regulations and innovations are critical to the industry's
growth, human resource development is also equally important. There
are no degrees in Islamic banking and finance, and banks currently
conduct most training in-house. Human resources is a challenge in the
sense that Islamic banking is very much in its infancy. There are not
many Islamic banking degrees, and Islamic banking training institutions.
We think there is a clear need for it. The BIBF is probably doing the
major work in training and development in the area of Islamic banking, so
you are going to need reputable international universities in Islamic
studies. Interaction between Islamic scholars, international banking
scholars, and sharing information will also help Islamic banking principles
to be understood and learned. That will attract conventional institutions to
the industry. The BIBF itself offers a diploma in Islamic banking, which is
developed by the industry. There is an offer for about 25-30 skills training
courses each year, and it`s customisation for different banks in Saudi
Arabia, Sudan, Malaysia and Indonesia. Several international

intermediaries are also investing heavily in training their employees and
that, for some, is an expensive proposition. Most, however, are on a
vertical learning curve. Guided by their respective Shariah boards, most
senior managers learn, and consequently teach, other team members
the intricacies of the Islamic banking system. But there is a general
consensus that the industry needs fully-fledged Islamic finance degrees
and education to bring some conformity and common principles to which
every bank could adhere. With the industry showing strong signs of
moving forward on many fronts though, Islamic banks are expected to
become a force to be reckoned with in a few years time. Major Islamic
banking players - more staunch than ever in the face of the current crisis
- will see to that. But a clear need remains to introduce a range of Islamic
investment and retail products to ensure that the considerable assets of
people in the Muslim world, an overwhelming majority of which is locked
in conventional equities, funds and banks, can be repatriated and
ploughed back into home turf. That was, after all, the underlying principle
of the home-grown industry to begin with: to fund economic growth from
within the region. Islamic banking set to expand One of the
consequences of the events of Sept. 11 has been the attempt by the
United States to implicate various Islamic financial bodies and institutions
with involvement in terrorism, either knowingly or unknowingly. These
charges have been vehemently and categorically denied. Indeed, despite
such attempts, Islamic banking has continued to grow at a speed that
has forced many to study and analyze what is a relatively new
phenomenon. The reality is that millions of people all over the world are
seeking to make money in ways that do not run counter to Islamic
teachings and in so doing, Islamic banking has been born and has added
a religious element to conventional financial services. From a bare
handful of financial institutions set up in the 1970s to provide services
compatible with Shariah law, the numbers of Islamic banks have grown
to more than 200 in some 50 countries. They manage assets of around
$120 billion in addition to investments of another $150 billion. The great
desire by Muslims everywhere to conduct their financial dealings in
accordance with Islamic teachings by using banks that do not pay or
charge interest, and thus avoiding riba or usury which is forbidden to
them has propelled financiers to adjust and adapt Western-style
services. The system uses a variety of mechanisms including murabaha,
a profit and loss-sharing system, musharaka, a profit-sharing joint
venture, mudaraba, a profit-sharing agreement, istisna, supplying
industrial products to client's orders, and ijara which is a globally
recognized mode of leasing. These are all used in addition to the more
conventional funds and portfolios which follow Islamic teachings. Islamic
banking is not a negligible or a temporary phenomenon. It is here to stay

and there are strong signs that it will continue to grow and expand. Even
those who do not subscribe to the injunction against interest may find
innovative ideas in Islamic banking which could add more variety to the
existing financial network. Moreover, the speed with which Islamic
banking has sprung up and the rate at which it has progressed has made
it an academic discipline to be studied systematically. While Islamic
banking derives its rationale from the prohibition of interest, it is widely
believed that there is greater value to Islamic banking - such as
contributing to a more equitable distribution of income and wider equity
participation in the economy. The role of Islamic banks in stimulating
economic development is underlined by the fact that they would be ready
to finance acceptable projects which might be turned down by
conventional banks for lack of collateral. Islamic banks, on the other
hand, might involve themselves in these projects on a profit-sharing
basis. The growing number of Islamic financial institutions and the
opening of Islamic banking counters by major conventional banks are
proof of its attraction and are themselves proving successful. Insurance,
especially life insurance, has always been a contentious issue in Muslim
countries when it comes to financial dealings. Recently a Saudi bank,
Bank Al-Jazira, announced the introduction of what it described as the
first authorized Islamic life insurance ever launched in the Kingdom.
Mishari Al-Mishari, the bank's general manager and CEO, said the new
program known as Takaful is the first in the world to offer the wakala
contract concept. It provides participants with the opportunity to save on
a regular basis through a range of bank-approved investment funds. The
program, he added, has been approved by the Saudi Arabian Monetary
Fund and the bank's Shariah advisory board. Its first phase consists of
three individual products: Retirement, term protection and a waqf
(endowment) charitable donation savings plan as well as two corporate
group plans for term and credit protection. Later as the program grows,
savings and protection plans for education and marriage expenses will
be incorporated. In addition, a special savings plan for women will be
introduced. The NCB recently launched a new Shariah-compatible
product which it said would enable a large number of clients to raise
cash for immediate personal use without resorting to conventional
borrowing. Under the service, known as Tayseer, the bank would sell the
client goods it stocks and help to sell the same goods for cash in the
international market. This service is the first of its kind not only in the
Kingdom but in the whole world. It satisfies the needs of a large number
of our clients who have been looking for an Islamic means of retrieving
cash for immediate use. It is intended to save the client both time and
money. The service adds to the bank's 16 Islamic investment and
financing products with assets of more than SR14 billion. The largest of
these is the low risk, high-liquidity Saudi Riyal Trade Fund which
purchases goods and sells them at mark-ups on deferred payment terms
and has SR8 billion in investment. Local Islamic financial institutions are
expanding abroad through shared capital and asset merger initiatives.
The latest such deal was concluded between Dallah Al-Baraka Group of
Saudi Arabia, which runs Al-Baraka banks in several Arab countries, and
the International Investor of Kuwait. The two institutions heralded what
Dallah officials described as the beginning of an exciting new era in
global finance with the signing of a $350 million asset-merger deal. The
new organization will provide clients in the Middle East and Africa with a
full range of banking and investment services. While some analysts
attribute the success of Islamic banking simply to clients' desires that
these institutions comply with religious injunctions, most analysts predict
expansion and growth well into the 21st century. The development of the
Islamic banking experiment may still be in its early stages but what has
been achieved represents a great success. Making available the
legitimate tools demanded by clients who want to invest has increased
financial mediation. Studies in some Muslim countries have proved that
the introduction of Islamic financing tools has had a direct effect leading
to an increase in financial mediation. Another obstacle facing Islamic
banking is that although the burgeoning industry enjoys a huge potential,
a paucity of regulations and scarce long-term investments along with
their relatively small size are all slowing its progress. Economists say
Islamic banking is growing but the services offered by these institutions
lack Shariah-compatible structured instruments to absorb liquidity. These
banks and financial institutions need to establish a global, internationally
accepted regulatory system to help ensure continued growth. Countries
where these banks are located have also been advised to set up flexible
rules and regulations, as well as instruments that can be traded
according to Shariah to allow the industry to benefit their economies. The
Islamic finance industry - which has firmly established itself in the
mainstream global finance - faces many challenges ahead and, in the
aftermath of the September 11 events, has been unfairly treated,
according to Abdullah Saif, Bahrain's Finance and National Economy
Minister. This industry is also occupied in real economic activity and is
not part of any political movement of any kind. As Islamic finance
operates in a highly competitive market, it must be seen to offer
attractive risk-reward opportunities to both investors and users of funds.
Though Islamic finance is increasingly perceived as a viable and
competitive alternative, we must not forget that we do live in an universal
banking era characterized by advanced technology, economies of scale
and capital strengthening, together with consolidation of conventional
banking - which calls for a competitive response. Islamic finance is now

on the path of sound growth and still has outstanding potential for further
innovation and development.
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Opponents of Islamic banking Islamic banking, and generally Islamic

Financial Services are a growing phenomenon, which came into
existence to meet the needs of the devout Muslims around the world,
who have the main wish to observe the Koran and Sunne. More than 40
years ago the first Islamic bank Mit-Ghamr was established in Egypt and
15 years ago Libya and Pakistan opted for Islamic banking System. In
the last decade, a large number of Islamic banks or Islamic financial
institutions were emerged in many countries. As a result of the increased
interest in this large transactions, many Western banks started open their
branches or subsidiaries in Islamic countries. Following the experience
gained in the previous years, there is no doubts that non-interest based
financial transactions are viable and feasible, and more and more
interesting for western investors. There is a generally well accepted fact,
that Islamic Financial Services Industry (IFSI) is the fastest growing
component of the financial services industry, in terms of the availability of
the new products and also in the geographical spread. Islamic banking
clients are not limited only to Middle East areas, but they are spreading
across Europe, Asia and the US. Currently, the IFSI consists of the
following types of institutions: 1) Islamic banks ,including full-fledged
Islamic banks, Islamic subsidiaries and
Islamic windows
of conventional banks, 2) Islamic insurance and reinsurance companies
or takaful and retakaful Operators, 3) Islamic capital markets, 4) Islamic

non- bank financial institutions, including Islamic leasing, factoring,
finance companies, Islamic microfinance companies, etc. 5) Islamic
financial infrastructure including settlements systems, regulators and
supervisors, rating and external assessment institutions At least 75
countries have institutions performing Islamic Financial Services on their
territory. The world Muslim population is approximately 1.6 billion and
Islam is considered to be the fastest growing religion in the world. So, the
very high-speed development of the Islamic Financial Services could be
explained by the size of the market on the one hand and by the
increasing wealth of the regions dominated by Islam, i.e. Middle East.
The current assets in Islamic Banking segment alone are estimated at
over $ 500 billion. The annual market capitalization of the stocks meeting
the Dow Jones Islamic Market Index Criteria in Islamic countries is
estimated at $ 300 billion. Corporate and sovereign Sukuk bonds
amounting to around $18 billion have been issued till present day. The
growth and development is more spectacular taking into account that in
the 90s the IFS were in a nascent stage of its formation. This rapid
growth shows the demand for Islamic financial products in the global
financial markets and consequently the demand for such services
increased. The IFS offered previously for retail business, expanded to
new areas like private equity, structured products, project finance or
mutual funds. For some countries the share of Islamic banking assets in
total banking assets is still at very low level, despite the very aggressive
development, with a penetration level of 15 up to 22%.The five countries
with the largest Muslim population in the world: Pakistan, Indonesia,
Egypt, Bangladesh and Turkey are still at very low level of development
of the Islamic financial industry. For some countries the ratios of the IFS
are improved by the large international players like, Citibank, UBS,
HSBC, Deutsche Bank or BNP which entered recently into these
markets. All have entered the sector within last 10 years and their move
coincides with the rise in oil prices, as it happened 3 decades ago.
Islamic Financial Institutions bloomed when the oil boom ensured them
wealth. Religious fervor and oil prices are on the rise again and now
many western bank or companies are highly interested to do banking
business in accordance with Shariah and to attract millions of potential
clients. On the other side there are Islamic banks opening branches or
subsidiaries in Europe or US, and they are
forcing
the authorities to find some ways to integrate these services into the
global financial system. To the requests for the acceptance of these new
types of financial institutions we shall add the more concerns for ethical
investments of a large community in the world, which are similar to the
Shariah concerns of the Islamic finance. Many financial products were

developed and meet the specifications of investments in ethical products
or socially responsible services. The optimists consider this like a
precursor of the shape and form of global finance in the coming decades.
It is true that there are a lot of conventional banks, similar with the
Islamic banks, which do not enter in business partnership with
companies involved in activities like gambling, prostitution, alcoholic
liquor, narcotics, etc. There is no international financial institution which
will agree to grant loans to banks which will credit such a/m activities and
ethical and socially responsible finance are becoming popular in the
Western world. But, speaking at present about globalization and
assimilation of the Islamic banks by the conventional ones, we consider
being too early. As more and more we hear about Ethical finance in the
western world, we should consider Islamic investments as a potential
opportunity to the conventional financial services. When analyzing
majority of the products, we notice common features for both types of
systems and the final result is basically the same. The client receive a
credit card in a conventional or Islamic mode, leasing or ijara is the final
result, the same in case of sukuks. Like in the limited case of
conventional banks, not extended to Islamic ones, the banking products
are almost all
invented
already. It will harder be to develop a new product. But the difference is
done by the marketing and targeted clients, as far as all products have
the same basic features. Takaful (Islamic insurance), the discussions
seem to gravitate to one issue, namely the Shariah guidelines or
Shariah principles. However, the Islamic financial markets do not deal
with Divine rules alone and the operational aspects of the Islamic
markets can be considered. Shariah principles are applied to all aspects
of the Islamic life, including financial services, enabling individuals and
companies to adhere to these principles in their investment activities. We
can summarize the list with the main requests of Shariah: 1) No interest
(riba) will be charged or paid. Avoidance of interest has been abused by
those who merely seek to be considered Islamic bankers. Many convert
interest into capital gains and find a Koranic justification. The rules were
tightened progressively as they have been in tax avoidance. 2)
Avoidance of risk (gharar), means that trading of risk or sale of
something not yet obtained, must be avoided Trade related business
only will be financed .There are western similar instruments, involving
commercial papers and bankers acceptance, which also have to be
trade related. We must mention here that many of the developing
countries, having strict exchange control regimes, insist that all overseas
financing or foreign exchange transactions to be trade- related. 3) Part of
the income must be given to charity (zakat). 4) An ethical investment,

meaning that investments in certain activities are not permitted (halal).
These includes production of alcohol, tobacco, pork, gambling and
weapons. 5) The concept of profit sharing business is the base of each
credit contract. 6) The principles are religious and generally are
concerned how the income is generated, wealths distribution in society
or how the profit and loss are shared. The Islamic principles of sharing
risks and rewards, joint partnership in the wealth creation by lender and
borrower, through substituting equity for debt, is a possible positive
solution that promotes entrepreneurship and creativity. Usually this
model is transformed into a partnership through risk sharing and sharing
of the profit and loss. It doesnt mean that investments with financial
institutions are necessarily speculative. More than that, Islamic banks are
structured to retain a different status between shareholders capital and
clients deposits, in order to ensure correct profit sharing according to
Islamic principles. Islamic investors are motivated in their choice of
investments by almost the same criteria as their western counterparts.
The search for acceptable investments is balanced by natural riskaversion. In the same way, Islamic borrowers also have a reluctance to
give away a share in the profits of their enterprise. The most Islamic
banks take the form of one type mark-up or other, rather than profit
sharing. Investing according to Shariah principles requires trained
scholars, with a good understanding of Islamic Law and very good
knowledge of the financial markets. Another requirement is
standardization of the accounting and auditing principles. The Accounting
and Auditing Organization for Islamic Financial Institution (AAOFI) has
about 140 members from 30 countries and developed 68 standards,
including 30 Shariah standards. However, as it is explained in the recent
documents of Islamic Research and Training Institute, there is still more
to be settled, as far as Shariah is an interpretative law that has variance
among countries and people. At present, there is no Islamwide authority
that says what is haram (prohibited) and what is halal (accepted) and like
in the Western banking moving from one tax jurisdiction to another, the
Islamic product developers can go from one scholar to another to get the
approval of their product, as it is compliant to Shariah. In addition to
normal audits, Islamic banks have to conduct Shariah review of their
transactions and to check the compliance. It is supposed they will see
any funds used for prohibited activities. Unfortunately this beneficial
feature was not yet widely disseminated and used as a tool for the
prevention of the money laundering. As the Islamic banks are engaged in
partnerships with their clients, within the profit-loss sharing framework,
they have to know their clients, their sources of funds and their business.
Thus, the Islamic banks are in a better position to identify and prevent
the suspicious transactions of their clients. In the last few years were
many articles, opinions, etc related to Hawala. We would like to describe
it with more details for a better understanding of the link of hawala with
the anti money laundering guidelines and also with the Islamic banks, if
any links with the last ones exist. Hawala was originating in the Middle
East and means in Arabic
transfer
. We may say that hawala was practically the first banking system
established by the Phoenicians and than used by the Jewish immigrants
in Europe. Hundreds of years ago, merchants were forced to hide and to
transfer their wealth in more secure regions and they started to establish
a trust- based network. Many experts believe that hawala was
established in the modern era by the immigrants, sending money from
Europe or from Dubai and Bahrain in their countries in Asia and Africa.
The system was also used to avoid bans on gold imports into South-East
Asia. This system was developed and improved and now we can say
hawala is an informal, parallel, illegal remittance system based on honor
and performance among a large network of dealers, which are primarily
located in Middle East, Asia and Africa. In many countries, like India, Sri
Lanka, Philippines and Bangladesh, the system was eradicated. When
comparing a bank transfer with hawala, anybody from the Muslim users
can say the system is trustful, timesaving and costless. In this system, a
client gives an amount of money to a dealer and also the details referring
to the recipient. The hawala dealer contacts another dealer in the city
and country, where recipient is located and gives deposit instructions for
the funds. He also retains a small commission and promise to effect the
payment at a later date. There is no written document in the transaction,
which is merely done based on honor than on documents. For most
people, despite the existence of a multitude of banks, either conventional
or Islamic, hawala is a convenient, fast, cheaper and safe remittance
system. Today, most of the hawala transactions are taking place in the
rich Middle East countries, by sending money to the Asian countries,
origin countries for most of the immigrants. The reason for domiciling
most of the hawala transactions here is that there is a large population of
expatriates workers and because especially Dubai is the large gold
market for India and Pakistan. Irrespective how efficient or trustful would
be hawala put a shadow from the AML point of the credibility of the banks
operating in these countries. Quite often weve read opinions related to
the close link of the Islamic banks with hawala, which logically it does not
make any sense as far as the banks and hawala are
competitors
on the transfer funds market. There are of course operations, which can
indicate the existence of a hawala transaction. This bank operation can
be done not only using Islamic banks, but conventional banks for some
certain transactions. In the paper published by Interpol General
Secretariat on January 2000, there are detailed explanations of the
routes, mode and even registrations of the hawala operations. After
carefully analyzing all these procedures, we couldnt prove any link with
the Islamic banks, except the case when the initial transfers to the first
hawala dealer are routed through a bank, which we must say could be a
conventional or an Islamic one. The first transfer should be identified as
a money laundering operation as the amount is unusual for the previous
activity on the account, if it is not a document based payment, if the
account shows a significant deposit activity previous to the transfer,
mainly in the form of cash or checks. All these indicators can appear in a
conventional or Islamic account and there is no difference in the
obligations of the compliance officers to report the suspect transaction.
So, antimoney laundering in the sense of the fight against any activity
which refers to
cleaning
of the profits generated by illegal activities has to be regulated in any
country. Know your customer (KYC) is a term used for the customer
identification process which helps banks or any financial institutions to
identify and prevent suspicious transactions. Banks are aware about
AML and KYC policy and they implemented strict controls for money
laundering. As it results from the detailed analysis of the Islamic banking
products, due to the specific requirements for considering
halal
transactions, we may say that Islamic banks should have more abilities
to know their clients than conventional banks. When Islamic banks start
to establish in Europe, they have to know that they have to obey the AML
rules, already established by the international banking community. As
Michael Foot, Managing Director of the UK Financial Services Authority
mentioned there will also need to be the usual guards against misuse of
a bank for purposes of financial crime and terrorism. But we see no
reason why the conditions they will need to be met for shariah
compliance need to be more difficult than for a conventional bank the key
task of knowing your customer which is at the heart of most good
safeguards for banks against financial crime. Growing Muslim
communities internationally has led to the request for more Islamic
banking services. Much progress was made in UK for launching Islamic
products from an UK authorized and established Islamic bank. This is
expected to be followed by similar initiatives among 20 million Muslims in
Europe, US and Canada. UK made important steps in making
allowances such as abolishing the double stamp duty on Islamic
mortgages. In Europe the main challenge will be to make the Islamic
mode of financing widely accepted among a constituency which

transcends Muslim communities. Still the main concern is the European
countries like Germany or France is either not interested or even
reluctant to agree with the establishment of the Islamic financial
institutions despite the fact that as Khan noted, the appearance of
interest-free based transactions are not an alien subject for western
economies. The global Islamic finance sector is growing year by year.
Islamic banks are able to offer new and innovative products, but there
are challenges to be met, especially when they have to compete in
Europe with international sophisticated and experienced banks.
Definitely, the Islamic banks had a fierce competition in their own
countries, as many international banks open Islamic windows there, but
the challenges they have to face are mostly the same in their origin
countries or in Europe: 1) Shortage of experts in Islamic banking, we
refer here to executive specialists not to scholars, 2) Tax regimes not
meeting the needs of Islamic products, 3) Lack of uniform rules in credit
analysis, 4) Lack of relevant of accounting and auditing standards for
Islamic banks. Basel II and IFRS changes will act as catalysts to improve
the quality and consistency of disclosure of the Islamic financial
institutions, 5) Enhancement of product development, according to the
market needs, taking into account the offers of conventional banks. We
can insist on the fact that Muslim population in Europe, having at least a
medium living standard level, applied already to conventional banking
products. They opened accounts in European banks, because they
needed it and they did not wait for a potential establishment of an Islamic
bank. We do not have to forget the two generations families living in
Europe, who were using the conventional banking services for many
years. It is quite difficult now, irrespective of their religiosity, to shift to
another bank without comparing the cost, the quality and diversity of
services of the two banks. Management of the Islamic banks in Europe
and not only have to be more creative, developing product variations and
enabling their banks to compete with their conventional peers. Strict AntiMoney Laundering rules, which have to be observed. There is a certain
need for designing the new financial architecture of Europe, which
should promote the strong infrastructure for better global integration of
both conventional and Islamic finance. Both types of institutions will have
to work together with the supervision and regulatory bodies, national or
European, for ensuring a free, fair and transparent market. Providing
banking services in conformity with Shariah rules will enhance the
accessibility of a significant part of population to financial services and
should have positive implications for social justice and economic
development. Due to their specificity, Islamic banks need to invest more
in their research for new products in order to ensure a proper financial
risk management, resource mobilization at a competitive price and a

proper balance sheet management through securitization. Chapter 6:
The effects and problems of the transformation
Islamic banks are not different from other financial institutions in terms of
their legal modalities, constitutive structures, objectives and means of
achieving those objectives. The only difference lies in their description as
Islamic. The Islamic banks have enjoined on themselves to conduct their
affairs within the limit of the rulings of Shariah and to comply with its
overall objectives. This definition of Islamic banks would make our
approach easy as we embark on the research into the success factors of
Islamic banks as financial institutions. It must be realized that
maximization of profit is the objective of the highest priority for all
investment institutions crated by private individuals. The effects of the
phenomenon of transformation As a result, all private sector financing
institutions have one fundamental objective: to make as much profit as
they can. However, profit maximization is a general proposition that must
be narrowed down and explicated in detail. Similarly, the criteria of every
component of this general objective must also be determined. In brief
those criteria are as follows: boosting all forms of deposits, improvement
in the quality of customer services, expansion the base of banking
services, protection of capital, provision of humanitarian and social
services, and the factors that raise the profit margin, or what is usually
called the rules of profitability management of an Islamic bank. An
Islamic bank normally has three types of deposits that determine its
capacity to raise the rates of shareholders return. These are current
account deposits, unrestricted investment deposits in savings and
Mudarabah accounts, and lastly, off-balance sheet deposits in
investment funds and special or restricted investment accounts. It is
wrong to think of these deposits as independent of each other. Many
researches have confirmed the being of typically positive links between
them. This has also been established by the reports of the 5 Islamic
banks that are the center of this study. Therefore, in marketing and
presenting any type of deposit to clients, its effect on other types of
deposits should always be taken into account. In fact, Islamic banks
must be able to measure this effect. Although Islamic banks do not
distribute returns to current account owners, the servicing of these
accounts, despite their cost, not only increases the rate of profit, because
the deposits are not subject to distribution as they are guaranteed, but
these demand deposits also increase the multiplier of assets/equity rate
which is reflected in the form even a greater increase in the rate of profit.
On the other hand, off-balance sheet deposits are considered an
attractive way to increase the number of clients in addition to being a
very important vehicle to increase the rate of shareholders returns,
because it increases the earnings from the agency activities, keeping in

mind that these earnings are less affected by investment risks to which
other banking earnings are subjected. Improving the Quality of Services
to Clients Some Islamic banks may pay little attention to the quality of
services they offer to their clients especially if such banks enjoy a
position where it can exercise some monopolistic power in the market.
Many Islamic banks were once in this situation when they were acting
alone in their Islamic financial services markets. Today, however, the
monopolistic position is weakening because of the multiplicity of Islamic
banks in many countries and the entry of conventional banks into the
Islamic finance markets. The experience of American banks in the 70s
and 80s, when there was fierce competition among them, has taught an
important lesson, even though it is theoretically not new: Improved
services to customers save cost in the long-term despite their pressure,
in the beginning stages, to increase spending on training and
rehabilitation. The principal reason for this is that improved services
create a motivating work climate and environment for both clients and
employees, which in turn, increase clients enthusiasm for dealing with
the bank and the productivity of the. This improves the cost effectiveness
of the dollars spent on labor. It should be noted that improving the quality
of banking services does not only mean receiving and responding to
clients requests; it rather means the ability of the bank to discover a
client and to offer her a service she has not previously used. This is a
kind of commercial marketing of financial services in full sense of the
word as it is familiar in goods and services marketing. The efforts
expended by the bank in improving the quality of clients services depend
on the clarity of its vision on the market segment to which it is directing
its services. Every segment of clients has its own peculiarities.
Experience has proven that banks that are able to offer specialized
services commensurations with the peculiarities and objectives of every
segment are those that can attract the largest amount of deposits. While
it is neither morally wrong nor against the principle of profit maximization
that a bank should offer its big clients special services that correspond to
the level of profit it makes from dealing with them and their financial
transactions, experiences have shown that banks that are able to
improve the services they offer to medium depositors and small traders
can still make huge profits through economies of scale. Clearly a bank
can offer improved services to all clients in addition to the higher
segment of clients by offering all of them an enjoyable banking practice.
This can be achieved through the following means: 1) Personalizing the
banking services: by that we mean making banking services individually
tailored to every client such that he feels a personal link with the bank he
deals with. 2) Raising the professional level of employees who deal
directly with clients such that they can offer professional services quickly
and efficiently and gain the clients confidence. 3) Strong concern in the
investment department to realize for investors - depositors or
shareholder- a rate of profit higher than other banks that operate in the
same market serviced by the bank, especially other competing Islamic
banks. 4) Improving the working environment and making it comfortable
and enthusiastic for the bank employees. 5) Providing social services
that are noticeable by the segment of the society from which the bank
derives its clientele and staff. The word noticeable should be underlined
because the objective behind services to the social environment is to
raise profit and as such the choice of the type of social services has a lot
of impact on its returns. For instance, it is better for a bank to award
scholarships of 1,000 Dinar each to 10 school graduates in a public
ceremony that will be talked about by people than awarding a single
scholarship of 10,000 Dinar to the best student. Quality of banking
services depends on improving these elements: correct banking
professionalism, knowledge of clients and establishing personal rapports
with them. Correct banking professionalism is the first point of departure
for creating confidence in the bank and its employees. Improving
professionalism therefore centers on improving the bank employees
knowledge and perfection of their banking job, such that anyone of them
can offer a professional, brief and accurate explanation of all banking
services that the client may have in mind. It also focuses on the staff
being able to carry out clients needs quickly and accurately, which would
make the client give generously her confidence to and rely on the
employee, and consequently on the bank itself. Knowledge of clients is
based on continuous relation with them which is, to some experts, the
most important managerial rule. Success in banking services means the
ability to interact with and relate to the clients desires, anticipate her
whishes, and offer services that are specific these desires and wishes.
There are several parameters by which the quality of banking services
offered to a customer can be measured. These include sounding out
customers pleasure through periodic questionnaires, which are then
analyzed and studied. There is also computing the time it takes to
perform services and linking that with the record time. Another parameter
is that which computes new customers whom marketing staff can draw to
the bank. The amount of accomplishment of the management of direct
services to customers as a whole can also be measured by the change
in the volume of market transactions the customers finished by the bank.
Numerous studies conducted by research bodies with various
inclinations in America have shown that 80-90% of bank customers
material assets are kept outside the bank that customers deal with. This
ratio increases every time bank activities are restricted current accounts,
granting loans and issuing credit cards. This means that plenty
opportunities exist for banks to attract new deposits and investments
even without expanding its customer base. Only at the end of the last
century that many Islamic banks turned towards expanding the base of
their services by extending services of agency for investment such as
creating investment funds and special investment accounts. However,
what cannot be marginalized in contemporary banking is that the ability
of the bank to increase its deposits and other investment funds largely
depends on the activity of its financial engineering department. This is
what guarantees continued expansion of its deposits and as such it has
the capacity to constantly increase its investments assets. This principle
is even truer for the Islamic banks because the nature of these banks is
based on new innovations in the art of banking that are far from the
prominent pillar of conventional banking operation: lending and
borrowing. Inventing a flow of investment products Offers customers
attractive alternatives that induce them to move their material assets
from other banks or from outside the banking sphere to the Islamic bank,
while, at the same time, attracting new customers with new deposits.
This continuous innovation process is both the foundation and the growth
certificate for advanced Islamic banking. In this regard, financial
engineering management becomes the strong engine that moves
banking marketing. Without the engineering activity, marketing
management cannot attract new deposits on a continuous basis as to
guarantee continuous growth for the Islamic banks activities and profits.
The measure of expanding the base of banking services is in checking
the growth of non-conventional investments, especially off-balance sheet
investments through the agency contract with fixed or declining
commissions. It can also be done by measuring the growth of new
innovations through reckoning the volume of operations in the invented
products. Protecting capital is the most important considerations in
maximizing profit in the long run because evaporation and loss of capital
not only cause banks to loose new deposits, they also cause the loss of
the means to achieve the very objectives of their existence. Undeniably,
one of the most important elements in capital conservation is the extent
of the banks diversification of its investments and the extent of
management between the maturity of its investments and the maturity of
its deposits. One of the frequent errors in the circles of Islamic banking
theorists is their continuous call for financing through partnership
(Musharakah) and non-voting equity (Mudarabah) that are both of a longterm nature, while the greater part of the banks deposits are shortterm
deposits in current accounts and short-term investment accounts.
Although there are attempts to reduce financing through Murabahah in
favor of an increased financing through Mudarabah and Musharakah,
these attempts should take into account that Musharakah and

Mudarabah financing should not exceed the safe limit in terms of
proportionality with the sources of financing and their maturities. In
addition, protection of deposits requires setting of clear red lines that
should not be crossed with regards to the degrees of risks the Islamic
bank cannot bear, whether they are investment risks or foreign currency
risks. Even though it is clear that Islamic banks are moving towards
taking generally conservative positions towards investment risks, some
of them have landed investors and depositors into pure failure because
of the absence of these red lines and the weakness of check and
balance processes in the management style. One of the most important
criteria in capital preservation is the structure and power of the banks
risk management department and its professional conduct that is not
limited to central bank guidelines and to what is usually known, in
conventional banking, as the rules of banking prudence, but should
include tying Mudarabah and Musharakah investments to long-term
investment deposits, setting red lines of potential risks and for checks
and balances rules in taking investment decisions. Such rules of
prudence must be applicable to even the CEO of the Islamic banks as
well as to other decision makers. There is no doubt that providing
humanitarian and social services to the local community increases the
bond between the bank and its local environment. This has a positive
effect on the volume of deposits and other banking transactions. We
must add that banks are like other institutions in any society. They are
made up of a group of individuals dealing with people in a particular
social environment. There is no way that this group will not be influenced
by its social environment or affected by the ideas, concepts and events
that emerge in that environment. This is why banks participate in many
charitable works and set programs of participation in charitable and
social work, regardless of, and indeed above the demands of the
principle of profit maximization. Banks contribute to public charitable
works and set aside funds in their annual budgets for such purposes.
Islamic banks are also looked at to participate in the charitable activities
in their societies. In fact, that is more expected from them than from
conventional banks because they are governed by the Islamic Shariah
which requires the wealthy to contribute to social and humanitarian
works. Surely it is possible -and may even be better- that the distribution
of Zakah is left to the individuals -investors or shareholders- to spend it
on causes they consider closer to Allah, since Zakah is a religious
obligation, first and foremost. But it is erroneous to think that good deeds
are limited only to the enjoined Zakah. One of the distinguishing factors
of the Islamic bank is its commitment to Quranic morals and values all of
which are based on goodness, righteousness and benevolence. Islamic
banks must portray these values in the same way as required of

individuals. We must note that the social generous objective is
distributive not creative by its very nature. In other words, Islamic banks
deal with their customers on the basis of fairness, justice and kindness
then spend money on the path of righteousness and charity. Thus
spending on charitable social objectives is a form of redistributing net
resources, even though the bank, purely for tax purposes, categorizes
such expenses as part of its public expenses. In fulfillment of its Islamic
character, the Islamic bank should always set aside for righteous causes
some money since it carries the banner and ideals of the Islamic values.
Since the prophet, pbuh, has promised replacement for every spending
and that money is not going to diminish as a result of spending, then the
means of substitution should be an increase of customers confidence in
the bank and their conviction about its sincerity about the Islamic
characteristics it declares. Consequently, their interest in dealing with the
Islamic bank is going to grow. Profit increase above the existing levels
with competing Islamic and conventional banks is in the final analysis the
final objective and the quantitative criterion for measuring the success of
any bank, in general, and for the success of the Islamic bank in
particular. Besides the role that every human being or every group of
people plays in participating in righteous deeds in the society, of which
the Islamic bank is expected to do more because of its identity and
character, any talk about non-profit objectives is either a rhetoric about
interim objectives that are mere means to the primary objective or it is a
form of marketing or public relations propaganda that serves the
objective of profit maximization. We shall devote the remaining part of
this section to recall the rules of managing the profitability of Islamic
banks. These rules can be summarized under the following six points:
pricing of banking services, cost/earning efficiency of banks operation,
selecting high return investments, reducing idle assets as much as
possible, benefiting from economies of scale, compliance with
institutional process for the flow of information to management to make
timely decisions. It is usual for new banks to seek to use the pricing list of
existing banks. But a bank that is keen on offering quality services must
set its own price list on the basis of analytical studies of its own
architectural cost, compare it with other banks, set its own fees to be
commensurate with the value of banking service provided and the
affordability of the proposed price to the average client (statistically it is
preferable to take the mode because it is the most frequent), and then
work to increase the price of banking services to the highest level
possible, without sacrificing the banks competitiveness. Pricing of banks
services includes setting the rage of charges on non-investment services
and determining the share of Mudarib/agent of the returns on
unrestricted, restricted and special investment deposits. Cost/earning

efficiency: This is measured by the ratio of total expenses to total
earning. As the ratio decreases, so does the efficiency of every Dinar
spent by the bank. The Islamic bank can increase its profitability by
increasing the efficiency of its workforce, through constant training and
injecting joy and happiness in the work environment. Investment
selection is linked to risk management because, as it is known, an
increase in the expected return is normally linked to an increase in
investment risk. But it is to a large extent also linked to the bank size
itself. The financial sector is like a jungle where the fatter the prey the
larger the predator animal that is needed to devour it. The bank that
enters the market with huge capital is able to find higher return
investments, in addition to it being able to instill greater confidence in
investors, thus making them to come forward to it with their investments.
It is not enough for the Islamic bank to start with high investment; rather
it should back such an investment with a strategy for continuous growth,
either through geographical coverage or through the size of deposits and
assets or through mergers or purchase of other financial institutions.
Every bank needs cash reserves. Some of these needs are compulsory
while others are required by the rules of banking prudence. But Islamic
banks are known of having higher cash reserves for reasons, part of
which are technical caused sometimes by the banks relations with the
central bank, others for purely administrative reasons. The Islamic bank
can minimize idle reserves by reconsidering its managerial philosophy,
improving its style of applying the rules of banking prudence and seizing
the little opportunities available to use its cash assets to increase
income. Utilization of economies of scale comes about by means of
increasing invested assets, because an increase in investment propels
the multiplier of the ratio of profit-bearing assets to equities towards profit
maximization. Compliance with an institutional approach of information
flow to management to enable it to take timely decisions: Decision
making close to the time of implementation is one the elements of
making profit as well as the most important in safeguarding capital. The
time span between a need for a decision and when it is taken cannot be
reduced unless information reaches the management in an institutional
and regular manner. Banks in the Arab world particularly often aim at
getting information to the management by tying customers time directly
with the chain of getting to the management, such that her transaction
has to be signed by the banks senior management, rather than adopting
a method of delegating middle-rank management to conclude provision
of services to the customer, and then link up with the senior management
to ensure that the information reaches there at the appropriate time.
There is no doubt that the centralized style of management reduces cost
effectiveness and engrosses the top management in trivialities that take

up the time that is better devoted to planning and drawing up growth
programs. Obstacles related to human resources Banking efficiency is
the extent to which a banks management is able to increase its assets
and maximize its profits in the long-term, which is the more important,
and in the short-term, which is also important. There is no doubt that the
Islamic bank is fundamentally different from the conventional bank in the
nature of its relationship with its depositors - a relationship of partnership
not of negotiation, although so many bankers, even those associated
with the Islamic banks, behave as if these two different kinds of
relationships are the same. This different nature of bank/depositor
relations suggest that the management policy of an Islamic bank should
to be fundamentally characterized by the maximization of both
shareholders profit and depositors profit. While efficiency in conventional
banks is defined as the gap between the average profit of a given bank
and the highest profit average in other banks, adding the element of
depositors share of profit to this definition is necessary for Islamic banks.
Such an addition is also consistent with the long-term consideration for
measuring banks efficiency in all cases, because depositors share of
profit is positively related to the size of deposits as we noticed earlier.
This addition may be measured, at least in a comparative static manner,
by holding one of the two indices constant while we examine changes in
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the other. The

reputation of management and founders is an issue that does not need
reemphasis. It is evident that trust is the first foundation for the success
of any bank. In addition, the Islamic bank also has the reputation of the
Shariah board. A tremendous progress has been recorded in the area of
financial Fiqh over the past four decades where numerous studies,
symposia and conferences were conducted with the help and support
from Islamic banks. Adherence to the Shariah in the banking and finance
has become a familiar issue that does not require new juristic reasoning,
especially after new standards issued by Bahrain-based Accounting and
Auditing Organization for Islamic Financial Institutions. What every
Islamic bank requires, today, is real and effective supervision on the
implementation of standards and collective religious rulings in their actual
deals and transactions with others including customers, depositors and

shareholders, as well as effective Shariah supervision on innovations by
the financial engineering department. This type of supervision cannot be
exercised by bringing together senior scholars who are pre-occupied
with a thousand other things in the Shariah board that presents
traditional annual reports at the end of the year. Thus, we consider it very
important for every Islamic bank to devise an effective institutional
framework of Shariah supervision which enables the bank to combine
effectiveness with reputation, such that it would be able to get real trust
that it can deploy in marketing its services and new innovative financial
products. Part of such measures includes the appointment of a Shariah
expert whose main duty would be the supervision of banking operations
and deals and assisting the financial engineering and investment
departments. He/she would also serve as a link between the bank and
other members of the Shariah board. Only a few Islamic financial
institutions in Sudan, United Arab Emirates, Kuwait, etc. have recently
implemented this concept.
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Obstacles related to development of banking products There a few

Shariah
and moral issues whose neglect had a negative effect on more than one
Islamic bank. We consider them important because they are genuine
factors that affect the distinguished image of Islamic banking that is the
main promotional and confidence building consideration of an Islamic
bank. First, there is a potential conflict of interest between shareholders
who are represented by the management and depositors who are
represented by no body. For instance, most Islamic banks leave it to the
management to decide on: the %age of Mudarabah deposits that is kept
liquid (un-invested), the Share of the bank as a Mudarib/agent even in
the absence of any competitive conditions in the market and, in some
Islamic banks, the ratio of profit distribution between the different types of
investment deposits. The report of one Islamic bank states that the
management decides on the share of profit assigned to each of deposits
in savings, 3 month deposits, 6 months and or one year. Leaving issues
like these to the management disturbs the contractual balance that is
required in Shariah. Second, the accounting methods of calculating
shareholders profit sometimes overlook certain important conceptual
issues. For instance, several of the Islamic banks calculate shareholders
profit on the assumption that what does not belong to Mudarabah
depositors is the right of shareholders. Hence the profit of investing

funds accumulated in the reserve fund for investment risk and in the
mutual debt insurance fund (both are furnished with deductions from
customers accounts) is assigned to shareholders by virtue of this de
facto rule! In 2001 bank A the total amount accumulated in these two
accounts was equal to 60% of net equity. Balance in these two funds
should be treated as Mudarabah deposits and given their share of profit.
Third, the little attention usually paid by the Shariah boards of Islamic
banks to fulfillment of justice in distribution of profits between depositors
and shareholders. It is true that Mudarabah is based on contractual
freedom, but freedom alone does not tell the whole story about
distribution when it is not supported by a bargaining power. When the
two parties have different powers, contracts are bound to be influenced
by the monopolistic power exercised by the Islamic bank vis--vis its
depositors. The effect of unbalanced contract is apparent in the huge
differences between the shareholders profit and the depositors share as
noticed from Figure 6. Such a huge disparity cannot be justified by the
little differences between these two groups in terms of commitments, as
it turned out in the cases of bankruptcy/failure of some Islamic banks.
Fourth, some Shariah boards rush to defend the bank management
even in technical matters that should have been referred to neutral
experts. Fifth, little attention is paid by the Shariah boards to the human
and labor relations in the Islamic bank including boycotting companies
that use child labor or practice gender or racial discrimination, number of
hours imposed on workers in certain Islamic banks and equitable pay the
workers receive. Sixth, there is a lack of interest of Islamic banks to
create and inculcate a culture of real development and investment
among their clientele and public at large. This is manifested in the lack of
emphasis on efficiency, hard working, wealth preservation, production
growth, etc., instead of being satisfied with financial increases alone. All
these factors accumulate over one another to point out the dire need for
Islamic banks and their Shariah boards to consciously reconsider their
present approaches and behaviors if they really want to provide
outstanding services to their customers and consequently gain their
confidence and the continued growth of their transactions with the
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bank. Proposal of a plan to convert a traditional bank branch to the

Islamic branch
Islamic finance in the Middle East and North African (MENA) countries,
and Libya, has now become an important element in their societies

development agendas and it is also gaining ground in the financial
landscape of the region as well as in the individual countries. It is also a
growing business as it caters to the financial needs of the people without
conflicting with their social and religious values. Despite this reality, little
systematic and consistent analysis exists in the literature on the asset
and liability structure of Islamic banks in the region and across different
countries. Even lesser is known on what drives Islamic banking growth.
Except for some sweeping statements that appear in popular press no
systematic analysis of the driving factors exist to our knowledge.
Similarly, what has been the contribution of Islamic banking to the
financial sector in terms of resilience and access are unexplored
questions. Islamic banks were among the first categories of financial
institutions that emerged in the Islamic financial services industry. As this
industry expanded, and as the conventional financial sector in MENA
countries diversified into capital markets and other segments, many
other non-banking financial institutions and services also emerged in
Islamic finance. In the conventional banking these two activities of
collection of funds and then their disbursement are done on the basis of
interest charge. That is, the bank charges and interest total from the
financed party and pays a a little slighter interest amount to the funding
party with the differential interest border gained for itself. Interest is
prohibited in Islam. Therefore conventional banking is not the right
arrangement for financial intermediation in an Islamic economy. Islam
also gives a higher role to moral values and promotes justice in all
aspects including finance. Hence, an Islamic economy requires other
institutional arrangements that are conducive to the objectives of Islamic
law. Banking without interest is one of the hallmarks of Islamic banking
system. In this system, the incentives to the financing institutions for
rendering their financing services are provided in the form of sharing in
the profits of the financed enterprise; in the form of earning profits by
engaging in trade or supplying of the intermediate goods and services to
other businesses; and in the form of fee in return for various payments
services and investment services, etc. An initial simple model of Islamic
banking that was proposed in 1960s was a two-tier mudharaba
arrangement. Whereby the bank collects funds on the basis of agency
relationship from savers/depositors and invests them as their agent on
the condition that the bank will get a pre-agreed proportion of profit from
this investment. This agency agreement in return for a defined proportion
of share in profit is called a mudharaba arrangement that the bank has
on its funding side with the savers/depositors. In order to invest the funds
that have been pooled from the savers/depositors and earn a return for
them the bank uses a second tier of mudharaba arrangement, this time it
is between the bank and the financed party. Whereby, the financed party
utilizes the funds in its commercial enterprise and agrees to share with
the bank a proportion of the profit. This is the two tier mudharaba model.
It has the advantage that the liability side fully adjusts to fluctuation in the
asset side, bank solvency is not an issue, and a broader level of risk
sharing is achieved in the society. Risk sharing at all levels of a business
enterprise leads to lower levels of premature bankruptcies of business,
and rarer event of sudden closure of banks. These characteristics have
very positive implications for financial as well as economic stability. An
important point to note in all models of Islamic banking, and also for
Islamic finance in general, is that finance is always tied to real economic
activity or investment. There is no untied credit that earns a return.
Income earning credit comes into being only by value adding real
economic transaction be it in the form of murabaha or leasing or other
such contracts. This in itself is a source of stability for the overall
financial system. Moreover, the profit sharing that takes place between
individual bank and savers/depositors works to stabilize the bank,
increase its monitoring, and in turn have positive systemic stability
implications as well. Following are some major business models used in
Islamic banking: 1. Retail and Corporate Banking 2. Investment Banking
3. Combination of Commercial and Investment Banking 4. Bank working
as Money Changing and Money Transferring Business 5. Investment
Company Models 6. Holding Company holding various financial
companies 7. Banks operating mutual funds (i.e., indirect investment
companies) 8. Industrial and financial conglomerates 9. Specialized
Banks (catering to specific sectors as agriculture only or industry only). In
the MENA region, the majority of Islamic banks are privately-owned.
They exist along with the conventional banking and financial institutions
with the exception of Libya which classifies all its banks as Islamic and
majority of them are state-owned. Among the MENA countries, the most
developed Islamic banking sectors are found in Bahrain, Kuwait, Qatar,
Saudi Arabia and United Arab Emirates. Islamic banking in the MENA
region has been a fast growing sector. The assets, deposits, and
financing all grew fast in the region during 2011-2013. To systematically
compare the performance of Islamic banks across countries a
methodology is devised in this section whereby we compare the average
of key ratios of Islamic banks in one country with the similarly averaged
key ratios of Islamic banks in the other countries. This is, as if an
average (representative) Islamic bank in one country is compared with
the average (representative) Islamic banks in other countries, as well as
with the average for the MENA region. The key ratios selected for
analysis are: return to equity, return on assets, asset utilization ratio, and
operating income to asset ratio. Return to equity (ROE) as measured by
net profit to total equity varied significantly across Islamic banks in our
sample but in general remained high even during the global financial
crisis when the conventional banking sector globally was severely
affected. For example, for the average Islamic bank in the UAE during
2008, the ROE was above 15 %, the highest in the region compared to
other countries. During the same year ROE for an average Islamic bank
in Bahrain was 7.2 %, in Egypt about 0.1 %, Jordan 14.4 %, Kuwait 8.2
%, Lebanon negative 9 %, Qatar 11.9 %, Saudi Arabia 10.7 %, and
Yemen 7 %. However, the situation changed in the MENA region during
2009 when ROE of Islamic banks declined in most countries becaose of
financial crisis. Figure 7 shows historical data on ROE, as measured by
the ratio of net profit to total equity, for the years 2006 to 2008 for eight
countries in the sample and up to 2009 for five of them where data was
available. The ROE in the MENA region shows a converging pattern from
2006 to 2008 across countries. This may be due to the moderating affect
of the financial crisis or it may reflect increasing integration and
competition across the countries. However, between 2008 and 2009 a
diverging trend is quite apparent with banks performing very differently
across countries. Bahrain and Kuwait displayed highly negative ROE.
While ROE figures also declined in other countries, they remained
positive. Islamic banks in Qatar witnessed an increase in ROE. Why did
the Islamic banking sector perform so differently across various countries
during the stressful time in 2009 while they were converging in
performance earlier? This is a highly important research question that
can shed light on the importance of various aspects for stability and
growth of Islamic banking which requires a full-fledged research in future.
Based on a-priori information, negative ROE in Bahrain can be attributed
to large number of small banks with relatively low capital base that
reduce their capacity to diversify as well as lower their capacity to absorb
credit losses from soured murabaha and ijara transactions. In case of
Kuwait the negative ROE, despite high capitalization of banks, may be
attributable to lax regulation as well as to the limited domestic investment
opportunities that led banks to invest in foreign markets and over
exposure to real estate sector. The better performance of UAE in 2009
compared to Bahrain and Kuwait may be due to strong liquidity support
provided by the Central Bank of UAE to its banking sector including the
Islamic banks during the crisis. Figure 7. Average Return on Equity for
Islamic Banks The chart shows Return on Equity averaged for all Islamic
banks in each country for each year since 2006. Data for Bahrain,
Kuwait, Qatar, Saudi Arabia, and UAE up to 2009, while only up to 2008
for Egypt, Jordan, and Yemen. Return on assets (ROA) had declined for
the average Islamic bank in every MENA country in 2008 compared to
2007 but remained in the range of 2.3 % to -0.06 %. The trend in ROA
had been downwards in most of the countries since 2006 with the
exception of Jordan, Qatar and UAE where it had edged up during 2007
before coming down in 2008 (see Figure 8). However, in 2009 ROA
declined sharply in most countries but in very divergent ways. The ROA
declined to negative 7 % in Bahrain and negative 2.1 % in Kuwait. It
declined but remained at positive 1.7 % in the UAE and at less than one
% in Saudi Arabia. However, it increased to more than 4 % in Qatar
during the same year. Figure 8. Average Return on Assets for Islamic
Banks The chart shows Return on Assets (ROA) averaged for all Islamic
banks by each country for each year since 2006. Data for Bahrain,
Kuwait, Qatar, Saudi Arabia, and UAE up to 2009, while only up to 2008
for Egypt, Jordan, and Yemen.
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The
performance of Islamic banks are encouraging if we analyze them in the
perspective of recent global financial meltdown that has caused the
collapse of many strong and established banks like Northern Rock,
Royal Bank of Scotland of the United Kingdom and Lehman Brothers,
Goldman Sacs, Merrill Lynch and Washington Mutual of the United
States. But, surprisingly, Islamic banks have proved their inherent
strength to grow in adverse macroeconomic condition. It indicates that
Islamic banks have capability to cope with sudden economic and market
shocks due to their real business activity and refrain from speculative
business activities. Human resources development is the main challenge
being faced by the Islamic banking industry. As the industry is expanding
all over the Muslim world including Libya it needs Islamic scholars having
vast knowledge of Islamic finance to help the bank in development of
new financial products and ensure the operation of the bank in
accordance with the Shariah compliance. It also needs trained staff
having experience and knowledge of Islamic banking for introducing
Islamic financial products. Presently, this shortage of skilled Islamic
bankers is being met through short courses and training of new staff or
hiring staff from conventional banks at higher financial package. This is
not a permanent solution. The Islamic banks must chalk out a long-term
human resource development strategy to meet the future demand of
skilled human capital. The absence of inter-bank money market for
Islamic banks is another serious problem. The Islamic banks cannot use
interest-based money markets and its instruments to manage their
liquidity and hence the development of a separate market mechanism for

Islamic banks is necessary so that they may be able to use their
excessive funds. This mechanism can be developed in the light of the
experience of Malaysia and Bahrain. Malaysian inter-bank money market
has been functioning since 1994 with several Islamic instruments.
Similarly, Bahrain Monetary Authority has established the Liquidity
Management Centre (LMC) in 2002 with the objective of facilitating
Islamic banks to manage their liquidity. The Governments of Muslim
countries should issue Islamic Sukuks and sovereign securities on large
scale to enable Islamic Banks to invest their funds in these secure
instruments. In
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this respect, Sudans experience can be materialized. Despite rapid

growth of Islamic banking and finance, the emerging industry faces
several challenges which are hampering its future prospects. These
problems are related to liquidity management, monetary policy
instruments, standardization of financial products, supervisory and
regulatory framework, cost efficiencies, shariah-compliance and
development of interbank and money markets. The most important job to
be done is the issuance of suitable interest-free government securities
(sukuk) in which IBs can invest their excess liquidity. Secondly, there is
demand for developing a mechanism for standing credit facilities by the
central bank which can be drawn upon in a distress situation. Absence of
these facilities along with inefficient Islamic interbank and money
markets creates liquidity management problems for Islamic banks. Thus,
to meet any unforeseen liquidity shock these banks hold costly excess
reserves increasing their inefficiencies. IBs, in turn, include these costs
while pricing their financing products. Therefore, a higher markup rate on
Islamic financing may render IBs less competitive than other market
players. Standardization of products, differences in accounting treatment
of various products, issues in minimum capital requirement, difference in
shariah ruling in various regions and regulatory issues must be resolved
for the future expansion of the Islamic banking. Some countries like
Malaysia and Bahrain have addressed the issue of liquidity management
of the bank by developing an Islamic interbank money market. However,
their main instruments are not accepted in other regions from the shariah
viewpoint. Establishments of Account and Auditing Organization for
Islamic Financial Institutions (AAOIFI), Islamic Financial Services Board
(IFSB), and International Islamic Financial Market (IIFM) are significant
developments to address the issues about standardization of accounting
practices, issuance of prudential regulations and development of Islamic
financial markets. The problems related to liquidity management and

monetary instruments can be resolved by issuance of ijarah sukuk in
sufficient volume to match the demand for these instruments. Since
these sukuk are also eligible for trading in the secondary market, these
would help in the development of efficient interbank market and open
market operation mechanism. We suggest that GDP-linked mudarabah
sukuk should also be used by the central bank to resolve the liquidity and
monetary management problems in IBF. To develop an alternative to
discount rate policy needs thorough deliberations of shariah scholars and
economists alike. Chapter 7: The field study Field
design This research study has been designed to give a reason for
transition from conventional to Islamic banking. The area of the study is
the whole Libya where Islamic banks are operating under the same
framework as conventional banks. In order to make this research study
more ample the author used both primary and secondary sources for
collection of relevant data and required information. The author used
interview method to collect primary data from individual bankers.. This
data was collected from the following sources: 1. Annual and quarterly
financial statements of five Islamic Banks, 2. Database of the Central
Bank of Libya, 3. Database of IMF, World Bank, IFC and Asian
Development Bank, 4. Database of Islamic Development Bank, Jeddah,
Saudi Arabia, 5. Different Research Journals, 6. Books on Islamic
Banking and Finance. The time of study is broadening over year starting
from October, 2013 to October, 2014. The data of five Islamic banks in
Libya have been included into this study. The author used the following
research techniques in this study. 1. Direct interview method was used to
record the views of Islamic and conventional bankers. Personal
interviews with a number of workers in the banking and administration
that have been converted to provide Islamic banking service and those
who occupy leadership positions in those departments. 2. Comparative
analysis technique was applied for framework of Islamic banks. 3. Ratio
analysis technique was used to measure the asset quality, profitability
and earning potential of
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Islamic banks. Personal interviews In this research take a part 315

employee from 5 Islamic banks. Most of the interviewees believe that the
authorities of the banking system in the Libya are able to make sure that
banking activities are shariah-compliant by considering and deliberating
on contracts. Interviewees submit to the next aspects: 1. Relating to the
contracts they believe that contracts are shariah-compliant because the
Law of Interest-Free Banking in Libya was generally accepted. 2.
According to the law all new contracts or executive guide directions or

instructions and bylaws should be approved by the Government.
According to Libyaian law even if just one person recognizes that one
guide direction or instruction is not shariah-compliant, he/she can issue a
complaint to the Justice Court. They inspect the matter and if they see
any problem they send it to the Government for consideration. 3.
Concerning the execution of the law according to the executive guide
direction or instructions and bylaw, interviewees mentioned several
factors which are necessary to ensure and check the conditions
regarding the law of Interest-Free banking in Libya which are as follows:
a) Determining the contracts and defining a clear relationship between
depositors and banks in the law. This, together with the training which
banks give to their staff can ensure that Islamic banking will be followed
by the banking system in the Libya. b) Central Bank inspectors usually
select some branches randomly and go there to scrutinize contracts.
They examine all contracts at the chosen branches, both from the
technical and the shariah point of view. In this case, they inspect some
contracts which have been sent to them for this purpose. Furthermore,
there will be a board called the Disciplinary Board of Banks. All violations
are reported to them for consideration and they are responsible for
deliberating on them carefully and precisely. Also, some big projects go
to the Central Bank for deliberation. They consider them carefully and
then approve them. c) Supervision by commercial banks themselves:
branches administer the projects and contracts directly. From the
interviewees point of view banks check specialty and experience by: (1)
Demanding proof of their specialty and their experience, (2) Sending
inspectors, (3) Having some personal knowledge of them, because every
branch works in a specific area and knows its customers, (4) Reports
from external corporations in private banks. (5) Checking job licenses
and clients credit. Opinions of interviewees regarding the ways of
making sure that banking activities are shariah-compliant by considering
the clients honesty. Honesty is very important in Islamic banking, not
only because Islamic banking as part of an Islamic economic system is a
moral system, but also because of its civil effects. In partnership
contracts, for instance the modharabah contract, the banking system
should trust the agents word. In other words, if the agent claims a loss,
the capital owner in this case the bank - must accept their claim without
asking for proof. In fact it would be the duty of the bank to provide proof
against their claim if they disagree with the agents claim. Therefore,
because banks are agents of depositors and are responsible not only for
protecting their deposits but also for obtaining profit for them, it is their
religious responsibility to do their best to make sure that those who apply
for financial facilities are honest. An important issue in the banking
system is the ability to respond to all legal demands for financial facilities
from a theoretical and legal point of view. Some people believe that
Islamic banking in Libya is not able to respond to all demands.
Sometimes this is due to a lack of sufficient resources and sometimes it
is due to limitations in contracts or law. Overdue or late payments are a
problem for all kinds of banks. In Islamic banking it can be more serious
than in conventional banking because, according to Islamic thought,
whenever debtors cannot pay their debt, it is recommended that
borrowers give them more time until they become able to pay them. If
one corporation receives ten billion Libyaian Dinars credit or other
facilities and claims it is not able to pay its debt, if the profit rate is 10% it
would benefit from delay in payment at one billion Libyaian Dinars per
year. This huge amount of money could encourage its staff to claim that
they are not able to pay their debt. It would be interesting if we have
interviewees opinions as a researcher or manager in Libyas banking
system. Overdue debts to all financial facilities to the private sector
increased from 7.1% in 2012 to 15% in 2013, while the average ratio
world-wide is 5%. This is due to political and economic conditions,
exchange rate, profit rate and unexpected events. Changing the
structure of the banking system after defining new responsibilities for it
could be one acceptable challenge which has existed for some years
between Muslim economists in Libya. What happened in Libya was not
simply the establishment of an Islamic banking system; rather, it was a
change in the existing conventional banking system to an Islamic
banking system, or Usury-Free banking system. Some economists
believe that apart from the need for training, it was necessary to change
the structure too because, in the past the banking system was interestbased and banking activities were simple. They collected deposits and
gave interest to depositors and then provided the deposits to credit
applicants and received a higher interest rate than that which they gave
to the depositors. They did not need to evaluate and monitor projects
and build or repair buildings and do many other things which they do
now. In fact, Islamic banks enter the actual economy and need a special
structure. Of course, some changes have been undertaken in the
structure of Islamic banks in Libya, but it seems that they are not
enough. This chapter has attempted to examine the assurance of
shariah-compliance in Islamic banking according to interviewees
responses. As mentioned before, by shariah-compliance we mean not
only using proper contracts for the projects but also considering their
profitability. Furthermore, we asked for the opinions of the interviewees
regarding the problems with which Islamic banks are faced and their
solutions. The vast majority of interviewees believe that banking system
authorities in the Libya are able to make sure that banking activities are
shariah - compliant by careful consideration of each contract, and of the

honesty, profitability, speciality and experience of their clients and by
supervising the process of the project throughout the entire process. In
addition, all interviewees believe that previous staff training, was not
enough and more training was needed. Also, regarding the problems
with which the Islamic banking system is faced, the majority of
responders believe that although asymmetric information, moral hazard
and adverse selection are also problems in Islamic banks, they are more
able to solve or reduce these problems than conventional banks.
Furthermore, the majority of respondents believe that, there is not
enough flexibility in Islamic contracts in Islamic banking in the Libya and
all interviewees believe that there are some problems regarding
financing all applicants, not because of the nature of Islamic contracts
but because of government policies which state-owned banks have
followed. In addition, all interviewees believe that there should be a
reform in the law which, fortunately, has being carried out now and 60%
believe that there is more overdue debt than usual. Regarding the
solutions for these problems, most of interviewees believe that a change
of structure is necessary. Also, all interviewees agree that there should
be a reform of all laws regarding the banking system, including the Law
of Usury-Free Banking in Libya. Methods of research The researcher
used the descriptive method using the analytical method, it is the
approach that is appropriate for the nature of the study, and because the
description is one of the basic processes in scientific research, as it can
be a researcher from the exact description of the phenomenon with the
need to organize and analyze data and extract conclusions of
significance and meaning for the problem of the study. Data collection
tool (statistical analysis) The primary data collected for a particular
phenomenon can not be used unless the coordinates, so that knowledge
of the contents, so the statistical analysis works to identify appropriate
methods of data collection, described and summarized and analyzed
using statistical methods to get to know the phenomenon under study.
The aim of doing statistical analysis for this study access to achieve its
objectives and hypotheses, which show the effectiveness of banking
services bank under consideration and upgrading and the adoption of the
best plans, policies and programs that contribute to and help get the best
banking services that meet and match the customer's wishes, This is not
only through the selection of the best method for collecting data, building
on the nature of the data to be collected, and the approach taken in the
study, and the time allowed him, and material resources available, the
researcher found that the tool most appropriate to achieve the objectives
of this study
questionnaire
and that the lack of basic information related to the subject under study,
as data is available, in addition to the difficulty of obtaining them by other
tools personal, or persona observation, and therefore, the researcher
designed the questionnaires to banks employees under study. The
questionnaire for employees consists of two parts, Part I include
variables descriptive of the sample, namely: sex, age, educational
qualification, experience, and occupation, and the second part includes
the basic variables from questionnaire. 1. Spatial boundaries: this study
was conducted at the five banks in Libya. 2. Time limits: from October
2013 to October 2014. 3. Spatial boundaries: In the sense that the data
collection tool give the same results if used or returned again under
similar circumstances to measure the stability of an instrument study
"questionnaire," the researcher used the equation Cronbach, this test
measures the degree of consistency of answers investigator them all the
questions in scale, and the extent to which measures where each
question the same concept, and the value of the coefficient of Cronbach
alpha between (0,1) shows the correlation between the response of
sample when the value of the coefficient of Cronbach alpha zero field on
there was no link absolute between answers sample, but if the value of
the coefficient of Cronbach alpha and the one true, this indicates that
there is a link full of answers to sample. It is known that the smallest
acceptable value for Cronbach alpha coefficient is (0.6) and the best
value Range (0.7 to 0.8) and the higher the value of (0.8), the better, and
table (5) shows the reliability coefficient of axis of questionnaire.
Cronbach's alpha is a measure of internal consistency, that is, how
closely related a set of items are as a group. It is considered to be a
measure of scale reliability. A "high" value for alpha does not imply that
the measure is unidimensional. If, in addition to measuring internal
consistency, you wish to provide evidence that the scale in question is
unidimensional, additional analyses can be performed. Exploratory factor
analysis is one method of checking dimensionality. Technically speaking,
Cronbach's alpha is not a statistical test - it is a coefficient of reliability (or
consistency). Cronbach's alpha can be written as a function of the
number of test items and the average inter-correlation among the items.
Below, for conceptual purposes, we show the formula for the
standardized Cronbach's alpha: Here N is equal to the number of items,
c-bar is the average inter-item covariance among the items and v-bar
equals the
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average variance. Table 5. Test results, Cronbach's alpha (1) for

variables of the study. Number of variables Phrase N 0. 886 21 All
phrases 1 It is clear from Table (5) that the coefficient stability of an

instrument of the study (alpha Cronbach) of the questionnaire employed
ranged between (0.771 and 0.985) for the various expressions of
questionnaire, and that the reliability coefficient (alpha Cronbach) for all
phrases of this resolution (0.897). Field study sample Staff represents
the population of the study in all the administrative leadership and
administrative staff for each of the banks (353). Due to the small
population of the study the researcher chose to use the method of
complete enumeration (a comprehensive survey sample), which took all
the members of the community study. Were distributed (353) form, where
the non-repeat of (22) questionnaire, and after screening questionnaires
to identify their suitability for analysis, show that there are (16) forms
were excluded for lack of compliance with the answer to sound any
number of forms recovered and viable for analysis (315) form by return
(89.23%). After collecting the questionnaires researcher used a method
of digital encoding of data, including that he meets all of the phrases
axes of the basic variables of the questionnaire a list with the following
choices according to the measure as: strongly agree - agree - neutral - is
OK - not OK strongly, has been given all of the choices the previous
grades to be processed statistically as follows: strongly agree (5) five
degrees, OK (4) four degrees, neutral (3) three degrees, but OK (2) two
degrees, is strongly agree (1) one degree, and since there are four
spaces and five choices for this was to determine the extent of each
selection where 0.8 = 4 / 5 = long hence, the term of each choice is
equal to 0.8, including the extent of each choice is calculated as shown
in Table (6). Table 6. Options that are used in study The choice Choices
1 to less than 1.8 Not strongly agree From 1.8 to less than 2.6 Not OK
From 2.6 to less than 3.4 Neutral From 3.4 to less than 4.2 OK From 4.2
to 5 Strongly Agree Statistical methods To achieve the objectives of the
study and analysis of data collected, it has been the use of several
appropriate statistical techniques using the Statistical Package for the
Social Sciences Statistical Package for Social Sciences, which
symbolized for short code (SPSS), and following a set of statistical
methods in which the researcher to use: 1. The arithmetic mean The
arithmetic mean "is the sum of the values on the issue", which is a
measure of central tendency, and is used to estimate the parameters of
society, or statistical hypothesis testing. The arithmetic mean is found by
the following equation: Where is: : The arithmetic mean :The values
given : Frequency for each value given : Number of values. 2. Standard
Deviation Standard deviation of a set of views is the positive square root
of the sum of squares of deviations from the middle values divided by the
arithmetic mean (n - 1), which is a dispersion, and is used to determine
the convergence or divergence NDF vocabulary sample on a particular
option. The standard deviation is found from the following equation: 3.

Test (t) Is the value of a (t) by the following equation: Where is: x: the
arithmetic mean. S: standard deviation. n: number of values. The test is
used (t) to test the hypothesis zero that the average a particular variable
is equal to a specified value against the alternative hypothesis that the
average variable less than (greater than) the specified value, where it is
compared to the value of testing (t) calculated with the value of (t)
indexed-degree of freedom and level of significance of certain If the
value of the test (t) is greater than the calculated value of (t) rejects the
hypothesis zero-indexed, but if the value of the test (t) is smaller than the
calculated value of (t) indexed accept null hypothesis. 4. Cronbach alpha
test ( ) to measure the stability The Cronbach alpha test of statistical
tests to analyze the task questionnaire data, where to do any analysis of
the questionnaire should be tested Cronbach alpha is a test shows the
stability of sample answers to the questionnaire statements where: N =
Number of questions in the questionnaire = Coefficient of stability =
Variance question = Variance of all question 5. Chi square test of
independence Using the chi square test of independence to test the null
hypothesis that two independent phenomena (there is no relationship
between them), versus the alternative hypothesis that the two
phenomena is independent (no relationship between them) (0) null
hypothesis: that the two phenomena independent (no relationship
between them) (1) the alternative hypothesis: that the two phenomena
is independent (no relationship between them) numerous to count, and is
used to test: Where (Oij) are duplicates of the phenomenon seen (i) are
distributed based on the patterns of the phenomenon (j), (Eij) is the
expected occurrences of the phenomenon (i) are distributed based on
the patterns of the phenomenon (j) is calculated (Oij) using the
relationship: Where the (Ti0) represent the total occurrences of the
phenomenon (i), and (Tj0) total occurrences of the phenomenon (j), and
(N) total duplicates. 6. Simple linear regression We have study of the
impact of the independent variable and one or more of the dependent
variable so that we can predict specific values of the dependent variable
if we know the values of the independent variable or independent
variables. It can be represented by the relationship between the
independent variable and the form of the equation as follows: Where y =
the dependent variable. a = a constant value. b = a tendency to decline.
x = the independent variable. e = random errors. Chapter 8: Conclusions
and recommendations Results of the study According
to the Central Bank of Libya, there are sixteen banks in Libya. Libyas
banking system is dominated by four banks which are owned in full or in
the majority by the Libyan Central Bank (Jamahiriya Bank, Wahda Bank,
Sahara Bank, Umma Bank and the National Commercial Bank). These
banks constitute almost ninety percent of Libyas banking sector assets.

All of these banks have capital of at least 10 million Libyan Dinars, and
two of them (Wahda Bank and Sahara Bank) were in the process of
being privatized in 2006. Frances BNP Paribas acquired 19% of Libyas
Sahara Bank in July 2007, and took operational control of the bank. The
deal also includes an option allowing BNP Paribas to purchase additional
shares up to 51% of Saharas capital over the next three to five years. In
November 2007, five foreign banks were short listed for the privatization
of Wahda Bank, including French, Italian, Jordanian, Bahraini and
Moroccan institutions; Arab Bank (of Jordan) was selected. They bid on a
19% of the share of Wahda Bank, with the option to increase their
ownership to 51% in three to five years. The Central Bank announced in
October 2007 that it would merge Umm bank and Jamahiriya bank into a
single entity; that process was completed in year 2000, although there
are still branches open under the banner of each bank. Libyan Banks get
most of their funding from customer deposits, which were 83% of their
liability base as of Nov. 30 2008. They reinvest most of these funds with
the Central bank of Libya in the form of demand and time deposits. Also,
loan/deposits ratio has been consistently decreasing going from 41% on
Jan 31 2007 to 23%
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on Nov. 30/2008 (Libyan central bank, 2009). This section will discuss
the experience of five Lybian Islamic banks in achieving their objectives
and quantify the degree of their achievement in transformation from
conventional banks. These banks are: Jamahiriya bank, Sahara bank,
Wahda bank, National commercial bank, Umma bank. Islamic banks
operating in Libya under an economic system that is uncomfortable
because it is based on the principles and ideas that are inconsistent with
the principles and ideas on which Islamic banks, and is working as a
minority within the commercial bank and the basis of their specialized
interest Islamic banks avoid trying to find formulas and coefficients do
not as such taking or giving. The logic of the RIBA and dealing with
Islamic banks in the same system of dealing with commercial banks
despite the fundamental differences between them, and this fact imposes
a set of troubles and obstacles of Islamic banks and Islamic banks
operating in Libya suffers from these problems and other problems
arising from the nature of the social, economic and political conditions of
the Libyan people in the present stage. These problems can be
summarized and constraints from the viewpoint of Islamic banks based
on the following: 1. General situation of social, economic and political

areas of the Libyan Authority and the instability and misty controlling
things and shadowy image of the future. 2. The economic blockade
imposed by the Libyan Authority and the repeated closures of the Libyan
towns and villages, creating a situation of isolation and lack of
communication and isolation from the outside world and no territorial
contiguity between the Libyan towns and villages. 3. The absence of
specific legislation suited the nature of Islamic banks and Islamic banks
shall be brought into relationship with each other and their relationship
with other banks, whether commercial banks, specialized, etc. 4. The
recent experience of Islamic banks and Islamic banks operating in Libya
in particular and consequent lack of awareness of Islamic banking and
lack of confidence required in this new type of transactions banks. 5. The
limited number of Islamic banks compared to other types of banks is still
low relative to other banks and has brought new practices do not trust
clients before. 6. The existence
of Islamic banks in the economic conditions and administrative and legal,
but restricted by the provisions of the Islamic Sharia. All the difficulties
and problems mentioned above led to the establishment of Islamic banks
directed most of their investments to the murabaha, for speed of
realization, and the clarity of the cash flow and revenue. The researcher
tries to treat and study the important question in the world of business
and finance, on the role of Islamic banks in the financing of economic
development, especially development in Libya. The study showed the
important role played by the Islamic banks in the
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overall development process and theory. The philosophy of Islamic

banks based attend risking funds in direct investment as a share and
speculation, and other factors contribute to invest indirectly as
murabaha, farmer, Istisna'a and other away from lending with interest
just for profit only. Islamic banking activities relating to the collection of
savings based attend receive intellectual acceptance and belief of
Muslim communities, which means their large pool of savings that are
invested directly or indirectly in the development process, thereby
ensuring broad popular participation. Researcher in this study attempted
to identify the true role of Islamic banks in financing economic
development in Libya under this hard reality because of the civil war in
Libya. The study showed that banks were able to accumulate savings of
depositors. Although these banks collect the savings in line with the
theoretical role of banks in development, but these banks failed to
provide adequate facilities to finance investments-especially long term-by
the Islamic approach to funding. The study also showed that the volume
of financing of these banks to the core economic sectors such as
agriculture and industry were very limited. It is clear that the contribution
of Islamic banks operating in the Libya in a very modest economic
development process. Perhaps the fundamental reasons behind the
weakness of bank facilities provided by Islamic banks in Libya in general
and in the field of agriculture, industry and long-term financing,
particularly due to the following: 1. Political instability, security and
economic weaker overall investment opportunities, investment
opportunities in particular security, weakening the opportunity to share in
the development of Islamic banks. 2. The civil war had the low
opportunity to make or participate in investment operations in Libya. 3.
The recent experience of Islamic banks in Libya, and the lack of
legislation that fits with regulated commercial banks and the Libyan
Monetary Authority, taking into account the specificity of these banks,
and legal obligations that do not abide by the commercial banks. 4. The
weak public confidence by the Libyan Islamic banks barrier to success in
development financing. These difficulties and problems and other
imposed on Islamic banking trend in investments aimed at investing
method to quickly liquidate and the cash flow and revenue profits ranged
between 40%-85% of the funds of the Islamic banks. Based on the
above, and despite the expected role of Islamic banks in the financing of
economic development, despite the success of these banks in aggregate
savings and deposits in Libya, but they did not succeed in the financing
for development process and in supporting the leading economic
sectors. They should not reduce the interest in Islamic banks and
expected role in Libya. But we should keep in mind that the Islamic
banks must take part in financing economic development in Libya and
regaining public trust to continue the flow stream deposits, and to
continue to finance the investment, so that the banks involved in direct
investment in different development areas such as agriculture, industry
and the other is long term. So the banks must to offer the following
recommendations: 1. Economic stability and security are key factors in
the success of the overall performance of banks and Islamic banks in
particular. However, these factors are not the ability of the banks to
control it, so the banks are trying to handle with this situation, despite its
difficulty. 2. The competent authorities must contribute to the success of
the role of Islamic banks which have a significant impact on the collection
of savings and a local alternative to finance economic development in
Libya away from the domination of foreign loans. This contribution is
considered privacy facing Islamic banks in terms of not dealing in RIBA,

interest in direct investment. Summary tables of the study Analysis of
personal data Bank staff 1. Gender Table 8. Distribution of the items of
the study sample by categories of gender % A percentage of Repetition
Gender 68.6 216 Male 31.4 99 Female 100.0 315 Of the total 2. Age
Table 9. Distribution of the items of the study sample by age Percentage
% Repetition Age 15.6 49 Less than 30 years old 30.8 97 From 30 to
less than 40 years 39.0 123 From 40 to less than 50 years old 14.6 46
Than 50 years and over 100.0 315 Total 3. Qualification Table 10.
Distribution of the items of the study sample according to qualifications
Percentage% Repetition Qualification 28 .9 91 High School or equivalent
49.8 157 Bachelor 18.7 59 Graduate 2.5 8 Doctorate 100.0 315 Total 4.
Experience Table 11. Distribution and the relative percentage of the items
of the study sample according to banking experience Percentage%
Repetition Years of experience 0 0 Less than 5 years 34.9 110 From 5
years to less than 10 years 65.1 205 Than 10 years and over 100.0 315
Total 4. Profession Table 12. Distribution of the items of the study sample
according to profession Percentage% Repetition Profession 1.0 3
Chairman of the Board or the Director-General 1.0 3 Vice-Chairman of
the Board of Directors 16.5 52 Manager 81.6 257 Bank officer 100.0 315
Total Analysis of questionnaires Table 13. Distribution and the relative
percentage of the sample answers to the statements Strongly disagree
Not OK Neu-tral OK Strongly agree Category Phrase N 60 94 74 40 47 T
T he central bank need to play a principal function in the development of
new financial instruments for the money and capital markets of an
Islamic economy. 1 19.0 29.8 23.5 12.7 14.9 % 77 92 44 63 39 T Most
consumers selected an Islamic bank because of religious motives. 2 24.4
29.2 14.0 20.0 12.4 % 127 109 22 34 23 T Islamic banking products will
guarantee that the customer will sheltered long-term financing against
variation of interest rates. 3 40.3 34.6 7.0 10.8 7.3 % 118 82 17 68 30 T
Islamic financial institutions are in front of assorted challenges and
difficulties in which the main and important is the lack of competent and
trained professionals to fulfil the requirements of this rising industry. 4
37.5 26.0 5.4 21.6 9.5 % 113 90 34 50 28 T Most important activity of
banks is gathering financial resources and allocates them to different
economical parts. 5 35.9 28.6 10.8 15.9 8.9 % 116 111 39 27 22 T
Dependable modernization should assist in the changeover of the
industry from being legally Sharia compliant, to representative the
contact of Sharia amenable system on individuals and economies. 6
36.8 35.2 12.4 8.6 7.0 % 120 123 20 28 24 T Retail banking is changing
fast and over 20% of customers in Libya may have already transitioned
from conventional to typically Islamic banking association. 7 38.1 39.0
6.3 8.9 7.6 % 107 95 22 62 29 T Islamic money market conducts alike
function of meeting the short-term liquidity requests. As an alternative of

interest, it allows Islamic banks to share extra capital on profit -sharing
basis. 8 34.0 30.2 7.0 19.7 9.2 % 126 105 34 31 19 T The organization
structure must also be expanded by including a Shariah audit and review
to enhance risk management and compliance. 9 40.0 33.3 10.8 9.8 6.0
% 110 119 56 16 14 T Despite the numbers of investors who are chasing
Shariah compliant assets, it is not always easy to attract them unless the
business proposition is sound. 10 34.9 37.8 17.8 5.1 4.4 % 98 76 46 49
46 T Lack of required development in financial markets forced banks to
financial providence in long and short periods. 11 31.1 24.1 14.6 15.6
14.6 % 83 96 31 57 48 T The major issues affecting growth of Islamic
finance is the shortage of quality human resources. 12 26.3 30.5 9.8 18.1
15.2 % 96 70 54 74 21 T The bank by using modern technology and
advanced in developing its services 13 30.5 22.2 17.1 23.5 6.7 % 105
114 48 36 12 T Foundations interested in the bank and standards in the
granting of loans and facilities 14 33.3 36.2 15.2 11.4 3.8 % 84 111 46 33
41 T Bank creates tools for the new banking transactions in the bank 15
26.7 35.2 14.6 10.5 13.0 % 132 102 39 25 17 T The presence of an
electronic link between the branches of the bank and all banks operating
within the State 16 41.9 32.4 12.4 7.9 5.4 % 78 99 36 57 45 T The bank
develops necessary equipment template the work 17 24.8 31.4 11.4 18.1
14.3 % 82 115 39 41 38 T The Bank has a department to study the
possibility of the introduction of sophisticated machinery contribute to the
development of banking service 18 26.0 36.5 12.4 13.0 12.1 % 116 118
20 29 32 T Familiarity with the requirements of the banking sector by the
staff helped to get the customer service required 19 36.8 37.5 6.3 9.2
10.2 % 84 78 42 66 45 T Provide immediate and quick by the staff of the
bank to their customers 20 26.7 24.8 13.3 21.0 14.3 % 117 123 48 13 14
T Bank management sympathizes with customers and reassure them
when exposed to specific problem 21 37.1 39.0 15.2 4.1 4.4 % The
(19.0%) of respondents disapprove strongly of the phrase 1 and (29.8%)
did not agree with them, and (23.5%) neutral, while (12.7%) agree, and
(14.9%) strongly agree. The (24.4%) of respondents disapprove strongly
of the phrase 2 and (29.2%) did not agree with them, and (14.0%)
neutral, while (20.0%) agree, and (12.4%) strongly agree. The (40.3%) of
respondents did not agree strongly on the 3 and (34.6%) did not agree
with them, and (7.0%) neutral, while (10.8%) agree, and (7.3%) strongly
agree. The (37.5%) of respondents strongly disagree with the words 4
and (26.0%) did not agree with them, and (5.4%) neutral, while (21.6%)
agree, and (9.5%) strongly agree. The (35.9%) of respondents strongly
disagree with the phrase 5, and (28.6%) did not agree with them, and
(10.8%) neutral, while (15.9%) agree, and (8.9%) strongly agree. The
(36.8%) of respondents strongly disagree with the words 6 and (35.2%)
did not agree with them, and (12.4%) neutral, while (8.6%) agree, And
of the phrase 7 and (39.0%) did not agree with them, and (6.3%) neutral,
while (8.9%) agree, and (7.6%) strongly agree. The (34.0%) of
respondents did not agree strongly on the 8 and (30.2%) did not agree
with them, and (7.0%) neutral, while (19.7%) agree, and (9.2%) strongly
agree. The (40.0%) of respondents did not agree strongly on the words 9
and (33.3%) did not agree with them, and (10.8%) neutral, while (9.8%)
agree, And (6.0%) strongly agree. The (34.9%) of respondents
disapprove strongly of the phrase 10 and (37.8%) did not agree with
them, and (17.8%) neutral, while (5.1%) disapprove, and (4.4 %) strongly
agree. The (31.1%) of respondents did not agree strongly on the words
11 and (24.1%) did not agree with them, and (14.6%) neutral, while
(15.6%) agree, And (14.6%) strongly agree. The (26.3%) of respondents
did not agree strongly on the words 12 and (30.5%) did not agree with
them, and (9.8%) neutral, while (18.1%) agree, And (15.2%) strongly
agree. The (30.5%) of respondents did not agree strongly on the 13 and
(22.2%) did not agree with them, and (17.1%) neutral, while (23.5%)
agree, and (6.7%) strongly agree. The (33.3%) of respondents did not
agree strongly on the words 14 and (36.2%) did not agree with them, and
(15.2%) neutral, while (11.4%) agree, and (3.8%) strongly agree. The
(26.7%) of respondents did not agree strongly on the 15 and (35.2%) did
not agree with them, and (14.6%) neutral, while (10.5%) agree, and
of the phrase 16 and (32.4%) did not agree with them, and (12.4%)
neutral, while (7.9%) Agree, and (5.4%) strongly agree. The (24.8%) of
respondents did not agree strongly on the phrase 17 and (31.4%) did not
agree with them, and (11.4%) of neutral, while (18.1%) agree, and (14.3
%) strongly agree. The (26.0%) of respondents did not agree strongly on
the phrase 18 and (36.5%) did not agree with them, and (12.4%) of
neutral, while (13.0 %) disapprove, and (12.1%) strongly agree. The
(36.8%) of respondents strongly disagree with the phrase 19 and
(37.5%) did not agree with them, and (6.3%) neutral, while (9.2 %)
disapprove, and (10.2%) strongly agree. The (26.7%) of respondents
disapprove strongly of the phrase 20 and (24.8%) did not agree with
them, and (13.3%) neutral, while (21.0%) agree, and (14.3%) strongly
agree. The (37.1%) of respondents did not agree strongly on the words
21 and (39.0%) did not agree with them, and (15.2%) neutral, while
(4.1%) agree, and (4.4%) strongly agree. The averages were found for
members of the study sample answer on the performance of the banking
arrangement to see expressions of this axis, as shown in table 14. Table
14. Study sample results Sort 95% confidence interval for the average
community Stan-dard Devi-ation Arithmetic average Phrase Repe-tition
Minimum Maximum 21 2.60 2.89 1.313 2.746 T he central bank need to

play a principal function in the development of new financial instruments
for the money and capital markets of an Islamic economy. 1 19 2.52 2.82
1.364 2.667 Most consumers selected an Islamic bank because of
religious motives. 2 6 1.96 2.24 1.248 2.102 Islamic banking products will
guarantee that the customer will sheltered long-term financing against
variation of interest rates. 3 11 2.24 2.55 1.414 2.397 Islamic financial
institutions are in front of assorted challenges and difficulties in which the
main and important is the lack of competent and trained professionals to
fulfil the requirements of this rising industry. 4 10 2.18 2.48 1.340 2.333
Most significant activity of banks is assembly financial resources and
allocates them to different economical parts. 5 7 2.00 2.27 1.204 2.137
Dependable modernization should assist in the changeover of the
industry from being legally Sharia compliant, to representative the
contact of Sharia amenable system on individuals and economies. 6 5
1.95 2.22 1.218 2.089 Retail banking is changing fast and over 20% of
customers in Libya may have already transitioned from conventional to
typically Islamic banking association. 7 12 2.25 2.55 1.368 2.400 Islamic
money market conducts alike function of meeting the short-term liquidity
requests. As an alternative of interest, it allows Islamic banks to share
extra capital on profit -sharing basis. 8 4 1.95 2.22 1.201 2.086 The
organization structure must also be expanded by including a Shariah
audit and review to enhance risk management and compliance. 9 3 1.95
2.18 1.063 2.063 Despite the numbers of investors who are chasing
Shariah compliant assets, it is not always easy to attract them unless the
business proposition is sound. 10 16 2.43 2.74 1.435 2.584 Lack of
required development in financial markets forced banks to financial
providence in long and short periods. 11 17 2.50 2.81 1.427 2.654 The
major issues affecting growth of Islamic finance is the shortage of quality
human resources. 12 15 2.39 2.68 1.317 2.537 The bank by using
modern technology and advanced in developing its services 13 8 2.04
2.29 1.124 2.162 Foundations interested in the bank and standards in
the granting of loans and facilities 14 13 2.33 2.63 1.334 2.479 Bank
creates tools for the new banking transactions in the bank 15 2 1.90 2.15
1.162 2.746 The presence of an electronic link between the branches of
the bank and all banks operating within the State 16 18 2.50 2.81 1.395
2.667 The bank develops necessary equipment template the work 17 14
2.34 2.63 1.327 2.102 The Bank has a department to study the
possibility of the introduction of sophisticated machinery contribute to the
development of banking service 18 9 2.04 2.33 1.298 2.397 Familiarity
with the requirements of the banking sector by the staff helped to get the
customer service required 19 20 2.56 2.87 1.421 2.714 Provide
immediate and quick by the staff of the bank to their customers 20 1 1.88
2.11 1.045 1.997 Bank management sympathizes with customers and

reassure them when exposed to specific problem 21 Table 14 shows the
answers to the sample of the study and the table note that the phrase
number 21 came first in terms and the average answers to the sample of
the study is equal to (1.997) standard deviation (1.045) and (95 %)
confidence interval for the answer to this statement in the study
population ranged between (1.88 -2.11), and the category of the answer
to this statement (not OK). Phrase number 16 was ranked second in
terms and the average answers to the sample of study equal to (2.025)
standard deviation (1.162) and (95 %) confidence interval for an answer
This statement in the study population ranged between (1.90 - 2.15), and
class to answer this phrase (not OK). Phrase number 12 ranked third in
standard deviation (1.063) and (95 %)confidence interval for the answer
to this statement in the study population Between (1.95 - 2.18), and that
the category the answer to this statement (not OK). Phrase number 9
was ranked fourth in and the average answers to the sample of study
equal to (2.086) standard deviation (1.201) and (95 %)confidence
interval for the answer to this statement In the study population ranged
between (1.95 - 2.22), and the category of the answer to this statement
(not OK). Phrase number 1 is ranked fifth in terms and the average
answers to the sample of study equal to (2.089) standard deviation
(1.218) and (95%) confidence interval for the answer to this Statement in
the study population ranged between (1.95 - 2.22), and that the category
the answer to this statement (not OK). Phrase number 3 was ranked in
sixth place in and the average answers to the sample Of study equal to
(2.102) standard deviation (1.248) and (95 %) confidence interval for the
answer to this statement in the community Study ranged between (1.96 2.24), and that the category the answer to this statement (not OK).
Phrase number 6 was ranked seventh in terms and the average answers
to the sample of study equal to (2.137) standard deviation (1.204) and
(95 %) confidence interval for the answer to this statement In the study
population ranged between (2.00 - 2.27), and the category of the answer
to this statement (not OK). Phrase number 14 ranked in eighth place in
standard deviation (1.124) and (95 %) confidence interval for the answer
to this statement in the study population ranged between (2.04 - 2.29),
and the category of the answer to this statement (not OK). Phrase
number 19 was ranked ninth in terms and the average answers to the
sample of study equal to (2.184) standard deviation (1.298) and (95 %)
period confidence to answer this statement in the study population
ranged between (2.04 - 2.33), and that the category the answer to this
statement (not OK). Phrase number 5 in tenth place in terms of the and
the average answers to the sample of study equal to (2.333) standard

deviation (1.340) and (95 %) confidence interval for the answer to this
statement in the study population ranged between (2.18 - 2.48) and the
category of the answer to this statement (not OK) Phrase number 4
ranked tenth in terms and the average answers to the sample of study
equal to (2.397) standard deviation (1.414) and (95 %) confidence
interval for the answer to this statement In the study population ranged
between (2.24 - 2.55) and the category of the answer to this statement
(not OK) Phrase number 7 was ranked twelfth in terms and the average
(1.368), and (95%) confidence interval for the answer to this statement In
the study population ranged between (2.25 - 2.55) and the category of
the answer to this statement (not OK) . Phrase number 15 was ranked
thirteenth in and the average answers to the sample of study equal to
(2.479) standard deviation (1.334) and (95 %) confidence interval for the
answer to this statement in the study population ranged between (2.33 2.63) and the category of the answer to this statement (not OK). Phrase
number 18 was ranked fourteenth in terms and the average answers to
the sample of study equal to (2.486) standard deviation (1.327) and (95
%) confidence interval for the answer to this statement in the study
population ranged between (2.34 - 2.63) and the category of the answer
to this statement ( not OK) Phrase number 13 ranked fifteenth in terms
and the average answers to the sample of study equal to (2.537)
standard deviation (1.317)and( 95 %)confidence interval for an answer
This statement in the study population ranged between (2.39 - 2.68), and
class to answer this phrase (not OK). Phrase number 11 was ranked
sixteenth in terms and the average answers to the sample of study equal
to (2.584) standard deviation (1.435) and (95%) confidence interval for
the answer to this Statement in the study population ranged between
(2.43 - 2.74), and that the category the answer to this statement (not
OK). Phrase number 12 ranked seventeenth in terms of and the average
answers to the sample of study equal to (2.654) standard deviation n
(1.427) and (95 %)confidence interval for the answer to this Statement in
the study population ranged between (2.50 - 2.81), and that the category
the answer to this statement (not OK). Phrase number 17 ranked
eighteenth in terms and the average answers to the sample of study
equal to (2.657) standard deviation (1.395) and (95 %)confidence
interval for the answer to this statement in the community Study ranged
between (2.50 - 2.81), and that the category the answer to this statement
(not OK). Phrase number 2 was ranked nineteenth and the average
(1.364) and (95 %)confidence interval for the answer to this statement In
the answer to this statement (not OK) . Phrase number 20 ranked

twentieth in terms and the average answers to the sample of study equal
to (2.714) standard deviation (1.421) and (95 %) confidence interval for
the answer to this statement in the study population ranged between
(2.56 - 2.87) and the category of the answer to this statement (not OK) .
Phrase number 2 was ranked twenty-one in terms and the average
(1.313), and (95%) confidence interval for the answer to this statement in
the answer to this statement (not OK). In order to determine the degree
of approval for answers on the total sample phrases related to the axis of
the banking performance, the use of test (t) on the average of the
expressions on the axis of banking performance and table number (15)
shows it. Table 15. Test results (t) on average for the answer The level of
moral Scenes Value t-Test 95% confidence interval for the average
community Standard deviation of sample Average sample Minimum
Ceiling 0.000 58.576 2.2779 2.4362 0.71418 2.35707 Table shows the
overall average for the answers members of the sample, and the table
note that the average answers to the sample of study equal to (2.35707)
standard deviation (0.71418), and (95%) confidence interval for the
answer to this variable in the study population ranged between (2.2779 2.4362). To test hypothesis that the average answers of "neutral" (from
2.6 to less than 3.4), test was used (t), and where the value of (t)
calculated equal to (58.576) is greater than the value (t) Indexed at the
level of significant (5%), equal to (1.645), which refers to the rejection of
null hypothesis that the average responses in a community study about
the axis is less than (2.6) (not OK), indicating that the majority of the
population of the study support that there is weakness in the study.
Conclusions Through the collection of data and information on the
subject of study and research to complete the study process, the
researcher reaches a set of results which, including the following: 1. To
accept the first hypothesis, expansion of conventional banks which offer
Islamic banking products and the desire of customers to have access to
these products. Based on the hypothesis that the bank owners pay for
the increased demand towards Islamic banking products, more open
banking units specialized in providing Islamic banking products, and to
provide banking products compliant with Islamic Sharia(h). 2 - To accept
the second hypothesis, which state the expansion of conventional banks
which offer Islamic banking products and the desire of customers to have
access to these products. Based on the hypothesis that the bank owners
pay for the increased demand towards Islamic banking products, more
open banking units specialized in providing Islamic banking products,
and to provide banking products compliant with Islamic Sharia(h). 3 - To
accept the third hypothesis, which states: multiple entrances to the

conventional banks to Islamic Banking from one bank to another: based
this hypothesis on the basis of the absence of specific entries prepared
in advance by bank regulatory agencies or research centers, which strive
every bank in the adoption of the entrance, which he deems appropriate
to achieve its objectives. 4 - To accept the fourth hypothesis Exceeded
the effects of turning conventional banks to Islamic banking business
decision makers to shift several parties: based this hypothesis that the
provision of Islamic banking at the Bank traditionally requires the
development in a variety of banking products and the development of the
fatwas legitimacy, manuals and forms, and contracts of employment and
the development of skills of workers and the relationship with the central
bank, and reflected the effects of the shift on the edge of numerous than makers decision to switch - within and outside the Bank and the
society, such as shareholders, customers, employees, competitors and
others. 5 - There is a recognition limited to the concept and importance
of the product life cycle banking, leading to non-policy compromise that
is tailored to the phase of the product's banking whales banks do not
follow the movement of demand for their services, but only by providing
only regardless of where if they are popular or not, where that aim to
increase the number of services without reducing them, as can be seen
that the Libyan commercial banks follow the policy of diversification of
their services do not follow the policy of simplification that would cancel
the services that are not suited to the needs of clients and are a burden
on the bank. 6 - Libyan commercial banks had to enter the means of
mechanization of modern development and accelerate the completion of
the procedures and reducing red tape but this is part of the development
as a lesson to improve service performance and style delivered to
customers and how to use those machines in order to facilitate the task
of the clients. 7 - The training programs provided by the bank for both
new and existing employees lack the assets to the principles and
methods of dealing with customers and strengthen the relationship with
them. 8 - Despite the importance of research development within the
Libyan commercial banks has been found that there is interest in
transition to Islamic bank and thus their impact and their relationship to
the process of developing banking services is weak. 9 - Process of
planning and development of services in the Islamic bank are not subject
to the planning organization where there is no written policy and clear
planning services 10 - There is a growing trend in Islamic banking in
achieving a rapid response to technological change and innovation in the
use of banking technology automation and mechanization of work 11 Human element that makes the consumer in Islamic bank services gives
a measure of the importance and easy to obtain the service in terms
easy to read and understand Islamic banking 12 - That the commercial

banks operating in Libya (the subject of study) have been confined to the
introduction of some Islamic banking services that meet customer needs,
as well as having developed some of the services of existing bank 13 That customers receive information on new Islamic banking services
from friends and employers in the first place and staff is second and
posters mainly the third, due to the failure of the bank using all means of
advertising Recommendations After closely examining the results of this
study, the researcher can make the following recommendations: 1 Transition in the Libyan commercial banks to Islamic banking from the
stage to focus on providing banking services on an ongoing basis to the
stage to focus on increasing the quality and technology of banking
services. 2 - Conducting studies and analyzes the theory and field to find
out the causes of success and failure of new Islamic banking services, to
benefit from the results of these studies and find out problems relating to
development and to find solutions to them, and to avoid weaknesses and
errors, and to emphasize the strengths and opportunities to compete in
the market. 3 - Test the system to provide Islamic banking services and
its implementation through the marketing strategy for its banking
services, and determine the form and method of the geographical area. 4
- The banks, training and forcing it using modern training for their
employees at all levels of administrative terms objectives, levels and
programs for trainers and trainees to raise the level of performance and
skills development and opportunities for advancement and to consider
the expenses of the training expenses are necessary and useful
investment so that it is working on the allocation of annual budgets to
achieve this purpose. 5 - The need to adapt and develop the activities
and elements of Islamic banking marketing different in accordance with
the development of banking services, and the need to note the
importance of marketing is personal increasingly important with the
increase in dealing with electronic devices to provide banking services to
customers directly without the presence of staff members of the bank. 6 The trend towards specialization in service and building an integrated
Islamic banking system in the Libya from commercial banks and banks
that the current community needs to make in the future. 7 - The
necessity of commitment to strategic planning to the Libyan banks
through the attention of senior management of the future direction of the
Islamic Bank and its commitment to and support for the planning and
work to develop a good database and the establishment of effective
control systems, including systems of incentives for staff. 8 - The need
for a strategy to develop new Islamic banking services in the Libyan
commercial banks. 9 - It should be noted that the development of Islamic
banking services have in the quality of services and how they are
providing these services, so as to satisfy the maximum amount of unmet

needs for customers to accomplish their work and achieve their goals. 10
- Need to take advantage of developments in Islamic and other kind of
banking services on a global level. 11 - Exchange of expertise between
the staff in Libyan Islamic banks and Arab and Islamic world through
mutual visits, seminars and scientific conferences to exchange periodic
and expansion of banking culture. 12 - Attention to equipment machinery,
including computers electronics that will improve banking services and to
provide precise statistical data at full speed and diversity required for the
management of Islamic banking and open new horizons to work on the
basis of the circumstances and economic considerations prevailing in
Libya 13 - Libyan commercial banks play an effective role in giving
advice and financial and economic advice to clients and work on the
promotion of these essential services and development with the
provision of internal organizations, including banks in allows you to do
this role as effectively. 14 - Need to work with marketing plans determine
the detailed operational work programs for the various elements of
marketing of Islamic banking (Product - Pricing - Distribution -Promotion).
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http://choo.fis.utoronto.ca/fis/respub/dlc95.html
s_english_jan_04_brunei.pdf http://www.nzibo.com/
s_english_jan_04_brunei.pdf ibid Grais, W., and Kulathunga, A. (2007).
, John Wiley & Son (Asia) Pte Ltd
%20and%20Finance_djvu.txt
%20and%20Finance_djvu.txt Efficiency Ratios. [online]. Available from:
http://kbr.dnb.com/help/Ratios/Efficiency_Ratios.htm
http://www.academia.edu/6221916/Islamic_Banking_and_Finance_Fund
amentals_and_Contemporary_Issues
http://colleges.jazanu.edu.sa/GirlsCampus/bac/Documents/Islamic
%20banks%20and%20their%20Accounting.pdf
s_english_jan_04_brunei.pdf ibid
%20and%20Finance_djvu.txt http://www.irtipms.org/PubText/222.pdf
s_english_jan_04_brunei.pdf ibid
s/MENAFlagshipIslamicFinance2_24_11.pdf
s/MENAFlagshipIslamicFinance2_24_11.pdf Badreldin, A.M., (2009).
Measuring the Performance of Islamic Banks by Adapting Conventional
Ratios. German University of Cairo. Working paper No. 16
s/MENAFlagshipIslamicFinance2_24_11.pdf Islamic Banker. Database:
Global Islamic Finance Monitor [online]. Available from:
http://www.islamicbanker.com/database.html
s/MENAFlagshipIslamicFinance2_24_11.pdf Peter, G., (2009). Asset
prices and banking distress: A macroeconomic approach. Journal of
Financial Stability, 5(1) http://jbsq.org/wpcontent/uploads/2013/03/March_2013_3.pdf
http://www.ciitlahore.edu.pk/pl/abrc/proceedings/all
%20papers/comparison%20of%20islamic%20and%20conventional
%20%28abdul%20ghafoor%20awan%29.pdf Errico, L. and Farahbaksh,
M. (1998).
Islamic Banking: Issues in Prudential Regulations and Supervision,
International Monetary Fund, IMF Working Paper No QP/98/30 Zaher,
T.S. and Hassan, M.K., (2001). A Comparative Literature Survey of
Islamic Finance and Banking. Financial Markets, Institutions and
Instruments [online], 10(4)
http://www.academia.edu/3527717/the_applications_of_islamic_banking
_in_the_light_of_maqasid_al_sharia_h http://cbl.gov.ly/eng/
http://ijbssnet.com/journals/Vol_3_No_10_Special_Issue_May_2012/11.p
df Central Libyan Bank Commercial Bank Specialized Banks National
Banks Sahara Bank Wahda Bank Bank of the Republic National
Commercial Bank Libyan Foreign Bank Agri-cultu-ral bank Deve-lopment Bank Bank Real Estate Inves-tment Mediators Money for consumption
Loan money Money for consumption Consumers Productive units
Monetary salaries 2
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Plagiarism Detector - Originality: Miroljub Hadzic

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Detailed Document Analysis:

views on the phenomenon of transformation 158 Islamic banking set to

In the financial sector banking services provided by the banks in Lybia

transformation to the Islamic. To propose appropriate solutions and

profit -sharing basis. 9 - The organization structure must also be

them unless the business proposition is sound. 11 - Lack of required

Principles to the transition, by our side of view are: 1 - Prepare a strategy

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But, speaking at present about globalization and assimilation of the

annual reports. In this section, we shall attempt to present important

based on capital intensity (Capital Intensive). Several studies have

banking (or participant banking) is banking or banking activity

these principles have been applied in varying degrees by historical

to private or semi-private commercial institutions within the Muslim

failure of an investment isnt very common in Islamic banks because the

called the rules of profitability management of an Islamic bank. In order

partnership (Musharaka) and non-voting equity (Mudaraba). Islamic

accepting deposits and extending financing and investments. Deposits

customer hence IFI participate in risk. Third refinancing facility is not

Salam cash is provided to farmers for purchase of seeds and fertilizers

underlying firm is required. Second financial operations of underlying firm

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shared by Skukholders. Typical products and services for Islamic banks

and the West.

any profit and loss. The common

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especially if such banks enjoy a position where it can exercise some

increase above the existing levels with competing Islamic and

continuous growth, either through geographical coverage or through the

programs. The development of Islamic banks

involvement. The involvement of institutions and governments led to the

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following years. Figure 2. Market share of Islamic banking in 2009

dollars, in addition to more than 310 banks traditionally Islamic banking

and UAE. The establishments of interest-free banking in lot of countries

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March 1985. Sharia based modes

Africa. It promotes, develops and applies Islamic principles, law and

unknowns, such as trading in futures, and in businesses that participate

growth at an astounding rate of 10-15% annually in recent years, despite

and investment. Table 1. Differences between convencional and islamic

securities and receive interest; three, deposit in a bank and receive

to this information, including the amounts, and has established itself as

conventional commercial banking in the form of Profit-and-Loss-Ssharing

money is involved, and this has serious consequences in a riba-free

distribution. The mudara ba principle is applicable to a range of

parallel in the conventional economy, but the individual tools and

or riba. This is very important. PF shares are transferable and have no

future losses. That is, there is no a retained profit or reserves at this

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strong, and their arguments came to be seen as reasonable. And they,

noteworthy expansion of trade and demand for credit. Borrowers

component of 0.01550002 = 150 dollars. It may sound like the usual