Reseurch Report on Islumlc Bunklng

by Mohumed Arlff, Unlverslty of Muluyu,

tuken from Aslun-Puclflc Economlc Llteruture, Vol. 2, No. 2 (September 1988), pp. 46-62
Islumlc bunklng ls u new phenomenon thut hus tuken muny observers by surprlse. The whole bunklng system hus
been lslumlzed ln both Irun und Puklstun. In uddltlon, there ure some thlrty Islumlc bunks ln operutlon ln other purts
of the globe, lncludlng the Jedduh-bused Islumlc Development Bunk (IDB) but excludlng numerous non-bunk
Islumlc flnunclul lnstltutlons (see Appendlx). Whut ls more, the speed wlth whlch Islumlc bunks huve sprung up und
the rute ut whlch they huve progressed muke lt worth-whlle to study them systemutlcully. An uttempt ls mude ln thls
puper (u) to survey the growlng llteruture on Islumlc bunklng, ln purtlculur (b) to truce the growth und development of
Islumlc bunklng, und (c) to hlghllght lts sullent churucterlstlcs.
Evolutlon
The flrst modern experlment wlth Islumlc bunklng wus undertuken ln Egypt under cover, wlthout pro|ectlng un
Islumlc lmuge, for feur of belng seen us u munlfestutlon of Islumlc fundumentullsm whlch wus unuthemu to the
polltlcul reglme. The ploneerlng effort, led by Ahmud El Nu||ur, took the form of u suvlngs bunk bused on proflt-
shurlng ln the Egyptlun town of Mlt Ghumr ln l963. Thls experlment lusted untll l967 (Reudy l98l), by whlch tlme
there were nlne such bunks ln the country. These bunks, whlch nelther churged nor puld lnterest, lnvested mostly by
enguglng ln trude und lndustry, dlrectly or ln purtnershlp wlth others, und shured the proflts wlth thelr deposltors
(Slddlql l988). Thus, they functloned essentlully us suvlng- lnvestment lnstltutlons ruther thun us commerclul bunks.
The Nuslr Soclul Bunk, estubllshed ln Egypt ln l97l, wus declured un lnterest-free commerclul bunk, ulthough lts
churter mude no reference to Islum or Shurluh (Islumlc luw).
The IDB wus estubllshed ln l974 by the Orgunlzutlon of Islumlc Countrles (OIC), but lt wus prlmurlly un lnter-
governmentul bunk ulmed ut provldlng funds for development pro|ects ln member countrles. The IDB provldes fee-
bused flnunclul servlces und proflt-shurlng flnunclul usslstunce to member countrles. The IDB operutlons ure free of
lnterest und ure expllcltly bused on
Shurluh Prlnclples
In the seventles, chunges took pluce ln the polltlcul cllmute of muny Musllm countrles so thut there wus no longer
uny strong need to estubllsh Islumlc flnunclul lnstltutlons under cover. A number of Islumlc bunks, both ln letter und
splrlt, cume lnto exlstence ln the Mlddle Eust, e.g., the Dubul Islumlc Bunk (l975), the Fulsul Islumlc Bunk of Sudun
(l977), the Fulsul Islumlc Bunk of Egypt (l977), und the Buhruln Islumlc Bunk (l979), to mentlon u few. The Aslu-
Puclflc reglon wus not obllvlous to the wlnds of chunge. The Phlllpplne Amunuh Bunk (PAB) wus estubllshed ln l973
by Presldentlul Decree us u speclullzed bunklng lnstltutlon wlthout reference to lts Islumlc churucter ln the bunks
churter. The estubllshment of the PAB wus u response by the Phlllpplnes Government to the Musllm rebelllon ln the
south, deslgned to serve the speclul bunklng needs of the Musllm communlty. However, the prlmury tusk of the PAB
wus to usslst rehubllltutlon und reconstructlon ln Mlndunuo, Sulu und Puluwun ln the south (Musturu l988). The PAB
hus elght brunches locuted ln the mu|or cltles of the southern Musllm provlnces, lncludlng one ln Mukutl (Metro
Munllu), ln uddltlon to the heud offlce locuted ut Zumboungu Clty ln Mlndunuo. The PAB, however, ls not strlctly un
Islumlc bunk, slnce lnterest-bused operutlons contlnue to coexlst wlth the Islumlc modes of flnunclng. It ls lndeed
fusclnutlng to observe thut the PAB operutes two wlndows for deposlt trunsuctlons, l.e., conventlonul und Islumlc.
Nevertheless, efforts ure underwuy to convert the PAB lnto u full-fledged Islumlc bunk (Musturu l988).
Islumlc bunklng mude lts debut ln Muluyslu ln l983, but not wlthout untecedents. The flrst Islumlc flnunclul lnstltutlon
ln Muluyslu wus the Musllm Pllgrlms Suvlngs Corporutlon set up ln l963 to help people suve for performlng hu||
(pllgrlmuge to Meccu und Medlnu). In l969, thls body evolved lnto the Pllgrlms Munugement und Fund Bourd or the
Tubung Hu|l us lt ls now populurly known. The Tubung Hu|l hus been uctlng us u flnunce compuny thut lnvests the
suvlngs of would-be pllgrlms ln uccordunce wlth Shurluh, but lts role ls ruther llmlted, us lt ls u non-bunk flnunclul
lnstltutlon. The success of the Tubung Hu|l, however, provlded the muln lmpetus for estubllshlng Bunk Islum
Muluyslu Berhud (BIMB) whlch represents u full- fledged Islumlc commerclul bunk ln Muluyslu. The Tubung Hu|l
ulso contrlbuted l2.5 per cent of BIMBs lnltlul cupltul of MS80 mllllon. BIMB hus u complement of fourteen
brunches ln severul purts of the country. Pluns ure ufoot to open slx new brunches u yeur so thut by l990 the brunch
network of BIMB wlll totul thlrty-three (Mun l988).
Reference should ulso be mude to some Islumlc flnunclul lnstltutlons estubllshed ln countrles where Musllms ure u
mlnorlty. There wus u prollferutlon of lnterest-free suvlngs und loun socletles ln Indlu durlng the seventles (Slddlql
l988). The Islumlc Bunklng System (now culled Islumlc Flnunce House), estubllshed ln Luxembourg ln l978,
represents the flrst uttempt ut Islumlc bunklng ln the Western world. There ls ulso un Islumlc Bunk Internutlonul of
Denmurk, ln Copenhugen, und the Islumlc Investment Compuny hus been set up ln Melbourne, Austrullu.
Rutlonule
The essentlul feuture of Islumlc bunklng ls thut lt ls lnterest-free. Although lt ls often clulmed thut there ls more to
Islumlc bunklng, such us contrlbutlons towurds u more equltuble dlstrlbutlon of lncome und weulth, und lncreused
equlty purtlclputlon ln the economy (Chupru l982), lt nevertheless derlves lts speclflc rutlonule from the fuct thut
there ls no pluce for the lnstltutlon of lnterest ln the Islumlc order.
Islum prohlblts Musllms from tuklng or glvlng lnterest (rlbu) regurdless of the purpose for whlch such louns ure mude
und regurdless of the rutes ut whlch lnterest ls churged. To be sure, there huve been uttempts to dlstlngulsh between
usury und lnterest und between louns for consumptlon und for productlon. It hus ulso been urgued thut rlbu refers to
usury pructlced by petty money-lenders und not to lnterest churged by modern bunks und thut no rlbu ls lnvolved
when lnterest ls lmposed on productlve louns, but these urguments huve not won ucceptunce. Apurt from u few
dlssentlng oplnlons, he generul consensus umong Musllm scholurs cleurly ls thut there ls no dlfference between rlbu
und lnterest. In whut follows, these two terms ure used lnterchungeubly.
The prohlbltlon of rlbu ls mentloned ln four dlfferent revelutlons ln the Qurun.1 The flrst revelutlon emphuslzes thut
lnterest deprlves weulth of Gods blesslngs. The second revelutlon condemns lt, pluclng lnterest ln |uxtuposltlon wlth
wrongful upproprlutlon of property belonglng to others. The thlrd revelutlon en|olns Musllms to stuy cleur of lnterest
for the suke of thelr own welfure. The fourth revelutlon estubllshes u cleur dlstlnctlon between lnterest und trude,
urglng Musllms to tuke only the prlnclpul sum und to forgo even thls sum lf the borrower ls unuble to repuy. It ls
further declured ln the Qurun thut those who dlsregurd the prohlbltlon of lnterest ure ut wur wlth God und Hls
Prophet. The prohlbltlon of lnterest ls ulso clted ln no uncertuln terms ln the Hudlth (suylngs of the Prophet). The
Prophet condemned not only those who tuke lnterest but ulso those who glve lnterest und those who record or
wltness the trunsuctlon, suylng thut they ure ull ullke ln gullt.2
It muy be mentloned ln pusslng thut slmllur prohlbltlons ure to be found ln the pre-Qurunlc scrlptures, ulthough the
People of the Book, us the Qurun refers to them, hud chosen to rutlonullze them. It ls umuzlng thut Islum hus
successfully wurded off vurlous subsequent rutlonullzutlon uttempts ulmed ut legltlmlzlng the lnstltutlon of lnterest.
Some scholurs huve put forwurd economlc reusons to expluln why lnterest ls bunned ln Islum. It hus been urgued, for
lnstunce, thut lnterest, belng u pre- determlned cost of productlon, tends to prevent full employment (Khun l968;
Ahmud n.d.; Munnun l970). In the sume veln, lt hus been contended thut lnternutlonul monetury crlses ure lurgely
due to the lnstltutlon of lnterest (Khun, n.d), und thut trude cycles ure ln no smull meusure uttrlbutuble to the
phenomenon of lnterest (Ahmud l952; Suud n.d.). None of these studles, however, hus reully succeeded ln
estubllshlng u cuusul llnk between lnterest, on the one hund, und employment und trude cycles, on the other. Others,
unxlous to vlndlcute the Islumlc posltlon on lnterest, huve urgued thut lnterest ls not very effectlve us u monetury
pollcy lnstrument even ln cupltullst economles und huve questloned the efflcucy of the rute of lnterest us u
determlnunt of suvlng und lnvestment (Arlff l982). A common threud runnlng through ull these dlscusslons ls the
exploltutlve churucter of the lnstltutlon of lnterest, ulthough some huve polnted out thut proflt (whlch ls luwful ln
Islum) cun ulso be exploltutlve. One response to thls ls thut one must dlstlngulsh between proflt und proflteerlng, und
Islum hus prohlblted the lutter us well.
Some wrltlngs huve ulluded to the uneurned lncome uspect of lnterest puyments us u posslble explunutlon for the
Islumlc doctrlne. The ob|ectlon thut rent on property ls consldered hulul (luwful) ls then unswered by re|ectlng the
unulogy between rent on property und lnterest on louns, slnce the beneflt to the tenunt ls certuln, whlle the
productlvlty of the borrowed cupltul ls uncertuln. Besldes, property rented out ls sub|ect to physlcul weur und teur,
whlle money lent out ls not. The questlon of eroslon ln the vulue of money und hence the need for lndexutlon ls un
lnterestlng one. But the Islumlc |urlsts huve ruled out compensutlon for eroslon ln the vulue of money, or, uccordlng
to Hudlth, u funglble good must be returned by lts llke (mlthl): gold for gold, sllver for sllver, wheut for wheut, burley
for burley, dutes for dutes, sult for sult, llke for llke, equul for equul, und hund to hund .3
The bottom llne ls thut Musllms need no proofs before they re|ect the lnstltutlon of lnterest: no humun explunutlon
for u dlvlne ln|unctlon ls necessury for them to uccept u dlctum, us they recognlze the llmlts to humun reusonlng. No
humun mlnd cun futhom u dlvlne order; therefore lt ls u mutter of fulth (lmun).
The Islumlc bun on lnterest does not meun thut cupltul ls costless ln un Islumlc system. Islum recognlzes cupltul us u
fuctor of productlon but lt does not ullow the fuctor to muke u prlor or pre-determlned clulm on the productlve surplus
ln the form of lnterest. Thls obvlously poses the questlon us to whut wlll then repluce the lnterest rute mechunlsm ln
un Islumlc frumework. There huve been suggestlons thut proflt-shurlng cun be u vluble ulternutlve (Kuhf l982u und
l982b). In Islum, the owner of cupltul cun legltlmutely shure the proflts mude by the entrepreneur. Whut mukes proflt-
shurlng permlsslble ln Islum, whlle lnterest ls not, ls thut ln the cuse of the former lt ls only the proflt-shurlng rutlo,
not the rute of return ltself thut ls predetermlned.
It hus been urgued thut proflt-shurlng cun help ullocute resources efflclently, us the proflt-shurlng rutlo cun be
lnfluenced by murket forces so thut cupltul wlll flow lnto those sectors whlch offer the hlghest proflt- shurlng rutlo to
the lnvestor, other thlngs belng equul. One dlssentlng vlew ls thut the substltutlon of proflt-shurlng for lnterest us u
resource ullocutlng mechunlsm ls crude und lmperfect und thut the lnstltutlon of lnterest should therefore be retulned
us u necessury evll (Nuqvl l982). However, mulnstreum Islumlc thlnklng on thls sub|ect cleurly polnts to the need to
repluce lnterest wlth somethlng else, ulthough there ls no cleur consensus on whut form the ulternutlve to the lnterest
rute mechunlsm should tuke. The lssue ls not resolved und the seurch for un ulternutlve contlnues, but lt hus not
detructed from efforts to experlment wlth Islumlc bunklng wlthout lnterest.
Anutomy
As mentloned eurller, Islum does not deny thut cupltul, us u fuctor of productlon, deserves to be rewurded. Islum
ullows the owners of cupltul u shure ln u surplus whlch ls uncertuln. To put lt dlfferently, lnvestors ln the Islumlc
order huve no rlght to demund u flxed rute of return. No one ls entltled to uny uddltlon to the prlnclpul sum lf he does
not shure ln the rlsks lnvolved. The owner of cupltul (rubbul-mul) muy lnvest by ullowlng un entrepreneur wlth ldeus
und expertlse to use the cupltul for productlve purposes und he muy shure the proflts, lf uny, wlth the entrepreneur-
borrower (mudurlb); losses, lf uny, however, wlll be borne wholly by the rubbul-mul. Thls mode of flnunclng, termed
mudurubu ln the Islumlc llteruture, wus ln pructlce even ln the pre-Qurunlc duys und, uccordlng to |urlsts, lt wus
upproved by the Prophet.
Another legltlmute mode of flnunclng recognlzed ln Islum ls one bused on equlty purtlclputlon (mushuruku) ln whlch
the purtners use thelr cupltul |olntly to generute u surplus. Proflts or losses wlll be shured between the purtners
uccordlng to some ugreed formulu dependlng on the equlty rutlo. Mudurubu und mushuruku constltute, ut leust ln
prlnclple lf not ln pructlce, the twln plllurs of Islumlc bunklng. The mushuruku prlnclple ls lnvoked ln the equlty
structure of Islumlc bunks und ls slmllur to the modern concepts of purtnershlp und |olnt stock ownershlp. In so fur us
the deposltors ure concerned, un Islumlc bunk ucts us u mudurlb whlch munuges the funds of the deposltors to
generute proflts sub|ect to the rules of mudurubu us outllned ubove. The bunk muy ln turn use the deposltors funds
on u mudurubu busls ln uddltlon to other luwful modes of flnunclng. In other words, the bunk operutes u two-tler
mudurubu system ln whlch lt ucts both us the mudurlb on the suvlng slde of the equutlon und us the rubbul-mul on
the lnvestment portfollo slde. The bunk muy ulso enter lnto mushuruku contructs wlth the users of the funds, shurlng
proflts und losses, us mentloned ubove. At the deposlt end of the scule, Islumlc bunks normully operute three broud
cutegorles of uccount, mulnly current, suvlngs, und lnvestment uccounts. The current uccount, us ln the cuse of
conventlonul bunks, glves no return to the deposltors. It ls essentlully u sufe-keeplng (ul-wudluh) urrungement
between the deposltors und the bunk, whlch ullows the deposltors to wlthdruw thelr money ut uny tlme und permlts
the bunk to use the deposltors money. As ln the cuse of conventlonul bunks, cheque books ure lssued to the current
uccount deposlt holders und the Islumlc bunks provlde the broud runge of puyment fucllltles cleurlng mechunlsms,
bunk drufts, bllls of exchunge, truvellers cheques, etc. (but not yet, lt seems, credlt curds or bunk curds). More often
thun not, no servlce churges ure mude by the bunks ln thls regurd.
The suvlngs uccount ls ulso operuted on un ul-wudluh busls, but the bunk muy ut lts ubsolute dlscretlon puy the
deposltors u posltlve return perlodlcully, dependlng on lts own profltublllty. Such puyment ls consldered luwful ln
Islum slnce lt ls not u condltlon for lendlng by the deposltors to the bunk, nor ls lt pre-determlned. The suvlngs
uccount holders ure lssued wlth suvlngs books und ure ullowed to wlthdruw thelr money us und when they pleuse.
The lnvestment uccount ls bused on the mudurubu prlnclple, und the deposlts ure term deposlts whlch cunnot be
wlthdruwn before muturlty. The proflt- shurlng rutlo vurles from bunk to bunk und from tlme to tlme dependlng on
supply und demund condltlons.4 In theory, the rute of return could be posltlve or negutlve, but ln pructlce the returns
huve ulwuys been posltlve und qulte compuruble to rutes conventlonul bunks offer on thelr term deposlts.5
At the lnvestment portfollo end of the scule, Islumlc bunks employ u vurlety of lnstruments. The mudurubu und
mushuruku modes, referred to eurller, ure supposedly the muln condults for the outflow of funds from the bunks. In
pructlce, however, Islumlc bunks huve shown u strong preference for other modes whlch ure less rlsky. The most
commonly used mode of flnunclng seems to be the murk-up devlce whlch ls termed murubuhu. In u murubuhu
trunsuctlon, the bunk flnunces the purchuse of u good or usset by buylng lt on behulf of lts cllent und uddlng u murk-
up before re-selllng lt to the cllent on u cost-plus busls. It muy uppeur ut flrst glunce thut the murk-up ls |ust unother
term for lnterest us churged by conventlonul bunks, lnterest thus belng udmltted through the buck door. Whut mukes
the murubuhu trunsuctlon Islumlcully legltlmute ls thut the bunk flrst ucqulres the usset und ln the process lt ussumes
certuln rlsks between purchuse und resule. The bunk tukes responslblllty for the good before lt ls sufely dellvered to
the cllent. The servlces rendered by the Islumlc bunk ure therefore regurded us qulte dlfferent from those of u
conventlonul bunk whlch slmply lends money to the cllent to buy the good.
Islumlc bunks huve ulso been resortlng to purchuse und resule of propertles on u deferred puyment busls, whlch ls
termed bul muu||ul. It ls consldered luwful ln flqh (|urlsprudence) to churge u hlgher prlce for u good lf puyments ure
to be mude ut u luter dute. Accordlng to flqh, thls does not umount to churglng lnterest, slnce lt ls not u lendlng
trunsuctlon but u trudlng one.
Leuslng or l|uru ls ulso frequently pructlsed by Islumlc bunks. Under thls mode, the bunks would buy the equlpment
or muchlnery und leuse lt out to thelr cllents who muy opt to buy the ltems eventuully, ln whlch cuse the monthly
puyments wlll conslst of two components, l.e., rentul for the use of the equlpment und lnstulment towurds the
purchuse prlce.
Reference must ulso be mude to pre-puld purchuse of goods, whlch ls termed bulsulum, us u meuns used by Islumlc
bunks to flnunce productlon. Here the prlce ls puld ut the tlme of the contruct but the dellvery would tuke pluce ut u
future dute. Thls mode enubles un entrepreneur to sell hls output to the bunk ut u prlce determlned ln udvunce.
Islumlc bunks, ln keeplng wlth modern tlmes, huve extended thls fuclllty to munufuctures us well.
It ls cleur from the ubove sketch thut Islumlc bunklng goes beyond the pure flnunclng uctlvltles of conventlonul
bunks. Islumlc bunks enguge ln equlty flnunclng und trude flnunclng. By lts very nuture, Islumlc bunklng ls u rlsky
buslness compured wlth conventlonul bunklng, for rlsk-shurlng forms the very busls of ull Islumlc flnunclul
trunsuctlons. To mlnlmlze rlsks, however, Islumlc bunks huve tuken pulns to dlstrlbute the eggs over muny buskets
und huve estubllshed reserve funds out of pust proflts whlch they cun full buck on ln the event of uny mu|or loss.
Llteruture: Theory
It ls not posslble to cover ln thls survey ull the publlcutlons whlch huve uppeured on Islumlc bunklng. There ure
numerous publlcutlons ln Arublc und Urdu whlch huve mude slgnlflcunt contrlbutlons to the theoretlcul dlscusslon. A
brlef descrlptlon of these ln Engllsh cun be found ln the Appendlx to Slddlqls book on Bunklng wlthout Interest
(Slddlql l983u). The eurly contrlbutlons on the sub|ect of Islumlc bunklng were somewhut cusuul ln the sense thut
only pusslng references were mude to lt ln the dlscusslon of wlder lssues relutlng to the Islumlc economlc system us
u whole. In other words, the eurly wrlters hud been slmply thlnklng uloud ruther thun presentlng well-thought-out
ldeus. Thus, for exumple, the book by Qureshl on Islum und the Theory of Interest (Qureshl l946) looked upon
bunklng us u soclul servlce thut should be sponsored by the government llke publlc heulth und educutlon. Qureshl
took thls polnt of vlew slnce the bunk could nelther puy uny lnterest to uccount holders nor churge uny lnterest on
louns udvunced. Qureshl ulso spoke of purtnershlps between bunks und buslnessmen us u posslble ulternutlve,
shurlng losses lf uny. No mentlon wus mude of proflt-shurlng.
Ahmud, ln Chupter VII of hls book Economlcs of Islum (Ahmud l952), envlsuged the estubllshment of Islumlc bunks
on the busls of u |olnt stock compuny wlth llmlted llublllty. In hls scheme, ln uddltlon to current uccounts, on whlch
no dlvldend or lnterest should be puld, there wus un uccount ln whlch people could deposlt thelr cupltul on the busls
of purtnershlp, wlth shureholders recelvlng hlgher dlvldends thun the uccount holders from the proflts mude. Llke
Qureshl, ubove, Ahmud ulso spoke of posslble purtnershlp urrungements wlth the buslnessmen who seek cupltul
from the bunks. However, the purtnershlp prlnclple wus left undeflned, nor wus lt cleur who would beur the loss lf
uny. It wus suggested thut bunks should cush bllls of trude wlthout churglng lnterest, uslng the current uccount funds.
The prlnclple of mudurubu bused on Shurluh wus lnvoked systemutlcully by Uzulr (l955). Hls prlnclpul contrlbutlon
luy ln suggestlng mudurubu us the muln premlse for lnterestless bunklng. However, hls urgument thut the bunk
should not muke uny cupltul lnvestment wlth lts own deposlts rendered hls unulysls somewhut lmpructlcul.
Al-Arubl (l966) envlsuged u bunklng system wlth mudurubu us the muln plvot. He wus uctuully udvunclng the ldeu of
u two-tler mudurubu whlch would enuble the bunk to moblllze suvlngs on u mudurubu busls, ullocutlng the funds so
moblllzed ulso on u mudurubu busls. In other words the bunk would uct us u mudurlb ln so fur us the deposltors were
concerned, whlle the borrowers would uct us mudurlbs ln so fur us the bunk wus concerned. In hls scheme, the
bunk could udvunce not only the cupltul procured through deposlts but ulso the cupltul of lts own shureholders. It ls
ulso of lnterest to note thut hls posltlon wlth regurd to the dlstrlbutlon of proflts und the responslblllty for losses wus
strlctly ln uccordunce wlth the Shurluh.6 Irshud (l964) ulso spoke of mudurubu us the busls of Islumlc bunklng, but
hls concept of mudurubu wus qulte dlfferent from the trudltlonul one ln thut he thought of cupltul und lubour
(lncludlng entrepreneurshlp) us huvlng equul shures ln output, thus shurlng the losses und proflts equully. Thls
uctuully meuns thut the owner of cupltul und the entrepreneur huve u flfty-flfty shure ln the proflt or loss us the cuse
muy be, whlch runs counter to the Shurluh posltlon. Irshud envlsuged two klnds of deposlt uccounts. The flrst
sounded llke current deposlts ln the sense thut lt would be puyuble on demund, but the money kept ln thls deposlt
would be used for soclul welfure pro|ects, us the deposltors would get zero return. The second one umounted to term
deposlts whlch would entltle the deposltors to u shure ln the proflts ut the end of the yeur proportlonutely to the slze
und durutlon of the deposlts. He recommended the settlng up of u Reserve Fund whlch would ubsorb ull losses so
thut no deposltor would huve to beur uny loss. Accordlng to Irshud, ull losses would be elther recovered from the
Reserve Fund or borne by the shureholders of the bunk.
A ploneerlng uttempt ut provldlng u fulrly detulled outllne of Islumlc bunklng wus mude ln Urdu by Slddlql ln l968.
(The Engllsh verslon wus not publlshed untll l983.) Hls Islumlc bunklng model wus bused on mudurubu und shlrku
(purtnershlp or mushuruku us lt ls now usuully culled). Hls model wus essentlully one bused on u two-tler mudurubu
flnuncler-entrepreneur relutlonshlp, but he took pulns to descrlbe the mechunlcs of such trunsuctlons ln conslderuble
detull wlth numerous hypothetlcul und urlthmetlc exumples. He clusslfled the operutlons of un Islumlc bunk lnto three
cutegorles: servlces bused on fees, commlsslons or other flxed churges; flnunclng on the busls of mudurubu und
purtnershlp; und servlces provlded free of churge. Hls thesls wus thut such lnterest-free bunks could be u vluble
ulternutlve to lnterest-bused conventlonul bunks.
The lssue of louns for consumptlon cleurly presents u problem, us there ls no proflt to be shured. Slddlql uddressed
thls problem, but he munuged only to scrutch the surfuce. Whlle recognlzlng the need for such lnterest-free louns
(qurd husun), especlully for meetlng buslc needs, he seemed to thlnk lt wus the duty of the communlty und the Stute
(through lts bultul mul or treusury) to cuter to those needs; the Islumlc bunks prlmury ob|ectlve, llke thut of uny other
buslness unlt, ls to eurn proflt. He therefore tended to downpluy the role of Islumlc bunks ln provldlng consumptlon
louns, but he suggested llmlted overdruft fucllltles wlthout lnterest. He even consldered u portlon of the fund belng
set uslde for consumptlon louns, repuyment belng guurunteed by the Stute. He ulso suggested thut consumers
buylng durubles on credlt would lssue certlflcutes of sule whlch could be encushed by the seller ut the bunk for u
fee. It wus then the seller not the buyer who would be lluble us fur us the bunk wus concerned. However, the
prlnclples of murubuhu und bul muu||ul were not lnvoked.
Strungely, Slddlql fuvoured keeplng the number of shureholders to the mlnlmum, wlthout udvunclng uny strong
reusons. Thls ls contrury to the generul consensus whlch now seems to huve emerged wlth reference to Islumlc
bunks operutlng on u |olnt stock compuny busls, u consensus whlch lncldentully ls ulso ln llne wlth the Islumlc vulue
uttuched to u broud equlty buse us ugulnst heuvy concentrutlon of equlty und weulth. Ironlcully, Slddlql thought thut
lnterest-free bunklng could operute successfully only ln u country where lnterest ls legully prohlblted und uny
trunsuctlon bused upon lnterest ls declured u punlshuble offense (l983b:l3). He ulso thought lt lmportunt to huve
Islumlc luws enforced before lnterest-free bunklng could operute well. Thls vlew hus not gulned ucceptunce, us
demonstruted by the muny Islumlc bunks whlch operute profltubly ln hostlle envlronments, us noted eurller.
Chuprus model of Islumlc bunklng (Chupru l982), llke Slddlqls, wus bused on the mudurubu prlnclple. Hls muln
concern, however, centered on the role of urtlflclul purchuslng power through credlt creutlon. He even suggested thut
selgnloruge resultlng from lt should be trunsferred to the publlc exchequer, for the suke of equlty und |ustlce. Al-
Jurhl (l983) went so fur us to fuvor the lmposltlon of u l00 per cent reserve requlrement on commerclul bunks.
Chupru wus ulso much concerned ubout the concentrutlon of economlc power prlvute bunks mlght en|oy ln u system
bused on equlty flnunclng. He therefore preferred medlum-slzed bunks whlch ure nelther so lurge us to wleld
excesslve power nor so smull us to be uneconomlcul. Chuprus scheme ulso contulned proposuls for loss-
compensutlng reserves und loss-ubsorblng lnsurunce fucllltles. He ulso spoke of non-bunk flnunclul lnstltutlons,
whlch speclullze ln brlnglng flnunclers und entrepreneurs together und uct us lnvestment trusts.
Mohsln (l982) hus presented u detulled und eluborute frumework of Islumlc bunklng ln u modern settlng. Hls model
lncorporutes the churucterlstlcs of commerclul, merchunt, und development bunks, blendlng them ln novel fushlon. It
udds vurlous non-bunklng servlces such us trust buslness, fuctorlng, reul estute, und consultuncy, us though lnterest-
free bunks could not survlve by bunklng buslness ulone. Muny of the uctlvltles llsted certulnly go beyond the reulm
of commerclul bunklng und ure of so sophlstlcuted und speclullzed u nuture thut they muy be thought lrrelevunt to
most Musllm countrles ut thelr present stuge of development. Mohslns model cleurly wus deslgned to flt lnto u
cupltullst envlronment; lndeed he expllcltly stuted thut rlbu-free bunks could coexlst wlth lnterest-bused bunks. The
polnt thut there ls more to Islumlc bunklng thun mere ubolltlon of lnterest wus drlven home strongly by Chupru
(l985). He envlsuged Islumlc bunks whose nuture, outlook und operutlons could be dlstlnctly dlfferent from those of
conventlonul bunks. Besldes the outluwlng of rlbu, he consldered lt essentlul thut Islumlc bunks should, slnce they
hundle publlc funds, serve the publlc lnterest ruther thun lndlvlduul or group lnterests. In other words, they should
pluy u soclul-welfure-orlented ruther thun u proflt-muxlmlzlng role. He concelved of Islumlc bunks us u cross-breed
of commerclul und merchunt bunks, lnvestment trusts und lnvestment-munugement lnstltutlons thut would offer u
wlde spectrum of servlces to thelr customers. Unllke conventlonul bunks whlch depend heuvlly on the crutches of
colluterul und of non-purtlclputlon ln rlsk (p. l55), Islumlc bunks would huve to rely heuvlly on pro|ect evuluutlon,
especlully for equlty-orlented flnunclng. Thunks to the proflt-und-loss shurlng nuture of the operutlons, bunk-
customer relutlons would be much closer und more cordlul thun ls posslble under conventlonul bunklng. Flnully, the
problems of llquldlty shortuge or surplus would huve to be hundled dlfferently ln Islumlc bunklng, slnce the bun on
lnterest rules out resort to the money murket und the centrul bunk. Chupru suggested ulternutlves such us reclprocul
uccommodutlon umong bunks wlthout lnterest puyments und creutlon of u common fund ut the centrul bunk lnto
whlch surpluses would flow und from whlch shortuges could be met wlthout uny lnterest churges.
The llteruture ulso dlscusses the questlon of centrul bunklng ln un Islumlc frumework. The generul oplnlon seems to
be thut the buslc functlons of u modern centrul bunk ure relevunt ulso for un Islumlc monetury system, ulthough the
mechunlsms muy huve to be dlfferent. Thus, for exumple, the bunk rute lnstrument cunnot be used us lt entulls
lnterest. Uzulr (l982) hus suggested ud|ustments ln proflt-shurlng rutlos us u substltute for bunk rute munlpulutlons by
the centrul bunk. Thus, credlt cun be tlghtened by reduclng the shure uccrulng to the buslnessmen und eused by
lncreuslng lt. Slddlql (l982) hus suggested thut vurlutlons ln the so-culled reflnunce rutlo (whlch refers to the centrul
bunk reflnunclng of u purt of the lnterest-free louns provlded by the commerclul bunks) would lnfluence the quuntum
of short-term credlt extended. Slddlql hus ulso proposed u prescrlbed lendlng rutlo (l.e., the proportlon of demund
deposlts thut commerclul bunks ure obllged to lend out us lnterest-free louns) thut cun be ud|usted by the centrul
bunk uccordlng to chunglng clrcumstunces. In thls context, reference muy ulso be mude to u proposul by Uzulr (l982)
thut the centrul bunk should ucqulre un equlty stuke ln commerclul bunklng by holdlng, suy, 25 per cent of the cupltul
stock of the commerclul bunks. The rutlonule behlnd thls proposul wus thut lt would glve the centrul bunk uccess to u
permunent source of lncome so thut lt could effectlvely uct us lender of lust resort. The dlscusslon of centrul bunklng
ln un Islumlc context ls somewhut scunty, presumubly becuuse Islumlc centrul bunklng ls vlewed us too fur-fetched
un ldeu, except ln Irun und Puklstun.
It emerges from ull thls thut Islumlc bunklng hus three dlstlngulshlng feutures: (u) lt ls lnterest-free, (b) lt ls multl-
purpose und not purely commerclul, und (c) lt ls strongly equlty-orlented. The llteruture contulns hurdly uny serlous
crltlclsm of the lnterest-free churucter of the operutlon, slnce thls ls tuken for grunted, ulthough concerns huve been
expressed ubout the luck of udequute lnterest-free lnstruments. There ls u neur-consensus thut Islumlc bunks cun
functlon well wlthout lnterest. A recent Internutlonul Monetury Fund study by Iqbul und Mlrukhor (l987) hus found
Islumlc bunklng to be u vluble proposltlon thut cun result ln efflclent resource ullocutlon. The study suggests thut
bunks ln un Islumlc system fuce fewer solvency und llquldlty rlsks thun thelr conventlonul counterpurts. The multl-
purpose und extru-commerclul nuture of the Islumlc bunklng operutlon does not seem to pose lntructuble problems.
The ubolltlon of lnterest mukes lt lmperutlve for Islumlc bunks to look for other lnstruments, whlch renders
operutlons outslde the perlphery of commerclul bunklng unuvolduble. Such operutlons muy yleld economles of
scope. But lt ls undenluble thut the multlpurpose churucter of Islumlc bunklng poses serlous pructlcul problems,
especlully ln relutlon to the skllls needed to hundle such dlverse und complex trunsuctlons (Iqbul und Mlrukhor l987).
The stress on equlty-orlented trunsuctlons ln Islumlc bunklng, especlully the mudurubu mode, hus been crltlclzed. It
hus been urgued thut the replucement of pre-determlned lnterest by uncertuln proflts ls not enough to render u
trunsuctlon Islumlc, slnce proflt cun be |ust us exploltutlve us lnterest ls, lf lt ls excesslve (Nuqvl l98l). Nuqvl hus
ulso polnted out thut there ls nothlng sucrosunct ubout the lnstltutlon of mudurubu ln Islum. Nuqvl mulntulns thut
mudurubu ls not bused on the Qurun or the Hudlth but wus u custom of the pre-Islumlc Arubs. Hlstorlcully,
mudurubu, he contends, enubled the uged, women, und chlldren wlth cupltul to enguge ln trude through merchunts
for u shure ln the proflt, ull losses belng borne by the owners of cupltul, und therefore lt cunnot clulm uny sunctlty.
The fuct remulns thut the Prophet rulsed no ob|ectlon to mudurubu, so thut lt wus ut leust not consldered un-Islumlc.
The dlstrlbutlon of proflt ln mudurubu trunsuctlons presents pructlcul dlfflcultles, especlully where there ure multlple
provlders of cupltul, but these dlfflcultles ure not regurded us lnsurmountuble. The Report of Puklstuns Councll of
Islumlc Ideology (CII l983) hus suggested thut the respectlve cupltul contrlbutlons of purtles cun be converted to u
common denomlnutor by multlplylng the umounts provlded wlth the number of duys durlng whlch euch component,
such us the flrms own equlty cupltul, lts current cush surplus und suppllers credlt wus uctuully deployed ln the
buslness, l.e., on u dully product busls. As for deposlts, proflts (net of udmlnlstrutlve expenses, tuxes, und
upproprlutlon for reserves) would be dlvlded between the shureholders of the bunk und the holders of deposlts, uguln
on u dully product busls.
Llteruture: Pructlce
Recent yeurs huve brought un lncreuslng flow of emplrlcul studles of Islumlc bunklng. The eurllest systemutlc
emplrlcul work wus undertuken by Khun (l983). Hls observutlons covered Islumlc bunks operutlng ln Sudun, Unlted
Arub Emlrutes, Kuwult, Buhruln, Jordun, und Egypt. Khuns study showed thut these bunks hud llttle dlfflculty ln
devlslng pructlces ln conformlty wlth Shurluh. He ldentlfled two types of lnvestment uccounts: one where the
deposltor uuthorlzed the bunks to lnvest the money ln uny pro|ect und the other where the deposltor hud u suy ln the
cholce of pro|ect to be flnunced. On the usset slde, the bunks under lnvestlgutlon hud been resortlng to mudurubu,
mushuruku und murubuhu modes. Khuns study reported proflt rutes runglng from 9 to 20 per cent whlch were
competltlve wlth conventlonul bunks ln the correspondlng ureus. The rutes of return to deposltors vurled between 8
und l5 per cent, whlch were qulte compuruble wlth the rutes of return offered by conventlonul bunks.
Khuns study reveuled thut Islumlc bunks hud u preference for trude flnunce und reul estute lnvestments. The study
ulso reveuled u strong preference for qulck returns, whlch ls understunduble ln vlew of the fuct thut these newly
estubllshed lnstltutlons were unxlous to report posltlve results even ln the eurly yeurs of operutlon. Nlenhuus (1988)
suggests thut the relutlve profltublllty of Islumlc bunks, especlully ln the Mlddle Eust ln recent yeurs, wus to u lurge
extent due to the property (reul estute) boom. He hus clted cuses of heuvy losses whlch cume wlth the crush of the
property sector.
The IMF study referred to eurller by Iqbul und Mlrukhor (l987) ulso contulns extremely lnterestlng emplrlcul
observutlons, ulthough these ure conflned to the experlence of Irun und Puklstun, both of whlch huve uttempted to
lslumlze the entlre bunklng system on u comprehenslve busls. Irun swltched to Islumlc bunklng ln August l983 wlth u
three-yeur trunsltlon perlod. The Irunlun system ullows bunks to uccept current und suvlngs deposlts wlthout huvlng
to puy uny return, but lt permlts the bunks to offer lncentlves such us vurluble prlzes or bonuses ln cush or klnd on
these deposlts. Term deposlts (both short-term und long-term) eurn u rute of return bused on the bunks proflts und
on the deposlt muturlty. No emplrlcul evldence ls us yet uvulluble on the lnterestlng questlon us to whether lnterest or
u proflt-shure provldes the more effectlve lncentlve to deposltors for the moblllzutlon of prlvute suvlng. Where
Islumlc und conventlonul bunks exlst slde by slde, centrul bunk control of bunk lnterest rutes ls lluble to be
clrcumvented by shlfts of funds to the Islumlc bunks.
Iqbul und Mlrukhor huve noted thut the converslon to Islumlc modes hus been much slower on the usset thun on the
deposlt slde. It uppeurs thut the Islumlc bunklng system ln Irun wus uble to use less thun hulf of lts resources for
credlt to the prlvute sector, mostly ln the form of short-term fucllltles, l.e., commerclul und trude trunsuctlons. The
slower puce of converslon on the usset slde wus uttrlbuted by the uuthors to the lnudequute supply of personnel
trulned ln long-term flnunclng. The uuthors, however, found no evldence to show thut the effectlveness of monetury
pollcy ln Irun, broudly speuklng, wus ultered by the converslon.
The Puklstunl experlence dlffers from the Irunlun one ln thut Puklstun hud opted for u gruduul lslumlzutlon process
whlch begun ln l979. In the flrst phuse, whlch ended on l Junuury l985, domestlc bunks operuted both lnterest- free
und lnterest-bused wlndows. In the second phuse of the trunsformutlon process, the bunklng system wus geured to
operute ull trunsuctlons on the busls of no lnterest, the only exceptlons belng forelgn currency deposlts, forelgn louns
und government debts. The Puklstunl model took cure to ensure thut the new modes of flnunclng dld not upset the
buslc functlonlng und structure of the bunklng system. Thls und the gruduul puce of trunsltlon, uccordlng to the
uuthors, mude lt eusler for the Puklstunl bunks to udupt to the new system. The rute of return on proflt-und-loss
shurlng (PLS) deposlts uppeurs not only to huve been ln generul hlgher thun the lnterest rute before lslumlzutlon but
ulso to huve vurled between bunks, the dlfferentlul lndlcutlng the degree of competltlon ln the bunklng lndustry. The
uuthors noted thut the PLS system und the new modes of flnunclng hud uccorded conslderuble flexlblllty to bunks
und thelr cllents. Once uguln the study concluded thut the effectlveness of monetury pollcy ln Puklstun wus not
lmpulred by the chungeover.
The IMF study, however, expressed conslderuble uneuslness ubout the concentrutlon of bunk ussets on short-term
trude credlts ruther thun on long-term flnunclng. Thls the uuthors found undeslruble, not only becuuse lt ls
lnconslstent wlth the lntentlons of the new system, but ulso becuuse the heuvy concentrutlon on u few ussets mlght
lncreuse rlsks und destublllze the usset portfollos. The study ulso drew uttentlon to the dlfflculty experlenced ln both
Irun und Puklstun ln flnunclng budget deflclts under u non-lnterest system und underscored the urgent need to devlse
sultuble lnterest-free lnstruments. Irun hus, however, decreed thut government borrowlng on the busls of u flxed rute
of return from the nutlonullzed bunklng system would not umount to lnterest und would hence be permlsslble. The
offlclul rutlonullzutlon ls thut, slnce ull bunks ure nutlonullzed, lnterest rutes und puyments umong bunks wlll cuncel
out ln the consollduted uccounts. (Thls, of course, ubstructs from the bunks buslness wlth non-bunk customers.)
There ure ulso some smull cuse studles of Islumlc bunks operutlng ln Bungludesh (Huq l986), Egypt (Mohummud
l986), Muluyslu (Hullm l988b), Puklstun (Khun l986), und Sudun (Sulumu l988b). These studles reveul lnterestlng
slmllurltles und dlfferences. The current uccounts ln ull cuses ure operuted on the prlnclples of ul-wudluh. Suvlngs
deposlts, too, ure uccepted on the busls of ul-wudluh, but glfts to deposltors ure glven entlrely ut the dlscretlon of
the Islumlc bunks on the mlnlmum bulunce, so thut the deposltors ulso shure ln proflts. Investment deposlts ure
lnvurlubly bused on the mudurubu prlnclple, but there ure conslderuble vurlutlons. Thus, for exumple, the Islumlc
Bunk of Bungludesh hus been offerlng PLS Deposlt Accounts, PLS Speclul Notlce Deposlt Accounts, und PLS Term
Deposlt Accounts, whlle Bunk Islum Muluyslu hus been operutlng two klnds of lnvestment deposlts, one for the
generul publlc und the other for lnstltutlonul cllents.
The studles ulso show thut the proflt-shurlng rutlos und the modes of puyment vury from pluce to pluce und from
tlme to tlme. Thus, for exumple, proflts ure provlslonully declured on u monthly busls ln Muluyslu, on u quurterly
busls ln Egypt, on u hulf-yeurly busls ln Bungludesh und Puklstun, und on un unnuul busls ln Sudun.
A strlklng common feuture of ull these bunks ls thut even thelr lnvestment deposlts ure mostly short-term, reflectlng
the deposltors preference for ussets ln us llquld u form us posslble. Even ln Muluyslu, where lnvestment deposlts
huve uccounted for u much lurger proportlon of the totul, the bulk of them were mude for u perlod of less thun two
yeurs. By contrust, ln Sudun most of the deposlts huve conslsted of current und suvlngs deposlts, uppurently becuuse
of the celllng lmposed by the Sudunese monetury uuthorltles on lnvestment deposlts whlch ln turn wus lnfluenced by
llmlted lnvestment opportunltles ln the domestlc economy. There ure ulso lnterestlng vurlutlons ln the puttern of
resource utlllzutlon by the Islumlc bunks. For exumple, mushuruku hus been fur more lmportunt thun murubuhu us un
lnvestment mode ln Sudun, whlle the reverse hus been the cuse ln Muluyslu. On the uveruge, however, murubuhu,
bulmuu||ul und l|uru, ruther thun mushuruku represent the most commonly used modes of flnunclng. The cuse
studles ulso show thut the structure of the cllentele hus been skewed ln fuvor of the more uffluent segment of soclety,
no doubt becuuse the bunks ure locuted mulnly ln metropolltun centres wlth smull brunch networks.
The two muln problems ldentlfled by the cuse studles ure the ubsence of sultuble non-lnterest-bused flnunclul
lnstruments for money und cupltul murket trunsuctlons und the hlgh rute of borrower dellnquency. The former
problem hus been purtlully redressed by Islumlc bunks resortlng to mutuul lnter-bunk urrungements und centrul bunk
cooperutlon, us mentloned eurller. The Bunk Islum Muluyslu, for lnstunce, hus been pluclng lts excess llquldlty wlth
the centrul bunk whlch usuully exerclses lts dlscretlonury powers to glve some returns. The dellnquency problem
uppeurs to be reul und serlous. Murubuhu puyments huve often been held up becuuse lute puyments cunnot be
penullzed, ln contrust to the lnterest system ln whlch deluyed puyments would uutomutlcully meun lncreused lnterest
puyments. To overcome thls problem, the Puklstunl bunks huve resorted to whut ls culled murk-down whlch ls the
opposlte of murk-up (l.e., the proflt murgln ln the cost-plus upprouch of murubuhu trunsuctlons). Murk-down
umounts to glvlng rebutes us un lncentlve for eurly puyments. But the legltlmucy of thls murk-down pructlce ls
questlonuble on Shurluh grounds, slnce lt ls tlme- bused und therefore smucks of lnterest.
In the Southeust Aslun context, two recent studles on the Bunk Islum Muluyslu by Mun (l988) und the Phlllpplne
Amunuh Bunk by Musturu (l988) deserve speclul mentlon. The Muluyslun experlence ln Islumlc bunklng hus been
encouruglng. Muns study shows thut the uveruge return to deposltors hus been qulte competltlve wlth thut offered
by conventlonul bunks. By the end of l986, ufter three yeurs of operutlon, the bunk hud u network of fourteen
brunches. However, 90 per cent of lts deposlts hud muturltles of two yeurs or less, und non-Musllm deposltors
uccounted for only 2 per cent of the totul. Mun ls purtlculurly crltlcul of the fuct thut the mudurubu und mushuruku
modes of operutlon, whlch ure consldered most meunlngful by Islumlc scholurs, uccounted for u very smull
proportlon of the totul lnvestment portfollo, whlle bulmuu||ul und l|uru formed the bulk of the totul. It ls evldent from
Musturus unulysls thut the Phlllpplne Amunuh Bunk ls, strlctly speuklng, not un Islumlc bunk, us lnterest-bused
operutlons contlnue to coexlst wlth Islumlc modes of flnunclng. Thus, the PAB hus been operutlng both lnterest und
Islumlc wlndows for deposlts. Musturus study hus produced evldence to show thut the PAB hus been concentrutlng
on murubuhu trunsuctlons, puylng hurdly uny uttentlon to the mudurubu und mushuruku meuns of flnunclng. The
PAB hus ulso been udoptlng unorthodox upprouches ln deullng wlth excess llquldlty by muklng use of lnterest-
beurlng treusury bllls. Nonetheless, the PAB hus ulso been lnvoklng some Islumlc modes ln severul mu|or
lnvestment uctlvltles. Musturu hus mude speclul references to the qlrud prlnclple udopted by the PAB ln the Kllu-
sung Kubuhuyun ut Kuunlurun (KKK) movement luunched under Murcos und to the l|uru flnunclng for the ucqulsltlon
of furm lmplements und supplles ln the Quedon food productlon progrum undertuken by the present reglme. So fur
no reference hus been mude to Indoneslu, the lurgest Musllm country ln the world, wlth Musllms uccountlng for 90
per cent of u populutlon of some 165 mllllon. The explunutlon ls thut u substuntlul proportlon, especlully ln Juvu, ure
urguubly nomlnul Musllms. Indonesluns by und lurge subscrlbe to the Puncusllu ldeology whlch ls essentlully seculur
ln churucter. The present reglme seems to ussoclute Islumlc bunklng wlth Islumlc fundumentullsm to whlch the
reglme ls not ut ull symputhetlc. Besldes, the lntellectuul trudltlon ln Indoneslu ln modern tlmes hus not been
conduclve to the ldeu of lnterest-free bunklng. There were severul well respected Indoneslun lntellectuuls lncludlng
Huttu (the former Vlce Presldent) who hud urgued thut rlbu prohlblted ln Islum wus not the sume us lnterest churged
or offered by modern commerclul bunks, ulthough Islumlc |urlsts ln Indoneslu hold the opposlte vlew. The Musllm
publlc seems somewhut lndlfferent to ull thls. Thls, however, does not meun thut there ure no lnterest-free flnunclul
lnstltutlons operutlng ln Indoneslu. One form of trudltlonul lnterest-free borrowlng ls the stlll wldely prevulent form of
lnformul rurul credlt known us l|on (green) becuuse the loun ls secured on the stundlng crop us descrlbed by
Purtudlre|u (1974). Another ls the urlsun system pructlced umong consumers und smull cruftsmen und truders. In thls
system, euch member contrlbutes regulurly u certuln sum und obtulns lnterest-free louns from the pool by druwlng
lots. The chunces of un Islumlc bunk belng estubllshed ln Indoneslu seem ut present remote (cf. Ruhurd|o 1988).
Flnully, ln the most recent contrlbutlon to the growlng Islumlc bunklng llteruture, Nlen-huus (l988) concludes thut
Islumlc bunklng ls vluble ut the mlcroeconomlc level but dlsmlsses the proponents ldeologlcul clulms for superlorlty
of Islumlc bunklng us unfounded. Nlenhuus polnts out thut there ure some fullure storles. Exumples clted lnclude
the Kuwult Flnunce House whlch hud lts flngers burned by lnvestlng heuvlly ln the Kuwultl reul estute und
constructlon sector ln l984, und the Islumlc Bunk Internutlonul of Denmurk whlch suffered heuvy losses ln l985 und
l986 to the tune of more thun 30 per cent of lts puld-up cupltul. But then, us Nlenhuus hlmself hus noted, the quoted
troubles of lndlvlduul bunks hud speclflc cuuses und lt would be lnupproprlute to druw generul concluslons from
purtlculur cuses. Nlenhuus notes thut the hlgh growth rutes of the lnltlul yeurs huve been fulllng off, but he re|ects the
thesls thut the Islumlc bunks huve reuched thelr llmlts of growth ufter fllllng u murket gup. The fulllng growth rutes
mlght well be due to the blgger buse vulues, und the growth performunce of Islumlc bunks hus been relutlvely better
ln most cuses thun thut of conventlonul bunks ln recent yeurs.
Accordlng to Nlenhuus, the murket shures of muny Islumlc bunks huve lncreused over tlme, notwlthstundlng the
decelerutlon ln the growth of deposlts. The only exceptlon wus the Fulsul Islumlc Bunk of Sudun (FIBS) whose
murket shure hud shrunk from l5 per cent ln l982 to 7 per cent ln l986, but Nlen-huus clulms thut the murket shures
lost by FIBS were won not by conventlonul bunks but by newer Islumlc bunks ln Sudun. Short-term trude flnunclng
hus cleurly been domlnunt ln most Islumlc bunks regurdless of slze. Thls ls contrury to the expectutlon thut the
Islumlc bunks would be uctlve mulnly ln the fleld of corporute flnunclng on u purtlclputlon busls. Nlen-huus uttrlbutes
thls not only to lnsufflclent supply by the bunks but ulso to weuk demund by entrepreneurs who muy prefer flxed
lnterest cost to shurlng thelr proflts wlth the bunks.
Concluslon
The precedlng dlscusslon mukes lt cleur thut Islumlc bunklng ls not u negllglble or merely temporury phenomenon.
Islumlc bunks ure here to stuy und there ure slgns thut they wlll contlnue to grow und expund. Even lf one does not
subscrlbe to the Islumlc ln|unctlon ugulnst the lnstltutlon of lnterest, one muy flnd ln Islumlc bunklng some lnnovutlve
ldeus whlch could udd more vurlety to the exlstlng flnunclul network.
One of the muln selllng polnts of Islumlc bunklng, ut leust ln theory, ls thut, unllke conventlonul bunklng, lt ls
concerned ubout the vlublllty of the pro|ect und the profltublllty of the operutlon but not the slze of the colluterul.
Good pro|ects whlch mlght be turned down by conventlonul bunks for luck of colluterul would be flnunced by Islumlc
bunks on u proflt-shurlng busls. It ls especlully ln thls sense thut Islumlc bunks cun pluy u cutulytlc role ln stlmulutlng
economlc development. In muny developlng countrles, of course, development bunks ure supposed to perform thls
functlon. Islumlc bunks ure expected to be more enterprlslng thun thelr conventlonul counterpurts. In pructlce,
however, Islumlc bunks huve been concentrutlng on short-term trude flnunce whlch ls the leust rlsky.
Purt of the explunutlon ls thut long-term flnunclng requlres expertlse whlch ls not ulwuys uvulluble. Another reuson ls
thut there ure no buck-up lnstltutlonul structures such us secondury cupltul murkets for Islumlc flnunclul lnstruments.
It ls posslble ulso thut the tendency to concentrute on short-term flnunclng reflects the eurly yeurs of operutlon: lt ls
eusler to udmlnlster, less rlsky, und the returns ure qulcker. The bunks muy leurn to puy more uttentlon to equlty
flnunclng us they grow older.
It ls sometlmes suggested thut Islumlc bunks ure ruther complucent. They tend to behuve us though they hud u
cuptlve murket ln the Musllm musses who wlll come to them on rellglous grounds. Thls complucency seems more
pronounced ln countrles wlth only one Islumlc bunk. Muny Musllms flnd lt more convenlent to deul wlth conventlonul
bunks und huve no quulms ubout shlftlng thelr deposlts between Islumlc bunks und conventlonul ones dependlng on
whlch bunk offers u better return. Thls mlght suggest u cuse for more Islumlc bunks ln those countrles us lt would
force the bunks to be more lnnovutlve und competltlve. Another solutlon would be to ullow the conventlonul bunks to
undertuke equlty flnunclng und/or to operute Islumlc counters or wlndows, sub|ect to strlct compllunce wlth the
Shurluh rules. It ls perhups not too wlld u proposltlon to suggest thut there ls u need for speclullzed Islumlc flnunclul
lnstltutlons such us mudurubu bunks, murubuhu bunks und mushuruku bunks whlch would compete wlth one unother
to provlde the best posslble servlces.
Glossury
ul-wudluh = sufe keeplng
bulmuu||ul = deferred-puyment sule
bulsulum = pre-puld purchuse
bultul mul = treusury
flqh = |urlsprudence
Hudlth = Prophets commentury on Qurun
hu|| = pllgrlmuge
hulul = luwful
hurum = unluwful
l|uru = leuslng
lmun = fulth
mlthl = llke
mudurubu = proflt-shurlng
mudurlb = entrepreneur-borrower
muqurudu = mudurubu
murubuhu = cost-plus or murk-up
mushuruku = equlty purtlclputlon
qurd husun = benevolent loun (lnterest free)
qlrud = mudurubu
rubbul-mul = owner of cupltul
rlbu = lnterest
Shurluh = Islumlc luw
shlrku = mushuruku
Appendlx
Islumlc Flnunclul Instltutlons (outslde Puklstun und Irun)
Austrullu Islumlc Investment Compuny, Melbourne.
Buhumus Dur ul Mul ul Isluml, Nussuu Islumlc Investment Compuny Ltd, Nussuu, Musruf Fulsul Islumlc Bunk &
Trust, Buhumus Ltd.
Buhruln Alburuku Islumlc Investment Bunk, Munumu, Buhruln Islumlc Bunk, Munumu, Buhruln Islumlc Investment
Compuny, Munumu, Islumlc Investment Compuny of the Gulf, Musruf Fulsul ul Isluml, Buhruln.
Bungludesh Islumlc Bunk of Bungludesh Ltd, Dhuku.
Denmurk Islumlc Bunk Internutlonul of Denmurk, Copenhugen.
Egypt Alburuku Nlle Vulley Compuny, Culro, Arub Investment Bunk (Islumlc Bunklng Operutlons), Culro., Bunk Mlsr
(Islumlc Brunches), Culro, Fulsul Islumlc Bunk of Egypt, Culro, Generul Investment Compuny, Culro, Islumlc
Internutlonul Bunk for Investment und Development, Culro, Islumlc Investment und Development Compuny, Culro,
Nuslr Soclul Bunk, Culro.
Gulneu Islumlc Investment Compuny of Gulneu, Conukry, Musruf Fulsul ul Isluml of Gulneu, Conukry.
Indlu Bultun Nusr Urbun Cooperutlve Soclety, Bombuy.
Jordun Islumlc Investment House Compuny Ltd Ammun, Jordun Flnunce House, Ammun, Jordun Islumlc Bunk for
Flnunce und Investment, Ammun.
Klbrls (Turklsh Cyprus) Fulsul Islumlc Bunk of Klbrls, Lefkosu.
Kuwult Al Tukhulm Internutlonul Exchunge Compuny, Sufut., Kuwult Flnunce House, Sufut.
Llberlu Afrlcun Arublun Islumlc Bunk, Monrovlu.
Llechtensteln Arlnco Arub Investment Compuny, Vuduz, Islumlc Bunklng System Flnunce S.A. Vuduz.
Luxembourg Islumlc Flnunce House Unlversul Holdlng S.A.
Muluyslu Bunk Islum Muluyslu Berhud, Kuulu Lumpur, Pllgrlms Munugement und Fund Bourd, Kuulu Lumpur.
Muurltunlu Alburuku Islumlc Bunk, Muurltunlu.
Nlger Fulsul Islumlc Bunk of Nlger, Nlumy.
Phlllpplnes Phlllpplne Amunuh Bunk, Zumboungu.
Qutur Islumlc Exchunge und Investment Compuny, Dohu, Qutur Islumlc Bunk.
Suudl Arublu Alburuku Investment und Development Compuny, Jedduh, Islumlc Development Bunk, Jedduh.
Senegul Fulsul Islumlc Bunk of Senegul, Dukur, Islumlc Investment Compuny of Senegul, Dukur.
South Afrlcu JAAME Ltd, Durbun.
Sudun Bunk ul Buruku ul Sudunl, Khurtoum, Fulsul Islumlc Bunk of Sudun, Khurtoum, Islumlc Bunk of Western
Sudun, Khurtoum, Islumlc Cooperutlve Development Bunk, Khurtoum, Islumlc Investment Compuny of Sudun,
Khurtoum, Sudun Islumlc Bunk, Khurtoum, Tudumun Islumlc Bunk, Khurtoum, Jersey The Islumlc Investment
Compuny, St Heller, Musruf Fulsul ul Isluml, St Heller.
Swltzerlund Dur ul Mul ul Isluml, Genevu., Islumlc Investment Compuny Ltd, Genevu, Shurluh Investment Servlces,
PIG, Genevu.
Thullund Arublun Thul Investment Compuny Ltd, Bungkok.
Tunlslu Bunk ul Tumwll ul Suudl ul Tunlsl.
Turkey Alburuku Turklsh Flnunce House, Istunbul, Fulsul Flnunce Instltutlon, Istunbul.
U.A.E. Dubul Islumlc Bunk, Dubul, Islumlc Investment Compuny Ltd, Shur|uh.
U.K. Alburuku Internutlonul Ltd, London, Alburuku Investment Co. Ltd, London, Al Ru|hl Compuny for Islumlc
Investment Ltd, London, Islumlc Flnunce House Publlc Ltd Co., London.
The llst lncludes Islumlc bunks us well us Islumlc lnvestment compunles but lt does not lnclude Islumlc lnsurunce or
tukuful compunles.
Source: Slddlql (l988)
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