Syariah Bank

Shirka (Syirkah) Financing in Indonesia's Islamic Banking

2013-11-06T12:04:00.003+07:00

In the Indonesia’s Islamic banking system that has the natural operations in the revenue-sharing basis, syirkah financing that based on revenue-sharing basis is important as the operations of Islamic banks to maximize profits. This study aimed to determine the effect of syirkah financing on profitability of Islamic banking in Indonesia. Influence of shirka financing performance can be estimated by a Stokastic Frontier Approach (SFA) in the form of a linear regression model analysis (Pooled Ordinary Least Squares), Fixed Effects regression model and Random Effects regression model.

The results showed that the level of shirka financing statistically significant has negative effect on the three indicators of profitability of Islamic banking in Indonesia, namely Return on Assets (ROA), Return on Equity (ROE) and profit ratio towards total financing (Return to Financing Ratio). The predicted possibilities are the low rate of return in Syirkah financing that increase Rate of return Risk and the investment risk that has not been handled optimally.

Riba (Usury / interest), Serious Social Crime

2013-02-28T18:37:00.000+07:00

al-Qoran'e l-Kareem [2]: 275-281
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah . But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein.
Allah destroys interest and gives increase for charities. And Allah does not like every sinning disbeliever.
Indeed, those who believe and do righteous deeds and establish prayer and give zakah will have their reward with their Lord, and there will be no fear concerning them, nor will they grieve.
O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers.
And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal - [thus] you do no wrong, nor are you wronged.
And if someone is in hardship, then [let there be] postponement until [a time of] ease. But if you give [from your right as] charity, then it is better for you, if you only knew.
And fear a Day when you will be returned to Allah . Then every soul will be compensated for what it earned, and they will not be treated unjustly.

Meaning:
Riba literally means ziyadah (addition / increase). In terms (shar'e), riba means addition that the lender take it from the borrower for term.

Kinds of Riba:
Riba that is haram (forbidden) (1) in Islam consists of two kinds; riba nasi`ah and riba fadl.
Riba Nasi`ah is also known as riba jahiliyyah that lend a certain amount of money for a limited period (like a month or a year) with a requirement to increase (money) peer over a term (period).
Riba Fadl happens when you sell the similar / same thing with an addition like barter 1 pon of wheat by 2 pons of the other wheat or selling 1 litre of sha-mey (2) honey by 1.5 litres of hijazey (2) honey.

As hadits Rasulullah Saw. said:
"As cited by Abu Said al-Khudri (ra), Prophet Muhammad (Saw) said: Gold for gold transactions must be done in equal amounts, like for like, hand to hand (in cash values); any excess in riba; silver for silver transactions must be done similarly, like for like, hand to hand; any excess is riba; wheat for wheat must be done likewise; any excess is riba; powder for powder must be traded in equal muasures; so must dates for dates, and salt for salt; any excess is riba." (narrated by Muslim).

And Riba is haraam even if it just "a little riba".

Karim (2005) said that riba nasi'ah is different than riba jahiliyyah. So, riba nasi'ah for him is usury that arises a lending or borrowing transaction that does not meet the criteria of al ghunmu bil ghurmi (that profit goes along with risk) and al kharaj bi dhaman (income goes along with expense). Such a transaction contains an exchange of lialibility only because of the passage of time.

Lathaef'e Tafseer:
a- The mean of "el-Aklu" in ayah is absolute taking and disposition in ta'beer الذين يأكلون الربا (al-Quran 2: 275) because it is the primary purpose of property
b- "The God blight riba and rears Shadaqah,and Allah does not like every sinning disbeliever (al-Quran 2: 276)" means that Riba is decreasing reason without development, and Shadaqah is developing reason without decrease
c- Quran.Sunnah 2:279 فأذنوابحرب منالله ورسوله
means denying war for magnification and Allah has increased it in majesty and "Haulan"

(1) haram is one of five laws in Islam that the executor going to get sin or crimed and someone who left it going to be rewarded.
(2) names of two cities in arabic land

Tafseer al-Ayat al-Ahkam min al-Qur`an, Volume 1, by Muhammad 'Ali as-Shabuni
Islamic Banking, 3rd Edition, by Adiwarman Karim, Jakarta
and google translation

INDONESIA: 2013 is the blooming year of Islamic insurance

2012-12-22T20:51:00.000+07:00

REPUBLIKA.CO.ID, JAKARTA – Year 2013 will be a challenging year for Islamic industry as regulator drafts stricter regulation for Islamic banking. Spin-off regulation is one of them.

The Analyst of Islamic Economy and founder of Karim Business Consulting (KBC), Adiwarman A Karim, said 2013 would be a year for the development of Islamic industry, instead of the downturn.

"2013 is the year of Islamic insurance," Karim said on Monday at the forum entitled 'Outlook Islamic Economy 2013: Islamic Economic System to Replace the West'.

He explained that Indonesia Capital Market and Financial Institution Supervisory Agency (Bapepam-LK) set minimum capital for insurance company in the amount of 100 billion IDR. For those which cannot fulfil the requirement, they must add their capital or convert to Islamic insurance. The minimum capital for Islamic insurance is only 50 billion IDR.

He added that Islamic Business Unit (UUS) must also prepare to spin off in 2013. Vice President Director of Manulife Insurance Indonesia, Nelly Husnayati, said the company prepared to spin off. It will separate from the central company in 2014.

Manulife Islamic business unit still books a capital of 25 billion USD. With the spin off, Manulife Syariah is ready to add the capital to meet the requirement.

(this's real my post) 8 [EIGHT] Sectors OF CHANGE to the Advance or a Decline

2012-11-01T01:28:00.001+07:00

Do you know IBNU Khaldun?
do you know his monumental opus?
YEAH ... He is the moslem scientist in 14th century, the writer of Muqaddimah

Let us first knowing who was Khaldun,
Born at Tunisia as Al-Allamah Abd al-Rahman Ibn Mohammad Ibn Khaldun(1332-1395)

picture is taken from: geosetem.blogsome.com

Ibn Khaldun is the most important figure in the field of History and Sociology in Muslim History. He is one of those shining stars that contributed so richly to the understanding of Civilization. In order for one to understand and appreciate his work, one must understand his life.

He lived a life in search of stability and influence. He came from a family of scholars and politicians and he intended to live up to both expectations. He would succeed in the field of Scholarship much more so than in any other field.

Here, or you are more familiar with Machiavelli??

more you can see {here}

And about Muqaddimah, or 'Prolegomena' which identifies the psychological, economic, environmental and social facts that contribute to the advancement of human civilization and the currents of history (in contrast to political context of history). Analyzed the dynamics of group relationships and showed how group feelings, al-'Asabiyya, give rise to the ascent of a new civilization.

source of image: userpage.fu-berlin.de; M. Hozein

Muqaddimah had the Influence on the subjects of history, philosophy of history, sociology, political science and education. Muqaddimah considered in league with and rival of Machiavelli’s The Prince (written a century later)

Islamic gold dinar

2012-07-13T15:16:00.001+07:00

The modern Islamic gold dinar (sometimes referred as Islamic dinar or Gold dinar) is a currency that aims to revive the historical gold dinar which was a leading coin of early Islam. They consist of minted gold coins, Dinar, and silver coins, Dirham.

Dinar history

Main article: Gold Dinar

Crusader coins of the Kingdom of Jerusalem. Left: Denier in European style with Holy Sepulchre. Middle: One of first Kingdom of Jerusalem gold coins, copying Islamic dinars. Right: Gold coin after 1250, with Christian symbols following Papal complaints.

According to Islamic law, the Islamic dinar is a coin of pure gold weighing 72 grains of average barley. Modern determinations of weight range from 4.25 grams to 4.45 grams of gold, with the silver Dirham being created to the weight ratio of 7:10, yielding coins from 2.975 to 3.15 grams of pure silver.
Umar Ibn al-Khattab established the known standard relationship between them based on their weights: "7 dinars must be equivalent (in weight) to 10 dirhams."^{[citation needed]}

“	The Revelation undertook to mention them and attached many judgements to them, for example zakat, marriage, and hudud, etc., therefore within the Revelation they have to have a reality and specific measure for assessment of zakat, etc. upon which its judgements may be based rather than on the non-shari'i other coins. Know that there is consensus since the beginning of Islam and the age of the Companions and the Followers that the dirham of the shari'ah is that of which ten weigh seven mithqals weight of the dinar of gold... The weight of a mithqal of gold is seventy-two grains of barley, so that the dirham which is seven-tenths of it is fifty and two-fifths grains. All these measurements are firmly established by consensus.	”
—Ibn Khaldun, Al-Muqaddimah^[1]

Abdalqadir as-Sufi is known to be a strong proponent of the idea for the gold dinar revival movement. Imran Nazar Hosein has also been promoting the revival of Dinar usage but has linked its use to Islamic eschatology.

Value and denomination

As per the historical law slated above, one dinar is 4.44 grams of pure gold, while one dirham is 3.11 grams of pure silver. A smaller denomination, daniq, has 1/6th of dirham's weight. The value of each coin is according to their weight and the market value of the two metals. The coins may be minted at fraction or multiples of their weights and valued accordingly.

Adoption

Indonesia

The currency was introduced in Indonesia in the year 2000 by Islamic Mint Nusantara and Logam Mulia. IMN also introduced Dinarfirst, an online dinar exchange system.

Malaysia

Libya

Along with the uprising in Libya, RT News on August/September 2011 brought several stories about Muammar Gaddafi's introduction of golden dinar^[6] within his "gold-for-oil plan" ^[7] to possibly trade Libya oil on international markets.^[8]

Use

Most of the coins are issued privately and do not own legal tender status. In case of Malaysia, the state government of Kelantan allows their use in transactions while it is illegal according to the federal law.
Common uses of the gold dinar include:

Buying merchandise from outlets.
Holding accounts, and making and receiving payments as with any other medium of exchange.
Saving, of which they do not suffer from devaluation due to inflation.
Paying zakat and dower as established within Islamic Law.

Notes

Citations

^ Ibn Khaldun, The Muqaddimah, ch. 3 pt. 34
^ The Economist, March 16th 2005, Buttonwood, Starkers
^ The Malaysian Insider, Kelantan launches gold dinar, August 12th 2010.[1]
^ Malaysia: Kelantan collects Zakat in Shariah money
^ New Strait Times, Silver state launches dinar, dirham coins, March 1st 2011.[2]
^ The Economist, October 8th 2011, Libya’s revolution, reader comments
^ Gaddafi gold-for-oil, dollar-doom plans behind Libya 'mission'?
^ Motivation For Allies May Be Black Gold And Not Humanitarian Mission

References

Ahamed Kameel Mydin Meera, The Islamic gold dinar, Pelanduk Publications, 2002, ISBN 978-967-978-825-9
Umar Vadillo, Return of the Gold Dinar: Study of Money in Islamic Law, Bookwork, 1996, ISBN 978-1-874216-16-2

http://en.wikipedia.org

IDX: Sharia Market of Indonesia is Big

2011-11-25T11:35:00.002+07:00

About Sharia

Indonesia as the biggest Muslim country in the world is holds an enormous market for the development of sharia finance industry. Sharia capital market, which is part of the Sharia finance industry, has an important role in increasing the market share of Sharia finance industry in Indonesia. Although its development is still new compared to the Sharia banking, Indonesia's sharia capital market is expected experience rapid growth along with significant growth in Indonesian capital Market Industry.

As far known, sharia capital market in Indonesia is associated to the Jakarta Islamic Index (JII), which only composed of 30 sharia securities listed in Indonesia Stock Exchange (IDX), whereas Sharia Securities existed in the Indonesian Sharia capital market are not only consists of 30 shares that become the constituents of JII but also consists of various types of securities. This was become more apparent after Bapepam-LK issued Sharia Securities List (DES) in November 2007. Since then, Bapepam-LK made DES as the only reference for Sharia Securities in Indonesian capital market.

According to the Regulations of Bapepam-LK Rule No IX.A.13 concerning Issuance of Sharia Securities, item 1.a.3, Sharia Securities is Securities as defined in Capital Market Law and its implementing regulations in which its contract and issuance method fulfills the Sharia Principles in Capital Market.(Includes description about the List of Syariah Securities). Read more.

Fatwa and Legal Foundation

Different from other securities, Sharia Securities need not only beside legal foundation, both in the form of regulations or laws, but also fatwa that can be used as reference to the enactment of Sharia Securities. Fatwa are needed as a basis to establish sharia principles that could be applied in the capital market. Read more.

Sharia Capital Markets Products in Indonesia Stock Exchange

Sharia Stock

The selection criteria of sharia stocks are based on Bapepam-LK Regulations No II.K.1 concerning Criteria and Issuance of Sharia Securities List, item 1.b.7. The regulation states that Securities in the form of shares, including sharia rights and sharia warrant, issued by Issuer or Public Company who does not declare that its business activities and management are conducted based on Sharia Principles, as long as the Issuer or Public Company fulfills. Read more.

Sukuk / Sharia Bonds

According to Bapepam-LK Rule No IX.A.13 concerning Issuance of Sharia Securities, Sukuk is Sharia Securities in a form of certificate or proof of ownership which have the same value and represent participation unit which is not separated from or consists of. Read more.

Jakarta Islamic Index

JII was initially launched by IDX (which was known as JSX at that time) in collaboration with PT Danareksa Investment Management on July 3, 2000. However, in order to generate longer historical data, the base date for the calculation of JII is using January 2, 1995 with index base number of 100. The methodology for JII’s calculation is the same that used in Jakarta Composite Index (JCI) that is based on the Market Value Weigthed Average Index using Laspeyres formula. Read more.

Indonesia Sharia Stock Index

Indonesia Sharia Stock Index is an Index that has been launched by Indonesia Stock Exchange (IDX) on May 12, 2012. Constituent ISSI are all of sharia stock and listed on the Indonesia Stock Exchange, where at this time, they are 219 stock which is constituent of ISSI. Indonesia Stock Exchange has two stock based of Sharia Stock, they are ISSI and JII.

Milestones Sharia Capital Market Development in Indonesia

The Milestones of the development of sharia capital market in Indonesia was started on July 3rd, 2000 by the issuance of JII. Eventhough PT Danareksa Investment Management had priory launched a Danareksa Sharia on July 3, 1997, but due to the Self Regulatory Organizations (SRO) has not issued an official instrument related to Sharia Securities, the developments of Sharia capital market is not yet reckoned until the issuance of JII. Read more.

The real read more

Sharia Banking Conquers Europe

2011-08-17T18:27:00.001+07:00

All over Europe Islamic banks are establishing branches, Western banks are offering Sharia-compliant financial services, and European governments are trying to outcompete each other in welcoming them. Proponents of banking along the lines of Sharia (Islamic law) claim that the Islamic banking system is “more ethical” than the West’s capitalist system. This is not true. Unfortunately, however, in our age of crashing financial markets, many Westerners – not just the traditional anti-capitalist European left – seem very eager to buy that argument.

Early this month, even the Vatican newspaper Osservatore Romanovoiced its approval of Sharia banking. “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the paper said in a downright stupid and “unethical” article published on March, 4.

The article, entitled “Islamic finance proposals and ideas for the West in crisis” [pdf] suggests that the basic rules of Islamic finance could relieve suffering markets and particularly international financial systems. It says that in the current atmosphere of crisis banks should take Muslims as an example and that the Islamic finance system may pave the way for the establishment of new rules in the Western world.

Islamic or Sharia banks differ from regular banks in two major ways. As commanded in the Koran, the charging of interest is prohibited in all monetary transactions. The other defining feature of Islamic banks is that they are supervised by a board of Islamic scholars and clerics whose job it is to ensure that the banks’ activities comply with Sharia law.

Its proponents argue that Islamic banking is “ethically superior” to the capitalist principles of the “materialistic” West because, as Giovanni Maria Vian, the editor of Osservatore Romano says, Sharia banks take “the human dimension of the economy” into account.

The two dirty secrets of Islamic banking, however, are that, like all banks, Sharia banks do charge interest – they just give it another name – and that the clerics supervising the banks have ties to extremist, even terrorist, groups which work towards the Islamization of Europe and world dominance.

Helena Christofi, an expert on Sharia banking, explains that Islamic banks extend a type of Islamic “credit,” called murabaha, that shifts risk to the borrower in a manner similar to interest.

“An Islamic bank granting murabaha credit to a customer for an automobile, for example, would purchase the automobile for the customer for $15,000 and the customer would owe the bank $20,000 in a year’s time. Similarly, under the ‘diminishingmusharaka’ credit, the Islamic version of a mortgage, the bank and the customer purchase the property together. The customer must make monthly payments to the bank and pay a monthly rental fee, both based on the portion of the purchase price the bank still owns. Ironically, the interest this amounts to ranges between one and two percent higher than the interest on a conventional mortgage. Although the resale price of the vehicle and the rent paid on the house are akin to simple interest charges, the banks’ sharia boards legitimate the charges by renaming them ‘commissions’ or ‘profits.’”

The Sharia boards supervising the Islamic banks and Sharia-compliant financial services offered by regular European banks are composed of members of the European Council for Fatwa and Research. This Council is headed by Sheik Yousef Al-Qaradawi, a leader of the Muslim Brotherhood and instigator and financier of terrorism in Europe and the Middle East. Both Al-Qaradawi and the Council have expressed their hope that “Islam will return to Europe as a conqueror.”

With ever larger Muslim populations there is a growing internal demand for an “ethical alternative” to conventional banking for Muslims. A 2006 poll by Lloyds Trustee Savings Bank in Britain found that over 75% of British Muslims want Sharia-compliant banking products, while in 2005Mufti Abdul Barkatullah, Sharia adviser to Lloyds TSB and an imam at a North London mosque reported that 20% of inquiries into Islamic products at Lloyds TSB came from non-Muslims who have bought the argument that conventional capitalist banking is somehow unethical.

Alun Williams, marketing director of the Islamic Bank of Britain, established in 2004 and one of the first Sharia banks in Europe, told The Guardian (April 2, 2005):

“Our biggest appeal outside the Muslim community will be to those who feel disenfranchised by, and bitter about, mainstream banks. […] Non-Muslims are fascinated by us, the more so because we intend offering […] an ethical dimension.”

That was four years ago. Meanwhile, Islamic banking has boomed all over Europe and interest from non-Muslims has grown in the wake of the financial crisis, which some, such as the Vatican paper, claim is due to the free-market model having “grown too much and badly in the past two decades.”

Sharia principles, however, not only prohibit the collection and payment of interest and investing in companies involved in gambling, alcohol, tobacco, pornography and the production of pork, but also forbid women from opening bank accounts without their husband’s approval. How “ethical” the latter is for the non-Muslims “fascinated” by Sharia banking is unclear. However, Western banks offering Sharia-compliant services to non-Muslims do not seem to insist on barring women. According to Christofi,

“The justification for replacing capitalism with the Islamic model is based on an intentional corruption of Sharia law, but the banks’ clerics don’t seem to mind undermining their theological philosophy, since the ethical image their misrepresentation has created for Islamic banking has managed to spread Islamic ideology to non-Muslims in Britain. According to Al-Qaradawi, Islam’s ideological infiltration into the West will be the vehicle through which it will establish an Islamic government over the entire globe.”

Although Al-Qaradawi and other members of the European Council for Fatwa and Research are connected to Islamist circles, the British government continues to promote the UK as a hub for Islamic banking. Western governments welcome Sharia-compliant banking because of the huge sums this attracts from Muslim immigrants, “ethically”-driven non-Muslims, and investors from Muslim countries.

In December 2008, the French Senate looked at ways to eliminate legal hurdles for Islamic financial services and products in France. French Finance Minister Christine Lagarde announced France’s intention to make Paris “the capital of Islamic finance” and said several Islamic banks would open branches in the French capital in 2009. French sources estimate this area of the financial market is worth from 500 to 600 billion dollars and could grow by an average 11 percent a year.

In July 2007, Wouter Bos, the Dutch Finance Minister (and leader of the Dutch Labour Party), said the Dutch government actively encourages Islamic banking, despite the risk that this acts as a Trojan horse in the Western banking system for groups linked to terrorists.

“In the first place because Islamic banking meets a demand from the Muslims living in the Netherlands. In the second place because we see an opportunity here for the Dutch financial sector. A third reason is that banning Islamic banking from the perspective of fighting terrorism will have a counter-productive effect. Denial of an actual need can lead to money-flows running via alternative channels out of the sight of the government.”

Switzerland, too, wants its share of Sharia banking. Years ago, Swiss banks already opened branches in the Middle East, offering worldwide Sharia-compliant financial products to wealthy Arabs.

In October 2006, the Swiss authorities granted a banking license to the first Switzerland-based bank that operates according to Sharia principles. Others have followed. “There are simply not enough financial products being created in the West for Muslim clients,” says John Sandwick, managing director of Swiss asset management firm Encore Management. “If no effort is made whatsoever, I am afraid the world will pass Switzerland by in the race to control the rich prize: which today is worth hundreds of billions, but in the future will be trillions of dollars of Islamic wealth.” Michael Fouad Chahine of Credit Suisse says “The development of Islamic banking has so far been limited to countries with a higher percentage of Muslims. But this is changing as more international regulators accept the importance of Sharia. It is now also accepted as socially responsible banking.”

How “socially responsible” and “ethical” is it to try to grab a share of the billions of dollars amassed by rich Arabs, while turning a blind eye to the fact that a substantial part of the money is used to promote terrorism and the establishment of an Islamic government over the entire globe?

In one of his sermons, Sheikh Al-Qaradhawi, one of the supervisors of the Sharia-compliant financial services offered in Britain, speaks of “the conquest of Rome.” In view of the recent article of the Osservatore Romano, Al-Qaradhawi’s words sound rather ominous:

“The city of Hirqil [Constantinople] was conquered by the young 23-year-old Ottoman Muhammad bin Morad, known in history as Muhammad the Conqueror, in 1453. The other city, Romiyya [Rome], remains, and we hope and believe [that it too will be conquered]. This means that Islam will return to Europe as a conqueror and victor, after being expelled from it twice […]. In one of my previous programs, I said that I think that this conquest [of Rome] would not be by the sword or armies, but by preaching and ideology. Europe will see that it suffers from materialistic culture, and will seek an alternative, it will seek a way out, it will seek a lifeboat. It will find no lifesaver but the message of Islam.”

Will the Vatican Bank be the next to go Sharia?

www.brusselsjournal.com

Role of Fiscal Policy in Controlling Inflation in Islamic Framework

2011-04-30T13:31:00.002+07:00

Introduction

A focus on inflation presumes inflation is high. The situation in the developed countries has, however, changed recently, provoking some to proclaim the death of inflation. The situation in the developing countries remains worrisome but, excepting a few countries, no longer alarming. So what is the need for discussing the role of fiscal policy in controlling inflation, in Islamic framework? Two reasons to do so. Firstly, to reassure ourselves, and those who care that this problem too can be handled in Islamic way if and when the need arises. Secondly, insofar as the Islamic developing countries are concerned inflation remains high enough to press for a solution.

In what follows we define inflation. Then we describe fiscal policy and explain what is meant by Islamic framework. We note some characteristics of fiscal policy which make it less effective in controlling inflation once it is there even though it can be an effective tool for preventing inflation from occurring. Briefly mentioning other faster acting ways of controlling inflation we also have a glance at Islamic history, how price rises were handled. In conclusion we prefer a fiscal policy oriented towards supply augmentation over the one focused on demand management.

Inflation

Inflation refers to 'a sustained upward trend in the level of prices', its most common measure being the percentage rate of change in a country's Consumer Prices Index. This is, however, regarded by some as a monetary definition, a better way to understand inflation being to focus on aggregate demand overstepping aggregate supply at full capacity. Yet what is visible to the eye remains the same: prices rise and continue rising.

A small rise in prices may go unnoticed in many countries even though it is sufficient to jolt an advanced economy which has been fairly stable in the past. But an annual rise in prices of 10 percent or more is considered serious any where and every where. But what causes real concern in developing countries is double digit inflation with no signs of slowing down.

Why the concern? Because it hurts. For most people incomes do not rise paripassu with the rise in prices. They can consume less, save less. They find planning for the future more difficult because of the greater uncertainty about future prices. The more the uncertainty about the future prices the more deleterious the effect on savings and investment. Inflation distorts the distribution of income and wealth to the disadvantage of the poor. It also stunts real growth due to its negative effects on saving and investment. Economists have established a negative relationship between inflation (even at a moderate rate) and growth of productivity.

Fiscal Policy

Fiscal policy involves government expenditure and revenue, through taxes, borrowing and printing money. Anti inflationary fiscal policy would focus on with- drawing purchasing power from the public so that they spend less, relieving the upward pressure on prices. This can be done by raising taxes and borrowing from the public without spending the proceeds. As the origin of inflation in most developing countries has been increasing government claim on productive resources (required for public sector projects), a decrease in government expenditure leaving taxes undiminished may still be more effective. Fiscal policy is regarded as 'deliberate manipulation of the relation between government expenditure and government receipts with a view to maneuvering the level of aggregate demand in the desired direction.

Manipulation of aggregate demand is not the only way fiscal policy can target inflation. Spending money in a way that increases the supply of goods and services can also help governments check the rising trend in prices.

It has been rightly observed that inflation as we know it (i.e. a sustained rise in prices) is a modern phenomenon. The price level was stable for nearly a century till 1914. But a number of factors, among which debt financing of the two world wars was only one, caused most countries to experience rising prices since the middle of the century till the eighties. The same period also saw a phenomenal rise in public spending which globally reached 43% of the GDP by 1980. As a result inflation is commonly perceived as a consequence of rising public expenditure. This, however, may not always be true. One has to examine specific cases to arrive at a conclusion.

The Islamic Framework

The Islamic framework within which this study examines the role of fiscal policy in controlling inflation is defined, in the first instance, by the goals of an Islamic economy. It is need fulfillment, justice and equity. Also included in these goals is to provide the state with the means required for defense, law and order and fulfillment of other socially obligatory duties (furud kifaya) which the private sector fails to fulfill. In the context of money, finance and government policies the Islamic framework can be further specified by prohibition of interest and gambling, minimization of hazard and uncertainty and keeping government intervention in the market limited to what is necessary for the realization of the above mentioned goals. Furthermore can be mentioned the concept of moderation in consumption and treating public money as a trust which have an impact on our subject matter. That there is a role for fiscal policy in realizing the goals of an Islamic state is quite obvious. But that is not our subject in this study. What needs emphasis is that anti inflationary fiscal policy should not jeopardize the long term arrangements for realizing the goals of Shari'ah. But before we proceed to examine the scope for such policies we have to note another dimension of the matter which shall not be discussed by us: the hypothat the full implementation of Islamic teachings, i.e. the operationalisation of the 'Islamic framework' noted above, will prevent inflation or at the least, minimize its incidence. This is due to the presence of several 'built in stabilizers' in the system.

The hypothesis is supported mainly, by four arguments.

In the Islamic economic system debt financing which is the chief source of inflation and instability in the contemporary economies will have been replaced by equity and sharing based finance which are non inflationary and stable. The change from debt finance to share finance also integrates saving and investment decisions making the system more stable than its capitalist counterpart.

Thanks to Zakat, inheritance laws and other redistributive provisions, Islam will effect a less unequal distribution of income and wealth (as compared to the same economy under capitalism). This will change the composition of aggregate demand in favour of the necessities of life thereby reducing the fluctuations in aggregate demand.

Islam will induce people to moderation in consumption, to shun wasteful life styles and conspicuous consumption. This will result in a decrease in aggregate demand.

Islamic governments, treating public money as trust will be frugal, keeping public expenditure within the bounds set by the available means. Public borrowing will be minimum and deficit financing rare. Financing public expenditure by printing new money will be almost non existent.

It is not necessary to examine this hypothesis in a discussion on the role of fiscal policy in controlling inflation. Since the possibility of inflation in an Islamic economy is not denied3 and since it is very likely that an Islamizing regime inherits inflation from the earlier regime, it would be quite logical for us to narrow down our focus on control as distinct from prevention. This is still the more credible a methodology in view of a third and more compelling reason. Inflation may impose itself on an economy from outside, caused by global moves beyond its control, especially if it is a small economy. What follows is, therefore, not affected by one's acceptance or rejection of some or all of these arguments. Those who take the hypothesis skeptically due to lack to empirical evidence will, of course, find the subsequent arguments more compelling. But those who whole-heartedly support the hypothesis will also find good reason to attach due weight to them.

Prevention and Control

There are two significant differences between fiscal policies designed to control already existing inflation and those designed to prevent inflation from afflicting an economy which at the time is free of inflation. The first difference relates to time horizon and the speed at which a policy measure is carried out. The second relates to the size of the change required in the relevant variables e.g. government expenditure, taxes, etc. Policies designed to control inflation have to have an impact now. They must be fast acting showing their results in a matter of months. This in turn may require big reduction in government expenditure, large increases in taxes, huge amounts of domestic borrowing etc. Given these measures successfully implemented over a short period of time aggregate demand will decrease and the trend of prices to rise will be checked. The big question is how far it is possible and desirable to do so.

Let us have a look at the way government decides how much to spend. Part of government expenditure relates to the core of governance, no government can function without these. They can be reduced if they are inflated but there is a limit to such reduction. Expenditure on salaries and offices of the executive, legislative and judicial branches of government come under this category. Then come the expenditure on defense and law and order, both permanently mandated by Shari'ah. The volume of expenditure on these heads may be dictated by circumstances beyond the government control e.g. geopolitical situation, moral degeneration, etc.

Reduction in Public Expenditure

It is only when we come to the other public goods and the welfare activities of the government that reduction in government expenditure becomes a real possibility. But the actual scope of such reduction depends on the historical path followed by (the increase in) government expenditure. Modern day governments have shown little ability to reduce expenditure on education and health care. For an Islamic state in a developing country the idea of reducing expenditure on education and health care is still the less appealing. This is in view of the priority of these items on the Islamic agenda and the neglect from which they suffered in the past. The most a developing country can manage to do is to prevent expenditure on these items from increasing further. Reducing the current levels of expenditure on education and health care are no where a real option. In fact any attempt to do so would be economically disastrous and politically suicidal for the regime.

It has been rightly observed that public expenditure increases as the national output increases, often at a faster rate. It is very difficult to envisage a reduction in public expenditure in an economy where the real output is increasing.

There is a strong case for reducing public expenditure when it is necessary to do so for controlling inflation. But the practical scope for doing so is very limited. If there is an across the board reduction in the salaries of government employees many of them may be forced to find better paid jobs in the private sector, even abroad, affecting the quality of the bureaucracy to the detriment of public interest. Reduction in ostentatious expenses on ceremonies, etc. may not involve significant amounts. As we hinted above, reduction in the expenditure on defense and internal security may not be practical. Some relief is expected from elimination of corrupt practices, bribes and kick backs. This will reduce the cost of doing business, expanding trade and investment and, ultimately, boosting production. These reforms may also reduce the cost of public projects, reducing government expenditure.

Increase in Tax Revenues

One should also consider the possibility of an Islamic state eliminating tax evasion and even coaxing people to pay 'donations' ---- over and above taxes --- to enable their government do good things for them. The likely gains in revenue terms are however, likely to be more than counterbalanced by two other inevitable changes. There are certain indirect taxes on basic necessities of life which Islamic economists regard to be antipoor and worth scrapping. Then there is mandatory lowering of tariffs and custom duties as part of ones belonging to a world set to reduce them globally.

Let us now turn to the other policy measure, withdrawal of purchasing power from the public through increased taxation and domestic borrowing not accompanied by a corresponding rise in public expenditure. This in fact is only a textbook proposition insofar as the developing countries are concerned. These countries are not able to meet even current levels of public expenditure through all the taxes and domestic borrowing they can manage, thereby taking recourse to printing new money. As regards an Islamic economy domestic borrowing ceases to be an option as no interest can be paid to the lenders. A resort to compulsory borrowing free of interest as suggested by some1 would be hardly feasible in political terms. Additional taxation with the sole purpose of withdrawing some purchasing power and freezing it implies that the money should be paid back when the time comes to defreeze it. That makes it akin to compulsory borrowing. There is no empirical evidence of any developing country ever having adopted these policies successfully.

Increasing the Supply of Goods and Services

That leaves us with the last option noted under the heading fiscal policy: spending money in a way that increases supply of goods and services. This spending does not have to be done by the government itself, at least not all of it. Tax reduction that encourages private investment may serve the same purpose. Lowering corporation taxes and lowering or scrapping capital gains taxes, even scaling down the income taxes may boost production by increasing the incentive to work and the incentive to save. Another possible measure is to restructure the subsidies, if any, in favor of the intermediate industries whose products are needed for expanding the production of consumer goods. Building the infrastructure --- roads, bridges, irrigation systems, electricity and telecommunication, etc. --- at public cost and making them available to the private sector at affordable prices has also been a favorite policy of mid-century developmental planning. These can be adopted after due consideration of the lessons from the past.

Even though each one of these policies is slow acting and of modest impact their cumulative impact over time would be significant. There can be no surer way to check the rising trend in prices than to arrange for increasing the supply of the very things whose prices are increasing. Fiscal policy has no other way to make a durable contribution to solve the problem of inflation since the two other options examined above are limited in scope and not practical. Unlike the impact of anti inflationary monetary policy which may be immediate but temporary, the impact of supply increasing fiscal policies is slow but durable.

In seems the scope for reducing public expenditure from their current levels is very limited insofar the contemporary Muslim countries are concerned. The same applies to the possibility of withdrawing purchasing power from the public without spending the proceeds. This leaves us with the slow acting option of trying to maneuver public expenditure and taxation in a way that increases the incentives to work, save and invest and / or directly contributes to increasing the supply of goods and services.

Moderation, Abolition of Interest and Zakat

We shall now proceed briefly to examine if the three other Islamic provisions noted above, i.e. moderation in consumption, abolition of interest and gambling and Zakat can play some role in controlling inflation.

In an already inflationary situation prices of necessities and other consumer goods would be rising. In such a situation people can not be expected to spend less in money terms as that would mean drastic reduction in their living standards. In fact they have to spend more to stay where they are. If current levels of consumption are perceived to be extravagant the most that can be expected in the name of moderation is for spending not to increase in money terms. As regards luxuries some additional revenue can be raised by increasing sales taxes with a view to reducing demand. But the rich who buy these goods may be the same people who become richer due to inflation. They could afford higher prices. Then there is always the danger of excessive taxes driving goods into the black market and increasing the incentive to evade taxes. In any case there is no empirical evidence of forced moderation having contributed to controlling inflation in a free market economy.

Abolition of interest and introduction of new arrangements for financial intermediation based on profit sharing will ensure financial stability. Savings will flow from households to firms smoothly through financial intermediaries who will be able to plough back to the savers attractive returns gotten from the businessmen. Abolition of gambling and the resulting curbs on speculation will further contribute to the stability of the financial system. A stable financial system is, however, a necessary but not a sufficient condition for price stability. Changes in technology and tastes may throw whole industries out of gear causing the levels of output, employment, and incomes to change despite a stable financial system. For a single country influx of foreign capital, favorable balance of payment or similar causes originating outside may cause the prices to rise by affecting the domestic money supply. What is more important for our purpose in this study is however, the fact that the change over form debt-finance to share-based finance will not by itself bring down prices. Inflationary prices boost business profits which will translate themselves in to higher profits (though not higher ratios of profit sharing) for financial intermediaries as well as for the savers / depositors. Profit-sharing may not necessarily feed the inflationary process but it shall not check it either. More direct intervention may be needed to rectify the situation. Redirection of investible funds by sectorally different ratios of profit-sharing or out right controls on incomes, profits and prices may become necessary in certain circumstances. But these options are outside the scope of this study.

The role of Zakat in reducing inequality in the distribution of income and wealth and thereby contributing to a change in the composition of aggregate demand that would make it more stable has already been noted above. Our focus now is the possible contribution of Zakat in bringing down prices when they are high and rising. It has been rightly pointed out that advance collection of Zakat due in the future and/or delaying the expenditure of Zakat proceeds till a more appropriate time can contribute to controlling inflation. It is also suggested that aggregate supply may be manipulated by collection and distribution of Zakat in kind.

Appropriate Policy Mix

The role of fiscal policy in controlling inflation shouldn't be discussed in isolation from the role of the monetary policy and exchange rate policy. The true picture can be obtained only by considering a mix of these policies in the context of a given situation. The size of a country's economy, the relative sizes of its domestic and external economies, the historical path through which an inflationary situation has come to hold are all important aspects of the situation. Also important is whether the chief source of inflation is in the labor market and/or goods market or in the money supply. The moral standards of the people, the level of corruption, the government's credibility and the degree of the people's trust in government too are forces to be reckoned with. Bereft of these data no meaningful study can be made on the role of fiscal policy in controlling inflation in an Islamic framework. The reason in simple. All the three terms appearing in our title: fiscal policy, inflation and Islamic framework derive their meaning - operational meaning - from these data.

Epilogue

The type of inflation experienced in early Islamic history was different in nature from the one experienced in twentieth century. More often than not the rise in prices was sharp but short lived. Instances of 'a sustained upward trend in the level of prices' are rare. There are, however, instances of a gradual rise in prices at a low rate caused by continued influx of gold and silver. Also there were brief spurts of rising prices due to the same cause as happened in the third and fourth decades of Islamic history. But most of the times it was climatic conditions or disruption in transportation that caused a failure in supply leading to sharp rise in food prices. Also in later Islamic history, especially after the disintegration of the Abbasids, it was debasement of currency, excessive issue of subsidiary (copper) coins (fulus) and circulation of large quantities of counterfeit that caused spurts of inflation. These, were, generally, localized and temporary. Protests from the populace often resulted in cancellation of new issues and rectification of debasement. No special measures are reported to counter the rise in prices due to influx of gold and silver. A fast expanding economy with widespread foreign trade was able to absorb the new money without serious problems.

Price rise caused by famine and disruption in supply caused great pain and suffering. Egypt during the Mamluk period was specially afflicted by these devastations as recorded, among others, by Maqrizi. If and when the situation did evoke a response from the authorities it was in the form of arranging additional supplies of food grains at public expense. Sometimes they also tried to ensure larger imports by reducing import duties.

Putting an end to debasement of currency and meeting rise in prices by arranging for increased supply are policies rooted in Islamic tradition, the difference in the nature of inflation notwithstanding. These policies are likely to evoke public cooperation as well as endorsement by the Ulama. The two other fiscal measures noted above, reduction in public expenditure (with welfare provisions bearing most of the cut) and increased taxation (and domestic borrowing) are doubly doomed. They are not practical. They have no roots in the Islamic past, hence they do not sound familiar, neither to the populace nor to the Ulama.

By Muhammad Nejatullah Siddiqi

www.islamic-world.net

The Economic Revelance of The Sharia Maxims (Al-Qawaid al-Fiqhiyah)

2011-03-08T11:05:00.000+07:00

"Islamic economics is the knowledge and the application of the injunctions and the rules of the Sharia in regard to acquisition and disposal of the available resources for providing satisfaction to the individuals in order to enable them to perform their obligations to Allah' and the society".

In this definition the word injunctions signifies the prescriptive and the prohibitive injunctions of the Qur'an and the Sunna. The rules of the Sharia used in the definition signify the set of principles determined with precision and their subordinate legal maxims which the great Muslim jurists have derived from the Do's and Don'ts to ensure and to determine the Islamicity of any act, institution or policy. These rules are the systematic exposition of the spirit of the legal text (nass) intended to guide man towards different situations in human society throughout the ages. They provide broad contours within which policy making can be pursued and its validity judged. The legal maxims, on the other hand, are amenable to trade-offs and substitutions.

Before reproducing these rules and applying them, as far as possible, to contemporary economic situations and problems it is necessary to take care of the following precautions that are necessary to protect one from fallacious analogy, misleading over-confidence and lapse:

1.

Recourse may be made to reasoning based on these rules only if the Qur'an and the Sunna do not provide guidance on an issue. Consensus of early jurists (Ijma) also commands priority over the legal maxims. Injunctions of the Qur'an and instructions of the holy Prophet are also to be taken as a whole. The method of deriving conclusions from them are known and should be followed. Legal decisions based on them are contained in the compilations made by great jurists and scholars.

Jurists have also recorded the judgments and the opinions that are based on the consensus (Ijma) of early' ulama'. This leaves a large number of issues that require a decision keeping within the limits of the Sharia. For example, the legal opinion in regard to profit-sharing in a joint venture is that:

"Profit is to be distributed according to the agreement but loss is to be borne in proportion to capital contribution".

In this rule the ratio of the distribution of profit according to agreement can be reviewed in light of business conditions. It may be left to the partners to decide the ratios of profit-sharing or otherwise an Islamic government or central bank may fix a range within which the partners should share profits. The government may even lay down that, like losses profit-sharing would also follow the ratio of respective capital contributions by different partners. The liability of loss, however, has to be borne strictly in proportion of capital contribution since this rule enjoys the consensus of the scholars. The government has no right to change this ratio nor can the business partners make an agreement that violates the rule. Similarly in Bay 'salam advance payment of cash is a condition that has been laid down by consensus of 'Ulama'. Deferred payment or adjustment of price against loan is not permissible. It is the consensus of 'Ulama' that business partnerships/(Shirka and Mudaraba) are treated as legal forms of joint venture. Thus there can be disagreement about forming a joint stock limited liability company, a trust, a cartel, a syndicate or a corporation but the legality of Shirka and Mudaraba may not be doubted.
2.

It has to be fully kept in mind that all the injunctions of the Sharia seek to benefit human beings and eliminate harm. But those benefits and harms are not entirely left to the judgment of man. In a large number of cases those benefits and harms have been specified in the Qur'an and Hadith and should be made the criteria of judgment. In cases where benefits and harms are not pointed out human intellect will judge the virtue or vice of any act. Thus intellect would be guided by sound reasoning, experience, prevalent practice and sound judgment of scholars who have well understood the spirit of the Sharia and are scrupulous. Whether or not state trading- should be allowed depends largely on experience. Should there be a difference in the wages of different workers and in the pay scales of different categories of employees depends upon custom and prevalent practice. Should any industry be nationalized in the interest of the community depends upon sound judgment of competent persons. The Sharia prohibits those trades and activities that involve ignorance and uncertainty since they may lead to disputes, strife and animosity. It is sound judgment that will decide which forms of present day trades and activities should be prohibited and which should be allowed and protected by law.
3.

The exigencies of the situation sometimes require that a lawful act should be disallowed for perseverance of public interest. Similarly there are situations under which an unlawful act has to be tolerated during a short period of contingency. But of the two situations, allowing an unlawful act is much more serious than banning a lawful act. The safe and preferable way is to retain the essential illegality of the act even when it is unavoidable to have recourse to it under compulsion of circumstances government, for instance, may be compelled to pay interest on credit purchases of military hardware. Despite this compulsion, however, it should not be disregarded that payment of interest is unlawful and that serious thought should be given to eliminate that situation as quickly as possible.
4.

We are attempting here to identify only a few of the vast number of rules that the great jurists have laid down. Interpretation and application of these rules require thorough knowledge of Islamic law and jurisprudence. Emphasis on a single rule ignoring the total perspective, its scope, qualifications and limitations may often lead to a blunder. Such is the case that Muslim economists are advised to ignore these rules unless they are guided by reliable experts of Sharia. Nevertheless, possibility of error in interpretation and application by the author cannot be ruled out. The readers who may like to apply them ought to discuss their problems with scholars of authoritative competence on the subject rather than building upon this discussion.

With the above precautions the rules that seem to be relevant to economic policies and institutions may be briefly reproduced in the following pages. The discussion mostly contains the examples that early jurists have adduced. In some cases, however, examples or contemporary situations have also been added.

(1) Claim and Practice:

The Qur'an insists that Muslims should demonstrate consistency in faith and practice and in words and deeds (2:208: 24:51; 30:30; 33':70: 41:30; 61:2,3). It is this basic requirement that has led to the formation of a number of rules in the Sharra to determine and judge the relationship between intention and deed and between claims and acts.

The first legal maxim in this respect reads as following:

* "The basis of every order is the intention thereof a judgment based on an order should follow the intention and purpose of that order"

The rule embodied in this maxim has been applied by early jurists mostly on acts of rituals, but it is just as equally applicable to other spheres of activity. The liability of a person who finds somebody's goods lying in the way and picks it up will be contingent upon the intention with which he has picked it up. If he intends to hand it over to the owner and has made it known to' others he will be treated as a trustee and will not be required to indemnify the owner in case the property is destroyed while in his possession. But if he has kept it as owner he would be treated as a usurper, Ghasib, and will be required to indemnify the owner in case the property is destroyed. The rule is also amenable to performance of visibly different acts leading to the achievement of the same object. Let us take an example from our own times. Nationalization of financial institutions in some countries may be the result of political ambitions while in some others it may aim at correcting mismanagement and regulating credit; and yet in some other countries it may be aimed at preventing foreign tion. Nationalization in socialist countries has a deep-rooted philosophical basis and underlying rationale quite different from the one which prompts nationalization of key industries in non-socialist countries. On the other hand, different actions by different countries by way of granting rebates on export, making available easy credit to exporters, fixation of import tariffs, laying down licensing procedures and quota restrictions in connection with imports etc., may aim at achieving a common cause of improving the balance of payments position. The relationship between intention and act could further be elaborated by the following examples:

1.

A man makes an earning:
1.

For the satisfaction of his selfish urges.
2.

For personal consumption and demonstration effects.
3.

For complying with the divine command to earn for the sake of survival and spending on noble causes.

In all above cases the act is the same but the intention/object is different.
2.

A man may grow and sell grapes to the consumer or to the manufacturer of wine.
3.

A fanner may grow poppy for sale of seeds or to prepare opium or drugs. In all these cases it is the intention that determines the legality or illegality of the act or an individual.

The same is also true in the case of public policies. Inscription of sacred words on coins may intend to symbolize a distinctive feature or the inscription may be desecration of sacred words. The former may be acceptable but the latter would be treated to be offensive.

In short it is the intention of the government in carrying out an act or in making policy that matters.

The relationship between an act and intention could take the following forms:
1.

Acts/policies that are good in themselves and are actuated by good objectives/intentions. For example, a government might seek to promote public welfare through Zakat and charity funds, donations, government revenues and just and equitable taxes.
2.

Acts and policies that are not good in themselves but are resorted to for achieving commendable objectives. The instances that immediately come to mind are winking over smuggling in order to allow some people to earn their livelihood or mobilizing funds for charity by means of games of chance and by floating interest-bearing loans and bonds.
3.

Acts and policies that are actuated by objectionable intentions but lead to good results. An example is the nationalization of an industry or of an industrial unit with a view to harassing or black-mailing one's political opponents but the step might result in providing job security to workers, reduction in the prices of products, elimination of cut-throat competition and waste, and standardization of the products and avoidance of incongruent growth of industry.
4.

Objectionable intentions with objectionable policies. The example is conniving at smuggling of wine into the country for use by Muslims.

It will be found that form No.1 (good acts with good objectives) is an ideal situation and has to be pursued. Form No.4 is to be rejected outright. In Nos. 2 and 3, the government has to make amendment of policy in the former and of objective in the latter. It should be noted that the announced phraseology of the policy sometime betrays the implicit objectives. The government may announcece its policy of providing a house to each shelter less family but in practice it could be unaffordable by a shelter less man. It is actual acts and policies rather than proclamations that determine the intention. This is so because of a sub-rule which governs contractual obligations:

"Contracts are to be understood in relation to their intention and substance, not by the words and phrases used: so a bay bi'l-wafa' will be held as a mortgage",

Surety ship (kafala) implies coextensive liability while transfer of debt (hawala) implies discharge of the principal debtor. If a contract of transfer of debt (hawala) is made with the condition to hold the principal debtor liable in case the transferee fails to discharge the debt, contract even though termed as a contract of hawala will be treated as a contract of kafala. suretyship. Similar will be the treatment of a contract of kafala in case the principal debtor is discharged after contract of suretyship is signed.

In case a government issues a license to set up an industry, or start a trade or import some merchandise it will not be lawful to sell the license because the object of the license was the authorization to set up an industry or trade or purchase of goods but not to make the license itself an article of trade.

Likewise if the banks declare their policy of financing their clients on non-interest bases it would be necessary to do so and not merely continue the same practice and seeking to rationalize it in Islamic terms by changing the relevant nomenclature such as calling it "buy-back" or "mark-up".

It will not be permissible for the banks to practice Shirka and Mlidaraba in such a way as to ensure a fixed rate of return for the banks while the liability of bearing loss or an uncertain amount of remaining profit is transferred to the working partner.

To take another case, if the government allots plots of land to individuals with the object of providing accommodation for themselves the allottee will be al1olating the implicit terms of the agreement by converting it into a commercial or industrial site or by treating it as merchandise.

In case the government allots agricultural land to a farmer for the purpose of cultivation, the land will have to be used for the purpose for which it was allotted. This allotment will not confer absolute right authorizing the allottee to claim the royalty of sub-soil wealth if it has been found on exploration, nor will he be allowed to convert it into a forest or a commercial or residential area because these objectives are not covered under the terms of allotment.. Authorizing the possession and use \would not be stretched to imply a use which the owner does not intend to allow. Leaving land unused deprives the allottee his right over land.

(2) Doubt and Certainty:

The basic rule that resolves the conflict between doubt and certainty is contained in the principle:

"A belief amounting to conviction cannot be caused to disappear by a doubt".

The rule is based on a Quranic verses: "Most of them follow naught but conjecture. Assuredly, conjecture can by no means take the place of truth" (10:37). The Prophet (peace by upon him) also rejected entertaining doubts in the face of valid ablution (wudu). The rule thus discards the effect of doubt that disturbs the original position. This provides guidance where discretion or personal judgment and subjective evidence are relied upon; the rule is of great significance in the event of controversy on rights and obligations of contending parties in the absence of a proof on either side. The benefit of doubt arising out of a controversial position can never go to a person on whom the onus of proof lies; thus the position of an indebted person even after his death will not be affected by doubt as to a probable discharge of debt.

Similarly a claim as to the discharge of a debt will not be rejected on the basis of presumption to the contrary. A contract between two parties will be treated as binding even though there may be reasons to doubt its Fait Du jour. The rule, if read with its following subrules, provides a broader canvas of its application.

(a) "As to incorporeal matters-that do not prove themselves, the basic principle (presumption) is that they do not exist" : so that if between the active partner and the financier there be a dispute as to profit, the word of the active partner will be taken, and the financier may lead evidence to prove the actual profit."

In case a firm declares a particular amount of income during the year this will have to be accepted by the income tax authorities in the absence of evidence to the contrary. Thus doubts of the assesses statement cannot be unilaterally or arbitrarily sustained unless the income statement filed by the assesses is proved to be containing discrepancies. Business partners whether individual or banks will also be required to accept it for purpose of sharing the profit. The rejection of this declaration would require convincing proof.

In the case of a dispute over defective merchandise the above sub-rule requires presumption of defect occurrence after sale unless the buyer could prove prior presence thereof.

Similarly, a partner has no right to assume a minimum rate of profit earned by his business partner and claim his share in that profit as different from the amount stated to have been actually earned by the partner. The sub-rule provides that in case the working partner declares a certain amount of profit no more will be presumed unless the contrary is proved to be a fact.

(b) The above sub-rule is further strengthened by another sub-rule that "no reliance (should be made) on mere imagination"

(c) Another rule is that of 'freedom from obligation : so that if one destroys the property of another, and they differ as to the extent of damage, the word of the person destroying may be taken, but the owner of the property may bring evidence to prove the excess.

Thus in case of loss in business a partner cannot allege willful neglect and require the latter to indemnify him for the loss. Unless he proves the contrary. Failing this proof the partner will not be personally made liable to the loss or to indemnify the other partner. Any doubt affecting his position of freedom from liability will be untenable. No arbitrary judgment of the contender would be acceptable.

www.islamic-world.net

Britain's a world-leader in sharia banking - but we haven't grasped the sinister and dangerous implications

2011-01-30T21:42:00.000+07:00

MELANIE PHILLIPS, WRITING EXCLUSIVELY FOR MAIL ONLINE

Worried that Britain is going bankrupt? Cheer up – we’re about to be bought up by the Islamic world.

A report by International Financial Services London reveals that Britain’s Islamic banking sector is now bigger than that of Pakistan.

The study says that the UK has by far the largest number of banks for Muslims of any western country.
islamic bank of britain

Increasing demand: Growing numbers of non-Muslims are turning to Islamic banking - but at what cost?

The UK now has five fully ‘sharia-compliant’ banks – providing products which prohibit interest payments and investment in alcohol or gambling firms in accordance with Islamic sharia law – while another 17 leading institutions including Barclays, RBS and Lloyds Banking Group have set up special branches or subsidiary firms for Muslim clients.

The $18billion (£12bn) in assets of Britain’s Islamic banks are said to dwarf those of Muslim states such as Pakistan, Bangladesh, Turkey and Egypt. And there are also 55 colleges and professional institutions offering education in Islamic finance in Britain – more than anywhere else in the world.

This development has been actively pushed by the government. When he was Chancellor of the Exchequer, Gordon Brown declared that he wanted London to become the global centre of Islamic banking. You can obviously see the attraction, especially in these straightened times. But the only thing our politicians and bankers appear to see is the seductive prospect of trillions of pound and dollar signs dancing before their bedazzled eyes.

What they refuse to acknowledge is the real price that is to be paid for this. They don’t understand that the spread of sharia banking in Britain and America is a significant part of the attempt to Islamise Britain and America. Acceptance of sharia finance furthers the Islamist objective of gradually legitimising Islamic sharia law more generally in the west.

The point which is being missed is that all who use it must conform to the dictates of sharia law. Sharia financial institutions may not be making this clear now – they don’t want to frighten people away – but at some point that IOU of sharia-compliance will be called in. This is how sharia-compliance will be spread to both the Muslim and non-Muslim population.

Any Western institution that endorses sharia-compliant products therefore effectively endorses the extremist ideology behind it of conquering the west for Islam, whether it knows it or not.

The most important point to grasp is that Islam recognises no authority superior to sharia. Sharia banks will therefore not recognise the superior authority of the law of the land. When trillions of pounds and dollars are locked into them, who will argue with them?

Even more troubling is the potential cover provided by sharia finance for the financing of terrorism. Sharia requires Muslims to tithe a percentage of their money to charity, called ‘zakat’.

But charity in Islam is more like solidarity. So some of this money donated to Islamic charities may well find its way to organisations promoting jihad and supporting suicide bombing including Hamas, Hezbollah, the families of Palestinian suicide bombers and Islamist madrassas in places like Pakistan.
Muslim women

Sharia finance: The UK now has five fully 'sharia-compliant' banks

Only certain Islamic authorities are entitled to issue the religious rulings or fatwas that can recognize investments as sharia-compliant. But the people and institutions making the decisions about where this money is sent are themselves often highly questionable.

These include the Fiqh Academy in Jedda, Saudi Arabia, which is associated with the Saudi-dominated Organization of the Islamic Conference (OIC); the European Council for Fatwa Research, and the Fatwa Council of North America. All of these are associated with the radical Wahabi and Salafi schools of Islam adhered to by groups such as al Qaeda and Hamas.
Radical cleric Sheikh Yusuf Qaradawi, who says suicide bombings are a religious duty in Israel and Iraq, is recognized as an expert in sharia-compliant investments.

Members of the Accounting and Auditing Organisation for Islamic Financial Institutions include the central banks of designated terrorist states Iran and Sudan along with finance houses implicated in funding al Qaeda, according to former U.S. counter-terror official Richard Clarke’s testimony to a commission investigating the terror attacks on the US.

And in any event, the very idea that sharia finance is necessary for Muslims living in the west is untrue. Indeed, Islamic countries have used and still use interest. The Ottoman Empire used it; and interest is permitted even in Saudi Arabia. In 1981 Sheikh Tantawi, the prominent Islamic legal authority at al Azhar university, Cairo, issued a fatwa justifying the charging of interest.

What has to be understood is that sharia finance is simply a modern jihadi strategy to help Islamise Britain’s institutions and society. It was devised in the mid-20th century by the ideologues who promoted the radical Islamism that threatens us today.

They advocated sharia finance as element of a separate, self-sustained Islamic order with its own Islamic ideology, Islamic politics and Islamic economics that taken together would guarantee an Islamic way of life and ultimately the Islamic state as the first step toward establishing Muslim rule worldwide.

As Britain’s government and banks congratulate themselves on the stunning growth of sharia banking in the UK, do any of them have the slightest understanding of what they are doing?

Read more: http://www.dailymail.co.uk/debate/article-1141087/Britains-world-leader-sharia-banking--havent-grasped-sinister-dangerous-implications.html#ixzz1CWuThOcx

www.dailymail.co.uk

Sharia banking grows strong in Indonesia

2011-01-30T21:40:00.000+07:00

Iwan Suci Jatmiko, Contributor, Jakarta

It was with good reason that the Indonesian Ulema Council and the government established PT Bank Muamalat Indonesia on Nov. 1, 1991. Such a move was welcomed by the public, which invested Rp 84 billion in shares when the bank was established.

The people of West Java also showed their support by injecting Rp 106 billion into the bank. Although its business was not too bright in its early days, the bank recorded a profit of Rp 372.5 billion in the second quarter of 2009. The achievement of Bank Muamalat is proof of the great potential of sharia banking in Indonesia. Sharia banking is based on Islamic law.

The fact that Indonesia has the world’s largest Muslim population creates a huge market for sharia banking, and Bank Muamalat became the pioneer that made a breakthrough in the existing concept of banking.

Huge potential for sharia banking still exists in the country. Bank Indonesia data reveals there are currently five sharia banks operating in the country, namely Bank Syariah Mandiri, Bank Muamalat Indonesia, Bank Syariah Mega, Bank Syariah Bukopin and Bank Syariah BRI. Twenty-six other banks have sharia banking units, such as Bank Permata, Bank BNI, Bank CIMB-Niaga, Bank Danamon and BPD DKI.

The country’s Muslims, accounting for 80 percent of the estimated 240 million population, are the target market of sharia banking. This means that 31 sharia banks or bank with sharia units are available to serve about 192 million Muslims.

Major conventional banks are also interested in establishing sharia banking units due to the huge potential in the country. Bank Indonesia predicts that sharia banks will enjoy business growth of between 5 and 5.5 percent this year due to high consumer spending and exports.

“Banks based on Islamic law are predicted to enjoy further growth in 2010,” said Darmin Nasution, acting governor of Bank Indonesia, as quoted by BI deputy governor Budi Mulya at a seminar on sharia banking in Indonesia last month. Darmin added that sharia banks would continue to flourish due to the organic growth within existing banks and the establishment of new sharia banks and units.

Another reason for the growth potential of sharia banks is their ability to attract customers from conventional banks due to the impact of the global financial crisis. The universal principles held by sharia banks also make the growth possible. Hence, more and more customers are turning to sharia banks.

The profit sharing concept offered by sharia banks is attractive to most businesspeople in Indonesia.

This method makes it possible for a customer to benefit from a loan. In conventional banking, a customer must pay interest on a loan regardless of whether the business is successful or not.

However, with the sharia profit sharing concept the customer will not have to bear the burden of paying interest if his or her business fails.

Sharia banking products are also varied and no less attractive than conventional banks’ products.

Bank Syariah Mandiri, for example, makes available various savings products, such as personal, haj, education, time deposit and so forth. Naturally, the bank also offers various types of loans based on the profit sharing sharia concept.

It is predicted that more sharia banks will come into existence soon to compete with the five already established as the public is now more aware of the superior features of sharia banks. Among the banks that have applied to open sharia banks are: Bank BCA Syariah, Bank Jabar-Banten Syariah, Bank BNI, Bank Victoria and Bank Panin Syariah. Some bank authorities are targeting 26 percent growth for sharia banks with the assumption that the growth is based on organic growth.

Mulya Siregar, Bank Indonesia deputy director, said on Dec. 8, 2009 at a seminar on Islamic banking that sharia banks could grow by a maximum of 81 percent for asset ownership, adding that such growth could only be achieved if related government regulations supported the growth.

If government regulations did not fully support it, he said, growth would only be about 43 percent, which was based on the contribution of new players or new banks in this sector.

Bank BRI Syariah president director Ventje Raharjo also has a similar view on regulations, especially on the taxation applied to sharia banks. He said the taxes should be more lenient in this case.

“Sharia banks need to be given certain incentives, such as leniency in taxation and a lower ratio of capital ownership, or there should be a sharia banking development allocation in the state budget,” he said.

The success of sharia banking in Indonesia has also attracted some foreign banks, although currently only HSBC has a sharia unit, called HSBC Amanah. Mulya Siregar, Bank Indonesia’s head of Islamic finance, said there were strong rumors that new banks from Malaysia and Bahrain would establish sharia branches here.

In the midst of waning customer trust in particular conventional banks, sharia banks seem to provide a safer alternative for customers. However, along with the huge potential and many opportunities for sharia banks there are also challenges facing them as they still have to educate customers about the superior features and products of sharia banks that are equal to or better than those of conventional banks.

www.thejakartapost.com

Sharia Banking Comes to Germany

2011-01-17T06:23:00.000+07:00

Financial services compatible with Islamic rules—already available in Britain—soon will launch in Germany. France and Switzerland are watching with interest

There are four million Muslims living in Germany. They eat, drink and pray in accordance with the precepts of the Prophet Muhammad. But when it comes to monetary transactions, the principles of the Koran have played hardly any role in Germany. That is about to change.

Early next year, the first Islamic bank in Germany to offer products that are in compliance with Sharia law will open its doors. The bank, Kuveyt Türk Beteiligungsbank, will open a branch in the downtown area of Mannheim, a city in western Germany, and branches in other cities are also planned.

The regulators with Germany's Federal Financial Services Authority, known as BaFin, recently issued a limited license to the subsidiary of a Turkish-Kuwaiti bank. It is only permitted to collect funds that are transferred to accounts in Turkey that conform to Islamic rules.

In other countries, the banking industry initially catered to Muslims on an equally small scale. But less than 10 years after first entering the market, all major banks in Great Britain now have Islamic divisions, and there are also five Islamic banks in the country.

The Prophet Muhammad's Prohibition of Interest

Worldwide, assets worth well over $700 billion (€470 billion) are now being managed in accordance with Islamic principles. In Germany, on the other hand, virtually no banks have so far even addressed this market.

The underlying concept of the Islamic banking business is the Prophet Muhammad's prohibition of interest. Like Jesus in the New Testament, Muhammad took action against the usurers of his time, who exploited their contemporaries by charging them exorbitant interest, sometimes well over 100 percent. Muhammad summarily prohibited charging interest unless something was provided in return. Since the 1970s, Islamic banks have sought to satisfy this requirement by offering their customers financial services on the basis of interest-free transactions.

Instead of interest, customers are promised a share in the profits of the bank. However, commercial activities can also be financed in which the Islamic saver collects a surcharge at a level similar to conventional interest.

Instead of taking out a loan to build a new factory, for example, a company would offer its investors a share of its profits. The important aspect of all of these transactions conducted in the name of Allah is that they are in fact based on a real exchange of goods or services. "The connection to reality must be clear," says Michael Saleh Gassner, a financial expert with the Central Council of Muslims in Germany.

Since the financial crisis, the principles of Islamic investors have also attracted the interest of conservative Christian investors. After all, the underlying concept seems so pleasantly removed from the speculative greed of Western financial executives.

Besides, the stock indexes that contain companies selected according to Islamic principles have sometimes outperformed comparable indexes without the religious association. Sharia-compliant banking transactions are "in a position to assume a global leadership role," says Susilo Bambang Yudhoyono, president of the world's most populous Islamic country, Indonesia.

No Investment in Gambling or Sex Trade

Investments that comply with the Koran still represent only 1 percent of the total market, but the market is growing is by 15 to 20 percent a year. Customers from the oil-rich Persian Gulf region, in particular, insist that their capital must be invested in accordance with religious criteria.

In addition to the prohibition of interest, it is also important to ensure that funds are not invested in gambling or the sex trade. Companies that are heavily in debt are excluded, because the large amount of interest they pay is seen as the work of the devil.

The Munich-based insurance giant Allianz (AZ) and Deutsche Bank (DB) have set up funds and certificates to satisfy Sharia-based criteria, but these products are only actively marketed in Islamic countries. "It is a business requirement in the Gulf region to offer products that conform to Sharia," says Hussein Hassan of Deutsche Bank in Dubai. The bank's Gulf region division is already responsible for 20 to 25 percent of profits.

There is no absolute certainty over which transactions conform to the principles of the Koran. Banks address the problem by appointing well-known Islamic scholars to so-called Sharia supervisory boards, which examine all bank products. In the Gulf region, there are about 10 religious scholars who provide consulting to almost every major Western bank and now have their own large staffs.

This leads to the creation of quasi-religious rating agencies, whose pronouncements have many a London investment banker shaking in his boots. Because different religious leaders interpret the Koran in every country, Deutsche Bank has appointed different Sharia supervisory boards for its businesses in Malaysia, Saudi Arabia and the Gulf region.

Markets Paralyzed by a Fatwa

It is clear that clerics can paralyze entire markets with a fatwa, as Muhammad Taqi Usmani demonstrated in 2007. The renowned religious scholar from Pakistan decided that most modern versions of Islamic bonds, known as Sukuks, were not in compliance with Sharia. He imposed a ban, which affected a booming market in which governments, real estate developers and companies raised about $50 billion in capital in 2007 alone.

The business collapsed. The Dubai-based real estate developer Nakheel is currently fighting to survive. The company had borrowed $3.5 billion to build dozens of artificial islands off the Dubai coast for tenants like football star David Beckham. In December, it will become clear whether the largest Sukuk ever issued can be disbursed. Muslims worldwide hope that Dubai will intervene on behalf of the borrower.

This investment sector is at least showing initial signs of recovery. Deutsche Bank introduced two Sukuks, for the Kingdom of Bahrain and for the Islamic Development Bank, into the market this year. Within a few years, the German bank has become one of the major players in the Islamic banking business. Its investment bankers are considered to be particularly creative when it comes to complying with the interest prohibition, while nevertheless offering investors the greatest possible security.

"The products the investment bankers dream up are sometimes bizarre," says Volker Nienhaus, the president of the University of Marburg in western Germany, who has been studying the Islamic banking industry for 30 years. The circumvention of interest stimulates the fantasy of financial engineers, says Nienhaus. For example, an important part of the platinum trade on London's derivatives exchange is indirectly attributable to Sharia. Because platinum, unlike gold and silver, was not a means of payment in Muhammad's day, the precious metal is now used as collateral for short-term financial transactions.

With some creative finesse, a surprising number of Western financial products can be executed in accordance with Islamic law. "The key Sharia products could be offered in Germany," says Robert Elsen, an advisor in BaFin's international division. According to Elsen, there are "no insurmountable obstacles."

Inspired by the British Model

The German financial regulators plan to host a major international conference next week in Frankfurt am Main to address the issue in Germany. If only to attract more business to German markets, BaFin, inspired by the success of the British model, is now eager to approve more financial institutions that offer Islamic products.

Although the Islamic banks were originally established for wealthy Arabs from the Gulf region, British Muslims are now among their most devoted customers. There is also political support for the development of Islamic financial centers in Paris, Zurich and Geneva.

So far the boom has bypassed Germany, despite the results of new studies showing that no other country in Western Europe has such a large Muslim population. The official explanation is that the Turks living in Germany are not particularly interested. But German financial professionals also fear that they could lose more of their existing customers by introducing Sharia-compliant products than gain new customers.

That argument, says Zaid el-Mogadeddi of the Frankfurt-based Institute for Islamic Banking, is pretty arrogant. He cites surveys that conclude that 75 percent of all Muslims in Germany would like to avail of Islamic financial products. According to Mogadeddi, between 1995 and 2002 Turks lost many billions of euros with "Islamic" shares in companies that had been floated by swindlers, and they now have a strong interest in products from established banks.

Islam-compliant real estate financing arrangements are considered particularly promising. In these situations, banks and customers purchase real estate together, with the customer contributing a share corresponding to his equity. The bank pays rent for the rest, gradually acquiring the remaining shares. As a result, no interest accrues, but the property acquisition tax is charged twice.

Sharing the Risk

The same problem used to exist in the UK. Then Prime Minister Gordon Brown, who was finance minister at the time, insightfully abolished the double tax burden. The Central Council for Muslims is now calling for similar measures to be taken in Germany.

A second stumbling block can also be removed with a bit of good will. Under Sharia law, Muslims who deposit money with a bank must also participate in the bank's risk. But what happens to the deposit insurance, which is set by the government? It comes into effect when a bank becomes insolvent. In fact, consumer advocates across the board have welcomed a recent increase in the deposit insurance limit to €50,000.

In Great Britain, a Muslim customer can expressly waive the insurance of his deposits in an individual agreement. The fact that the British government, in the course of the financial crisis, has nationalized entire banks is probably something like an Act of God under Islamic law. At any rate, there are no signs so far that a significant number of Sharia supporters have legally challenged the government's bailout of their bank.

Translated from the German by Christopher Sultan

Provided by Spiegel Online—Read the latest from Europe's largest newsmagazine

www.businessweek.com

Sharia Banking Conquers Europe

2011-01-17T06:12:00.000+07:00

From the desk of Thomas Landen on Tue, 2009-03-24 11:53

All over Europe Islamic banks are establishing branches, Western banks are offering Sharia-compliant financial services, and European governments are trying to outcompete each other in welcoming them. Proponents of banking along the lines of Sharia (Islamic law) claim that the Islamic banking system is “more ethical” than the West’s capitalist system. This is not true. Unfortunately, however, in our age of crashing financial markets, many Westerners – not just the traditional anti-capitalist European left – seem very eager to buy that argument.

Early this month, even the Vatican newspaper Osservatore Romano voiced its approval of Sharia banking. “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the paper said in a downright stupid and “unethical” article published on March, 4.

The article, entitled “Islamic finance proposals and ideas for the West in crisis” [pdf] suggests that the basic rules of Islamic finance could relieve suffering markets and particularly international financial systems. It says that in the current atmosphere of crisis banks should take Muslims as an example and that the Islamic finance system may pave the way for the establishment of new rules in the Western world.

Islamic or Sharia banks differ from regular banks in two major ways. As commanded in the Koran, the charging of interest is prohibited in all monetary transactions. The other defining feature of Islamic banks is that they are supervised by a board of Islamic scholars and clerics whose job it is to ensure that the banks’ activities comply with Sharia law.

Its proponents argue that Islamic banking is “ethically superior” to the capitalist principles of the “materialistic” West because, as Giovanni Maria Vian, the editor of Osservatore Romano says, Sharia banks take “the human dimension of the economy” into account.

The two dirty secrets of Islamic banking, however, are that, like all banks, Sharia banks do charge interest – they just give it another name – and that the clerics supervising the banks have ties to extremist, even terrorist, groups which work towards the Islamization of Europe and world dominance.

Helena Christofi, an expert on Sharia banking, explains that Islamic banks extend a type of Islamic “credit,” called murabaha, that shifts risk to the borrower in a manner similar to interest.

“An Islamic bank granting murabaha credit to a customer for an automobile, for example, would purchase the automobile for the customer for $15,000 and the customer would owe the bank $20,000 in a year’s time. Similarly, under the ‘diminishing musharaka’ credit, the Islamic version of a mortgage, the bank and the customer purchase the property together. The customer must make monthly payments to the bank and pay a monthly rental fee, both based on the portion of the purchase price the bank still owns. Ironically, the interest this amounts to ranges between one and two percent higher than the interest on a conventional mortgage. Although the resale price of the vehicle and the rent paid on the house are akin to simple interest charges, the banks’ sharia boards legitimate the charges by renaming them ‘commissions’ or ‘profits.’”

The Sharia boards supervising the Islamic banks and Sharia-compliant financial services offered by regular European banks are composed of members of the European Council for Fatwa and Research. This Council is headed by Sheik Yousef Al-Qaradawi, a leader of the Muslim Brotherhood and instigator and financier of terrorism in Europe and the Middle East. Both Al-Qaradawi and the Council have expressed their hope that “Islam will return to Europe as a conqueror.”

With ever larger Muslim populations there is a growing internal demand for an “ethical alternative” to conventional banking for Muslims. A 2006 poll by Lloyds Trustee Savings Bank in Britain found that over 75% of British Muslims want Sharia-compliant banking products, while in 2005 Mufti Abdul Barkatullah, Sharia adviser to Lloyds TSB and an imam at a North London mosque reported that 20% of inquiries into Islamic products at Lloyds TSB came from non-Muslims who have bought the argument that conventional capitalist banking is somehow unethical.

Alun Williams, marketing director of the Islamic Bank of Britain, established in 2004 and one of the first Sharia banks in Europe, told The Guardian (April 2, 2005):

“Our biggest appeal outside the Muslim community will be to those who feel disenfranchised by, and bitter about, mainstream banks. […] Non-Muslims are fascinated by us, the more so because we intend offering […] an ethical dimension.”

That was four years ago. Meanwhile, Islamic banking has boomed all over Europe and interest from non-Muslims has grown in the wake of the financial crisis, which some, such as the Vatican paper, claim is due to the free-market model having “grown too much and badly in the past two decades.”

Sharia principles, however, not only prohibit the collection and payment of interest and investing in companies involved in gambling, alcohol, tobacco, pornography and the production of pork, but also forbid women from opening bank accounts without their husband’s approval. How “ethical” the latter is for the non-Muslims “fascinated” by Sharia banking is unclear. However, Western banks offering Sharia-compliant services to non-Muslims do not seem to insist on barring women. According to Christofi,

“The justification for replacing capitalism with the Islamic model is based on an intentional corruption of Sharia law, but the banks’ clerics don’t seem to mind undermining their theological philosophy, since the ethical image their misrepresentation has created for Islamic banking has managed to spread Islamic ideology to non-Muslims in Britain. According to Al-Qaradawi, Islam’s ideological infiltration into the West will be the vehicle through which it will establish an Islamic government over the entire globe.”

Although Al-Qaradawi and other members of the European Council for Fatwa and Research are connected to Islamist circles, the British government continues to promote the UK as a hub for Islamic banking. Western governments welcome Sharia-compliant banking because of the huge sums this attracts from Muslim immigrants, “ethically”-driven non-Muslims, and investors from Muslim countries.

In December 2008, the French Senate looked at ways to eliminate legal hurdles for Islamic financial services and products in France. French Finance Minister Christine Lagarde announced France’s intention to make Paris “the capital of Islamic finance” and said several Islamic banks would open branches in the French capital in 2009. French sources estimate this area of the financial market is worth from 500 to 600 billion dollars and could grow by an average 11 percent a year.

In July 2007, Wouter Bos, the Dutch Finance Minister (and leader of the Dutch Labour Party), said the Dutch government actively encourages Islamic banking, despite the risk that this acts as a Trojan horse in the Western banking system for groups linked to terrorists.

“In the first place because Islamic banking meets a demand from the Muslims living in the Netherlands. In the second place because we see an opportunity here for the Dutch financial sector. A third reason is that banning Islamic banking from the perspective of fighting terrorism will have a counter-productive effect. Denial of an actual need can lead to money-flows running via alternative channels out of the sight of the government.”

Switzerland, too, wants its share of Sharia banking. Years ago, Swiss banks already opened branches in the Middle East, offering worldwide Sharia-compliant financial products to wealthy Arabs.

In October 2006, the Swiss authorities granted a banking license to the first Switzerland-based bank that operates according to Sharia principles. Others have followed. “There are simply not enough financial products being created in the West for Muslim clients,” says John Sandwick, managing director of Swiss asset management firm Encore Management. “If no effort is made whatsoever, I am afraid the world will pass Switzerland by in the race to control the rich prize: which today is worth hundreds of billions, but in the future will be trillions of dollars of Islamic wealth.” Michael Fouad Chahine of Credit Suisse says “The development of Islamic banking has so far been limited to countries with a higher percentage of Muslims. But this is changing as more international regulators accept the importance of Sharia. It is now also accepted as socially responsible banking.”

How “socially responsible” and “ethical” is it to try to grab a share of the billions of dollars amassed by rich Arabs, while turning a blind eye to the fact that a substantial part of the money is used to promote terrorism and the establishment of an Islamic government over the entire globe?

In one of his sermons, Sheikh Al-Qaradhawi, one of the supervisors of the Sharia-compliant financial services offered in Britain, speaks of “the conquest of Rome.” In view of the recent article of the Osservatore Romano, Al-Qaradhawi’s words sound rather ominous:

“The city of Hirqil [Constantinople] was conquered by the young 23-year-old Ottoman Muhammad bin Morad, known in history as Muhammad the Conqueror, in 1453. The other city, Romiyya [Rome], remains, and we hope and believe [that it too will be conquered]. This means that Islam will return to Europe as a conqueror and victor, after being expelled from it twice […]. In one of my previous programs, I said that I think that this conquest [of Rome] would not be by the sword or armies, but by preaching and ideology. Europe will see that it suffers from materialistic culture, and will seek an alternative, it will seek a way out, it will seek a lifeboat. It will find no lifesaver but the message of Islam.”

Will the Vatican Bank be the next to go Sharia?

www.brusselsjournal.com

The End of Prosperity: Can Islamic Finance Help?

2010-09-15T21:02:00.000+07:00

The End of Prosperity: Can Islamic Finance Help?

By Mahomed Shoaib Omar (Specialist Corporate & Islamic Finance Attorney)
POSTED: 21 DHUL HIJJAH 1429, 20 DECEMBER 2008

The meltdown of the global financial system has raised profound questions of its fundamental structural reform. The downward spiral in the US and Western Europe is described by financial experts as deleveraging : the forced reduction of accumulated debt by households and financial institutions. As more assets get dumped into the market, prices are driven down further, which in turn necessitates more deleveraging. This vicious cycle has gained such momentum that even the massive bailout packages may not be sufficient to stop it. The bursting of the debt-fuelled property bubble in the US, together with the crippling losses suffered by banks, has set in motion a chain-reaction that, in a worst-case scenario, (according to Prof Niall Ferguson of Harvard) could lead to a 21st century version of the Great Depression (1).

The immediate cause of the current financial crisis appears to be the excessive and imprudent lending by banks (2). This in turn is attributed to the unbridled power of private bankers to create money out of nothing, and then to loan this bank-created money on interest (described as fractional reserve banking). In this present monetary framework, money is traded as a commodity, instead of performing its true function of operating as a medium of exchange. This system favours the rich against the industrious poor. Despite the fact that deposits are sourced from a broad cross- section of the society, their benefit goes mainly to the rich. James Robertson in “Transforming Economic Life”(3) states that:

“Today’s money and finance system is unfair, ecologically destructive and economically inefficient. The money – must – grow imperative … skews economic effort towards money out of money, and against providing real services and goods”.

A substantial proportion of this privately created bank-money is invested in speculative wagering instruments, such as derivatives based on futures, swaps, and options. Such betting instruments are not connected with transactions in the real economy. According to Prof John Gray of Oxford University, (4) derivatives have created a “virtual financial economy” which “has a terrible potential for disrupting the underlying real economy as seen in the collapse in 1995 of Barings, Britain’s oldest bank”. It is therefore no surprise that George Soros has described derivatives as “hydrogen bombs”. Warren Buffet described them as “financial weapons of mass destruction”. The Bank for International Settlements (BIS) currently estimates the notional amount of all outstanding derivatives (including credit default swaps) to be a staggering 600 trillion dollars, more than 10 times the size of the world economy. (BIS, September 2008, pg 20).

Although debt-financing cannot be ruled out, the solution lies in a shift to equity-based financing, posited on profit and loss sharing, which is the primary characteristic of Islamic Finance. In this equitable manner, economic effort would be directed at providing useful goods and services, instead of simply making money out of money. At the same time, the wide gap between the supply of money and the supply of real goods and services would be decisively narrowed. The distinguishing features and benefits of Islamic Banking were aptly summarized by the Islamic Development Bank, based in Jeddah, (established 1975) in the following words:

“Islamic banking is distinctive in two respects: concentrating on the real sector of the economy, it imparts tremendous stability to the economic system by achieving an identity between monetary flows and goods and services, and by operating on a system of profit and loss sharing in its evolved state, it insulates the society from the debt-mountain on the analogy that if the economies enter into recessionary or deflationary phases, the principles of profit and loss sharing protects the states and economic operators from the evils of accumulation of interest and minimizes defaults and bankruptcies.” (5)

1. See generally the article entitled “The End of Prosperity” by Prof. Ferguson of Harvard, published in Time, October 13, 2008, at pages 18 to 21.

2. Dr M Umer Chapra, economics advisor to the Islamic Development Bank of Jeddah in a paper entitled “The Global Financial Crisis”. (Can Islamic Finance Help? (5/11/2008) (shorter version).

3. James Robertson, Transforming Economic Life : A Millennial Challenge, Green Books, Devon, 1998.

4. John Gray, False Dawn : The Delusions of Capitalism, Grunte Books, London, 1998, p62.

5. See the written submission of the Islamic Development Bank to the Supreme Court of Pakistan in 1999 in connection with its landmark judgment declaring all prevailing forms of interest as unlawful according to Islamic Law. The judgment was delivered on the 23 December 1999.

www.albalagh.net

Sharia Banking

2010-07-10T18:38:00.000+07:00

Islamic Banking and It's Chronology

(تعود جذور الخدمات المصرفية الإسلامية التي تتمحور حول قبول الودائع ورفض الربا الى أيام ar- Rasul صلّى الله عليه وسلّم). The roots of Islamic banking services that focus on acceptance of deposits and refused to usury to the days of the Prophet (peace be upon him).

ففي ذلك الوقت، كان الناس يودعون الأموال لدى النبي محمد عليه الصلاة والسلام، أو لدى أبو بكر الصدّيق رضي الله عنه، أول خليفة للمسلمين. At that time, the people entrusted their money to the Prophet Muhammad peace be upon him, or Abu Bakr, may Allah be pleased with him, the first Caliph of the Muslims.

لكن الخدمات المصرفية الإسلامية بصورتها الحالية بدأت بالظهور في نهاية الستينات من القرن الماضي، عندما عملت عدة دول إسلامية على وضع الفكرة موضع التنفيذ. But Islamic banking in its current form began to appear at the end of the sixties of the last century, when several Muslim countries to put the idea into practice.

حيث بدأت بعض أشكال الخدمات المصرفية الإسلامية بالظهور في سبعينات القرن الماضي، لكنها واجهت عدداً من المشكلات من ناحية الإلتزام الكلي بأسس الشريعة الإسلامية. As some forms of Islamic banking services to appear in the seventies of last century, but has faced a number of problems in terms of commitment total bases of Islamic law.

وخلال الفترة ذاتها، بدأ العمل على تطوير أسس المحاسبة الإسلامية، التي تعتبر أداة حيوية ورئيسية لنجاح المصارف الإسلامية، وتم في العام 1973 عقد أول اجتماع لمؤتمر المنظمة الإسلامية في جدة وتم التناقش والتباحث في إيقاف العمل بمعدلات الفائدة المحدّدة وابتكار أنظمة مالية جديدة ترتكز على تعاليم الدين الحنيف. During the same period, work started on developing the foundations of Islamic accounting, which is a vital tool and key to the success of Islamic banks were in 1973 held its first meeting of the Conference of the Islamic Organization in Jeddah has been discussion and discuss the discontinuation of the interest rates specified and invented new financial based on the teachings of religion religion.

وفي العام 1975 تم تأسيس بنك دبي الإسلامي كأول مصرف إسلامي متكامل، ومنذ ذلك الوقت، ظهرت العديد من المؤسسات المالية الأخرى التي ترتكز على مبدأ مشاركة الربح والخسارة. In 1975 was established by Dubai Islamic Bank's first fully fledged Islamic bank, and since that time, there have been many other financial institutions that are based on the principle of participation of profit and loss.

ولقد ارتكز النموذج النظري الأول للخدمات المصرفية الإسلامية على مبدأ المضاربة متعددة الأطراف، عبر اعتماد مبدأ مشاركة الربح بدلاً من مبدأ الفائدة على الودائع والقروض. And has been based theoretical model for Islamic banking services on the principle of speculation multilateral, through the adoption of the principle of profit-sharing principle instead of interest rates on deposits and loans.

ويمكن للمصارف الإسلامية أن تكون وسيطاً مالياً، مثل المصارف التجارية التقليدية، لكن عبر إلغاء مبدأ الفائدة من جميع التعاملات والإعتماد على الشراكة الحقيقة ومبدأ مشاركة الأرباح. Can Islamic banks as financial intermediaries, such as conventional commercial banks, but by abolishing the principle of interest from all the transactions, relying on partnership and profit-sharing.

وخلال فترة الثمانينات من القرن الماضي، لاقت الخدمات والنشاطات المالية الإسلامية اهتماماً واسعاً شمل الأكاديميين والمتخصصين. During the eighties of the last century, they received services and activities of Islamic financial interest in broad-based academic and professionals.

وبدأت العديد من الجامعات والمعاهد بتدريس أسس الخدمات المصرفية الإسلامية وتشجيع إجراء الدراسات والبحوث منها من جامعات بارزة في أوروبا وأميركا. And started many universities and colleges teach the foundations of Islamic banking services and to encourage studies and research, including from prominent universities in Europe and America.

وتم عقد الكثير من المؤتمرات والندوات في مختلف المدن العالمية مثل كوالالمبور وإسلام أباد ودكا والمنامة وجدة والقاهرة والخرطوم وسوكوتو (نيجيريا) وتونس وجنيف ولندن ونيويورك. Have been held many conferences and symposia in various international cities such as Kuala Lumpur, Dhaka, Islamabad, Bahrain, Jeddah, Cairo, Khartoum, Sokoto (Nigeria), Tunis, Geneva, London and New York.

وتخصّصت العديد من مراكز الأبحاث بالأسس الإقتصادية الإسلامية مركزة على الشؤون المالية والمصرفية. And specialized research centers, many of the foundations of Islamic economics, focusing on finance and banking.

وقامت بعض هذه المراكز بنشر المجلات الأكاديمية المتخصّصة موفرة بذلك منصة لتبادل الأفكار ونشر المعلومات حول العالم. The deployment of some of these centers specialized academic journals, thereby providing a platform for exchange of ideas and dissemination of information around the world.

وقد تم لاحقاً تطوير الأسس الأوليّة وتنقيتها وصقلها حيث شهد مجال الودائع وضع أسس محدّدة للتعامل مع الحسابات وعمليات التمويل ورؤوس الأموال والبيانات المالية، وذلك ارتكازاً على مبادئ الإجارة والمرابحة. Was subsequently developed for the initial purification and refinement of the area where he witnessed the deposits develop specific grounds for dealing with accounts and finance, capital and financial statements, and that based on the principles of Ijara and Murabaha.

كما تم خلال هذه الفترة تطوير التقنيات الخاصة لإطلاق المنتجات المالية وفقاً للشريعة الإسلامية، وشمل هذا الأمر اختيار شركات ومؤسسات يمكن التعامل بأسهمها كونها تتوافق مع مبادئ الشريعة. It was also during this period, the development of techniques for launching financial products in accordance with Islamic law, and this included selecting companies whose shares can handle being consistent with the principles of Sharia.

واليوم، أصبحت المصارف الإسلامية، وعلى رأسها بنك دبي الإسلامي، تشكل منافسة قوية في جميع مجالات العمل المصرفي بعد أن أزالت الصورة التي لازمتها بأنها فقط للمتعاملين المسلمين وتهدف الى تحقيق بعض الأهداف الدينية. Today, Islamic banks, led by Dubai Islamic Bank, a strong competition in all areas of banking business after it removed the image of the Haunted that it is just for clients Muslims and aims to achieve some of the goals of religion.

حيث أصبحت الخدمات المصرفية الإسلامية تتمتع بمستوى عال من التقدير وتعتبر بديلاً أكثر عدلاً وانصافاً من المصارف التجارية التقليدية، وهي تجذب المزيد من المتعاملين غير المسلمين، يحفزهم على ذلك تميّز النظام المصرفي الإسلامي. Where services have become the Islamic banking has a high level of appreciation and considered as an alternative, more just and more equitable than the conventional commercial banks, which attract more customers non-Muslims, the incentive to discriminate the Islamic banking system.

source: www.alislami.ae

Syariah Economics: Feasibility in Countering Global Crisis

2010-03-03T14:29:00.000+07:00

Looking at to what has happened to the world’s economic condition, experts are seeking for solvency to counter the problem. The problem starts from the investment of sub prime mortgage in the United States done by one the Real Estate company in that country, i.e. Lehman Bro’s., who had made investments through bank loan. The company has unfortunately invest the money in a, somehow, wrong way. It is quite becoming a problem right now to the world, by that investment made by the company (the kind of investment will not be explained here as it has become a general notice of what kind of “wrong investment” was made. It will be explained in the other post).

A discourse appear to the surface, to counter the problem of Global Crisis by the implementation of Syariah Economics. Syariah Economics, in a nut shell, is a concept of economics, which somehow is sourced from the Muslims, based on Quran and Hadits, to be implemented to the human beings actual life with the base of share (it may be share of loss or share of profits. So, may it be called “win-win solution” economics system). The first problem of implementing this concept (well actually it still becomes a pro contra until today anyway) was the consideration of the source of the concept, which is Muslims. Non-Muslims sees that it may lead them to a discrimination, wherein that concept includes only something coming from the Quran. On the other side, Muslims were believed to be radical in some ways (like those terrorist acts done by them), so that Muslims were no longer trusted. Nevertheless, it has now come to the phase were this concept is seen from the objective side.

Sub Prime Mortgage

If wee see what happened to USA, the problem of sub prime mortgage, started from Fannie Mae and Freddie Mac, the biggest credit housing company, lend money to the bank. Bank was wrongly to not see the potential of the company to not be ably to return the money. In the actual system, loaner should supervise the asset of the company to see the feasibility of returning the money loaned. For this case, even both concepts explained that in every kinds of debts, creditor should supervise the asset of debtors. This, the first is to make sure that the money will be returned. Second, to keep the business running. In fact, if the money was not returned, business would be stocked in problem of liabilities. This happened to the bank in USA, wherein the bank merely lend the money, without a proper supervision. The company then did a so-called bad investment by establishing Mortgage Backed Security (MBS-fzm), in which is the derivation of the debt to another party. Several MBS’s was bought by Lehman Brothers company, where again it was derived with the name of Collateralized Debt Obligation (CBO-fzm). So on, it was derived until seven steps.

The problem of the derivation was such a big problem in the US. Govt and experts could not predict the real loss and the number of the money circled by that system. In such a condition, it gives direct impact to the world also, because the position of America as the central base for the economy in the whole world. As America falls down, the rest of the world falls down as well, moreover those who are dependent to America in terms of economy.

Derivation of Debt in Islamic Finance Concept

According to the holy Quran (Islams Holy Bible), in Surah Al-Baqarah; Verse 278-279; Chapter 2, that every kinds of debts may not be attributed by any kinds of interests, because it consist riba. Riba, in Islam is a sum of money in which the acceptance is based on immoral way, i.e. causing the other party’s loss or through fraud, etc. In Islamic Economics and Finance itself, as explained previously, is a system of share. The implementation of interests may cause other party’s loss, while in the other side, our profit. It is based on information disclose, all kinds of interests are known by all parties. It is an effective way of running an economy if all party has the equal share. Because, if we see what happened in the US, one party, Bank, was being ………

On the second part, in Islamic financial concepts, derivation of debt does not have any excuses. One derivation from the Creditor to the Debtors is called as Mudharabah. Mudharabah is the Islamic investment system, carried by Mudharib as the executor and Shahibul Maal as the investor who has the money.

Syariah Banking to be Implemented: Advantages

More about other concepts of Islamic Banking maybe seen in previous posts, i.e. Analisis Kelayakan Pegadaian Syariah (in Indonesian), or Mudharabah Scheme for Syariah Banking.

The features available in Syariah, win-win, may be looked vague. The debate raises that either investments, commerce, or other divisions of economy is won by the party who has higher ability in their respective fields or not….

Note: This post is not done. Author will finish the post after three days. It need research and analysis. This is published to stay along with readers which has interest in this field of research.

www.kampusislam.com

THE CONCEPT OF MUSYARAKAH

2010-01-28T17:02:00.001+07:00

Another solution of partnership contract than Mudharabah

Session 9

The basic rules and Features of Musharakah
Musharakah means relationship established under a contract by the mutual consent of the parties for sharing of profits and losses,arising from a joint enterprise or venture.
Investments come from all partners/shareholders hereinafter referred to as partners.
Profits shall be distributed in the proportion mutually agreed in the contract.

The basic rules and Features of Musharakah
The existence of Muta’aqideen (Partners):
Capability of Partners: Must be sane & mature and be able of entering into a contract. The contract must take place with free consent of the parties without any fraud or misrepresentation.
If one or more partners choose to become non-working or silent partners. The ratio of their profit cannot exceed the ratio which their capital investment bears so the total capital investment in Musharakah.

The basic rules and Features of Musharakah
It is not allowed to fix a lump sum amount for any of the partners,or any rate of profit tied up with his capital. A management fee however, can be paid to the partner managing the Musharakah provided the agreement for the payment of such fee is independent of the Musharakah agreement.
Losses are shared by all partners in proportion to their capital.

The basic rules and Features of Musharakah
All assets of Musharakah are jointly owned in proportion to the capital of each partner.
All partners must contribute their capital in terms of money or species at an agreed valuation.
Share capital in a Musharakah can be contributed either in cash or in the form of commodities. In the latter case, the market value of the commodities shall determine the share of the partner in the capital.

The basic rules and Features of Musharakah
The presence of the commodity: This means the price and commodity itself.
The rate of profit sharing should be determined: The share of each partner in the profit earned should be identified at the time of the contract. If however, the ratio is not determined before hand the contract becomes void (Fasid).
Therefore identifying the profit share is necessary.

Distribution of Profit
The proportion of profit to be distributed between the partners must be agreed upon at the time of effecting the contract. If no such proportion has been determined. The contract is not valid in Shari’ah.

The ratio of profit for each partner must be determined in proportion to the actual profit accrued to the business, and not in proportion to the capital invested by him. It is not allowed to fix a lump sum amount for any one of the partners, or any rate of profit tied up with his investment.

ILLUSTRATION
If A and B enter into a partnership and it is agreed between them that A shall be given Rs. 10,000/- per month as his share in the profit, and the rest will go to B, the partnership is invalid. Similarly, if it is agreed between them that A will get 15% of his investment, the contract is not valid. The correct basis for distribution would be an agreed percentages of the actual profit accrued to the business.

OBSERVATIONS
If a lump sum amount or a certain percentage of the investment has been agreed for any one of the partners, it must be expressly mentioned in the agreement that it will be subject to the final settlement at the end of the term, meaning thereby that any amount so drawn by any partner shall be treated as on account payment and will be adjusted to the actual profit he may deserve at the end of the term.
But if no profit is actually earned or is less than anticipated, the amount drawn by the partner shall have to be returned.

OBSERVATIONS
However, if a partner has put an express condition in the agreement that he will never work for the Musharakah and will remain a sleeping partner throughout the term of Musharakha, then his share of profit cannot be more than the ratio of his investment.
Sharing of loss
In the case of a loss, all the Muslim jurists are unanimous on the point that each partner shall suffer the loss exactly according to the ratio of investment. Therefore, if a partner have invested 40% of the capital, he must suffer 40% of the loss, not more, not less, and any condition to the contrary shall render the contract invalid. There is a complete consensus of jurists on this principle.

Profit is based on the agreement of the parties, but loss is always subject to the ratio of investment.

Termination of Musharakah
Musharakah is deemed to be terminated in any one of the following events:
(1) Every partner has a right to terminate the Musharakah at any time after giving his partner a notice to this effect, whereby the Musharakah will come to an end.
In this case, if the assets of the musharakah are in cash form, all of them will be distributed pro rata between the partners. But if the assets are not liquidated, the partners may agree either on the liquidation of the assets, or on their distribution or partition between the partners as they are.

Termination of Musharakah
IN CASE OF A DISPUTE
If there is a dispute between the partners in this matter i.e. one partner seeks liquidation while the other wants partition or distribution of the non-liquid assets themselves,the latter shall be preferred, because after the termination of musharakah, all the assets are in the joint ownership of the partners, and a co-owner has a right to seek partition or separation, and no one can compel him on liquidation. However, if the assets are such that they cannot be separated or partitioned, such as machinery, then they shall be sold and the sale-proceeds shall be distributed.

Termination of Musharakah
(2)If any one of the partners dies during the musharakah, the contract of musharakah with him stands terminated. His heirs in this case, will have the option either to draw the share of the deceased from the business, or to continue with the contract of musharakah.
(3)If any one of the partners becomes insane or otherwise becomes incapable of effecting commercial transactions, the musharakah stands terminated.

Termination of Musharakah without closing the business
If one of the partners wants termination of the musharakah, while the other partner or partners like to continue with the business, this purpose can be achieved by mutual agreement. The partners who want to run the business may purchase the share of the partner who wants to terminate his partnership, because the termination of musharakah with one partner does not imply its termination between the other partners.

Termination of Musharakah without closing the business
However, in this case, the price of the share of the leaving partner must be determined by mutual consent, and if there is a dispute about the valuation of the share and the partners do not arrive at an agreed price, the leaving partner may compel other partners on the liquidation or on the distribution of the assets themselves.

by: lecturer of FEUI

The Concept of Mudarabah

2010-01-28T16:59:00.000+07:00

The Concept of Mudarabah

Session 9

Definition
This is a kind of partnership where one partner gives money to another for investing in a commercial enterprise.
The investment comes from the first partner who is called “Rabb-ul-Maal” (Investor) while the management and work is an exclusive responsibility of the other, who is called “Mudarib” (Working Partner) and the profits generated are shared in a predetermined ratio.

Types of Mudarabah

Al Mudarabah Al Muqayyadah
(Restricted Mudarabah)
Al Mudarabah Al Mutlaqah
(Unrestricted Mudarabah)

Al Mudarabah Al Muqayyadah (Restricted Mudarabah)

Rabb-ul-Maal may specify a particular business or a particular place for the mudarib, in which case he shall invest the money in that particular business or place. This is called Al Mudarabah Al Muqayyadah (restricted Mudarabah).

Al Mudarabah Al Mutlaqah (Unrestricted Mudarabah)
Rabb-ul-maal gives full freedom to Mudarib to undertake whatever business he deems fit, this is called Al Mudarabah Al Mutlaqah (unrestricted Mudarabah).

However, he is not authorized to:
a) keep another Mudarib or a partner
b) mix his own investment in that particular Mudarabah without the consent of Rabb-ul Maal.

Authority of Rabb-ul-Maal

Rabb-ul-Maal has authority to:
a) Oversee the Mudarib’s activities and
b) Work with Mudarib if the Mudarib consents.

Different Capacities of the Mudarib

Ameen (Trustee): The money given by Rabb-ul-maal (investor) and the assets required therewith are held by him as a trust.
Wakeel (Agent) : In purchasing goods for trade, he is an agent of Rabb-ul-maal.
Shareek (Partner): In case the enterprise earns a profit, he is a partner of Rabb-ul-maal who shares the profit in agreed ratio.

Capital of Mudarabah
The capital in Mudarabah may be either cash or in kind. If the capital is in kind, its valuation is necessary, without which Mudarabah becomes void.

Distribution of Profit & Loss

Distribution of Profit & Loss
Apart from the agreed proportion of the profit, the Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the Mudarabah.

The Mudarib & Rabb-ul-Maal cannot allocate a lump sum amount of profit for any party nor can they determine the share of any party at a specific rate tied up with the capital.

Termination of Mudarabah
Mudarabah can be terminated any time by either of the two parties by giving notice.
If Mudarabah was for a particular term, it will terminate at the end of the term.

Termination of Mudarabah means that the Mudarib cannot purchase new goods for the Mudarabah. However, he may sell the existing goods that were purchased before termination.

Distribution at Termination

If all assets of the Mudarabah are in cash form at the time of termination, and some profit has been earned on the principal amount, it shall be distributed between the parties according to the agreed ratio.
If the assets of Mudarabah are not in cash form, they will be sold and liquidated so that the actual profit may be determined.

Collective Mudarabah
“Collective Mudarabah” means a joint Pool created by many investors and handled over to a single Mudarib who is normally a juristic person.

Collective Mudarabah creates two different relationships:
Relationship between investors inter se, which is Shirkah or Partnership.

Relationship of all the investors with mudarib, which is mudarabah

When Mudarib is a Juristic Person
Who is the Mudarib?
Shareholders?
Management or Directors?
Juristic Person
Expenses of Mudarabah
Direct expenses are borne by the Mudarabah pool.
Indirect expenses are borne by the mudarib.

Running Mudarabah
Investors come in and go out at different dates
Profits are calculated on daily product basis.

Redemption before maturity
If the assets of mudarabah are in illiquid form, an investor may redeem his share by selling it to the pool..
If the assets are in liquid form, a provisional amount may be given to him subject to final settlement

by: lecturer of FEUI

If you find something wrong, unclear or the interesting one, please comment

BELOW

Medieval Islamic Economy

2010-01-15T20:03:00.000+07:00

As under Persian or Sassanian rule, the economy of West Asia [View map] during the Islamic period depended very heavily on trade. In the north of the Islamic Empire was the Silk Road, running across China, Tajikistan [View map] , Uzbekistan [View map] , Iran [View map] , Iran, and Syria [View map] to Lebanon [View map] , the Byzantine Empire, and across the Mediterranean [View map] to Italy. There wasn't really a road. It was just the track people went along. It led through deserts and over very high mountain passes, so it was a difficult and dangerous route.

As the name implies, silk was a very important part of what was traded along the Silk Road. But other things also traveled – from China [View map] , cotton cloth, paper, furs, lacquerwork and jade. From Africa, the Mediterranean and West Asia, traders carried gold, silver, ivory, glass, and jewels.

The Silk Road first got started during the Chinese Han Dynasty (the Parthian and Roman period in West Asia, about the time of Jesus). People all along the route soon realized they could make more money by producing the goods themselves, than by buying them. So by the 400's AD the Chinese were blowing their own glass. In the 500's AD, West Asians began to produce their own cotton (and sell it to the Romans and around the Mediterranean). By about 650 AD, Romans had learned how to produce silk. And in the late 700's AD, people in the Abbasid Empire began to produce their own paper. But trade continued all along the Silk Road anyway. The Mongol conquests of the 1200’s AD helped a lot by making one big empire out of China, India [View map] , West Asia, and all the land in between.

Traders in the Islamic Empire also controlled another very rich trade route from India to Egypt [View map] by way of the Arabian Peninsula [View map] . Most of these traders went by sea, taking advantage of the monsoon wind patterns to sail their ships. From the Mediterranean and Africa, these traders brought gold, glass, and ivory. They exchanged these things in India for cinnamon, frankincense, black pepper, and other spices, and for oranges, though by 300 AD people were beginning to grow oranges for themselves even in Italy.

But even though Islamic people made a lot of money from trade, most people in the Islamic Empire were still farmers or herders. You couldn't farm efficiently enough to feed very many people who weren't farming, so most people had to farm. The Islamic Empire was great for farmers. Some of that money from conquering people and from trade went into building new irrigation systems and new canals that helped farmers get more out of their land. And the money from trade also helped farmers get through a bad year, or even a lot of bad years in a row.

In the late 1400's AD, Portuguese explorers figured out how to sail around Africa and get to India. Even though it was a long trip, it was profitable because they didn't have to pay the middleman traders in the Islamic kingdoms. Soon most of the trade between China and India and Europe [View map] went by sea, around Africa [View map] , instead of over the Silk Road through West Asia. This was good for Europe, but very bad for West Asia.

www.historyforkids.org

Some Friendly Economics For The Nuclear Energy Booster Club by: Velimir Lackovic

2010-01-12T13:07:00.000+07:00

Some Friendly Economics For The Nuclear Energy Booster Club
by: Velimir Lackovic

i

I would like to begin this brief exposition with a bizarre fairy tale that was confected by two well known energy experts, Amory Lovins and Joseph Romm, and published in Foreign Affairs (1992-93), which is the prestigious journal of the (United States) Council on Foreign Relations. It goes like this:

"For example, the Swedish State Power Board found that doubling electric efficiency, switching generators to natural gas and biomass fuels and relying upon the cleanest power plants would support a 54 per cent increase in real GNP from l987 to 2010 - while phasing out all nuclear power. Additionally, the heat and power sector's carbon dioxide output would fall by one-third, and the costs of electrical services by nearly $1 billion per year. Sweden is already among the world's most energy-efficient countries, even though it is cold, cloudy and heavily industrialized. Other countries should be able to do better.

I called that statement completely wrong the first time I saw it, while in my new energy economics textbook (2007) I suggest that it and similar contributions are misleading bunkum. For example, there are a number of questions that must be answered in detail before biomass can unambiguously be classified a large- scale fuel of choice for the near or distant future. As for renewables such as solar and wind, and probably hydrogen, they will undoubtedly increase in quality and quantity, but it will not be at the expense of nuclear.

As David Schlageter pointed out in the important forum EnergyPulse (2008), "Renewable energy sources only supplement the electric grid with intermittent power that rarely matches the daily electrical demand." He continues by saying that "In order for an electric system to remain stable, it needs large generators running 24/7 to create voltage stability. Wind and solar generation are not on-line when needed to meet energy demand, and therefore to help decrease system losses." In the promised land of wind energy, Denmark, voltage stability is attained by drawing on the energy resources of Sweden and Germany (and perhaps Norway). The Danes pay for the imported electricity, but not for the stability.

Every member of the nuclear booster club, to include myself, should make it his or her business to memorize the quotations in the previous paragraph, because they provide an excellent contradiction to the tiresome delusion that it is economically feasible to largely supplant nuclear energy with 'renewables'. They also suggest why - with electric demand on the verge of increasing faster than supply in many parts of the world - more nuclear capacity is now scheduled for introduction than at any time during the past 3 decades.

Deeper Meanings

For those readers who have been exposed to secondary school algebra, the above reference to things like voltage stability is superfluous. Sweden and Norway produce, on the average, the lowest cost electricity in the world. Norway, however, generates almost all its electricity with hydro, which is generally recognized as the lowest-cost power source, while Swedish electricity is produced in almost equal amounts by hydro and nuclear. As I show in a forthcoming paper (2008), with this as a background, elementary algebra indicates that the unit cost of Swedish nuclear power is equal to the unit cost of Norwegian (and Swedish) hydro. This is not a welcome conclusion for many pseudo-scholars.

But what about nuclear waste, which is repeatedly portrayed as a malicious and unavoidable cost of nuclear based electricity because, ostensibly, it will have to be locked up for hundreds of thousands of years? An argument that is sometimes presented however is that the costbenefit of no carbon-dioxide (CO2) emissions from nuclear facilities. For instance, the International Energy Agency has calculated that for France - the country with the largest production of nuclear energy (as a per cent of the total output of electric power) - the average person is responsible for 6.3 tonnes of carbon dioxide, which e.g. is one-third of the U.S. average. of disposing of nuclear waste is balanced by the

The cost-benefit trade-off mentioned just above is probably worth remembering, however I prefer for students (and anybody else) to inform me that France intends to treat its 'waste' as a potential fuel, and to explain why. (A similar strategy has been proposed in the UK by their energy minister.) For that reason a law has been passed in France stipulating that toxic waste is to be stored in such a way that it can be comparatively easily accessed and recycled if, at some point in the future, "new" technologies appear which will allow it to be used as a satisfactory input in the nuclear fuel cycle.

The latter provision is, as the reader might guess, partially intended to appease or possibly bewilder nuclear sceptics, because technology is already available for recycling this 'déchet', and in the event that the price of newly mined and processed uranium escalates, it would almost certainly be utilized without further debate. Of course, as noted by many comments to EnergyPulse, few persons who work with or near uranium believe that there will be a shortage of this commodity in the foreseeable future, even if the forthcoming nuclear revival eventually assumed the dimensions of a Manhattan Project.

There are occasionally long discussions of the cost of nuclear relative to the cost of renewables in the technical literature. An item that frequently appears is the capacity factors of windmills and solar generators. In simple terms, the capacity factor gives the amount of energy (in e.g. kWh) that is actually obtained, as compared to that made available if maximum output (= 'nameplate' capacity x time) were realized. It appears that in the U.S. wind generation works at maximum efficiency about one-third of the time, but this is confusing. With capacity factors between 0.25 and 0.35, the energy actually obtained as a percentage of maximum energy is less than one-half for many long periods.

It might also be useful to cite some figures for the cost of nuclear relative to gas and coal. The Economist (July 9, 2005) presents estimates from several sources for average electricity costs. For German utilities the Union Bank of Switzerland (UBS) gives 1.5 cents/kwh for nuclear, 3.1-3.8 cents for gas, and 3.8-4.4 cents for coal. Similarly, they give 1.7 cents/kwh for nuclear in the US, 2 cents for coal, and 5.7 cents for gas. The International Energy Agency (IEA), employing a discount rate of 5%, argues that nuclear is $21-31/Mwh, while gas ranges from $37-60/Mwh. Other sources (e.g. Massachusetts Institute of Technology (MIT) and Britain's Royal Institute of International Affairs) disagree, however I specifically make a practice of ignoring everything originating with the energy economists of MIT and the RIIA, especially the latter, and advise everyone reading this to do the same.

So much for cost, but what about price of nuclear electricity - especially to private enterprises and households? In the case of Sweden, the low cost of nuclear and hydro power, and fairly smart regulation, made it possible to provide electricity to the industrial sector at perhaps the lowest price in the world. This being the case, nothing is more offbeat than hearing about the "subsidies" paid the nuclear sector. Cheap electricity meant the establishment of new enterprises, and just as important the expansion of existing firms. The tax income generated by these activities, and used for things like health care and education, more than compensated taxpayers (in the aggregate) for any 'subsidies' that might have been dispensed by the government.

An antithetical situation may prevail for wind and biofuels. In Germany the energy law guarantees operators of windmills and producers of solar energy an above-market price for power for as long as 20 years. This is an explicit subsidy, although it may be both economically and politically optimal due to the reduction in greenhouse gas emissions. More important, inexpensive electricity for plug-in hybrids is made available.

A more complex subsidy involves the exploitation of biofuels. Research newly carried in the United States, and reported in the influential journal Science, claims that almost all biofuels used today result in more greenhouse gas emissions than conventional fuels if the pollution directly and indirectly caused by producing these 'green' fuels is taken into consideration. In addition, there would be a substantial loss of 'consumer surplus' throughout the world due to a likely increase in food costs. Some of the intricacies of this important issue have been examined on an elementary level by Clay Ogg (2008).

In these circumstances, it might be argued that France's total acceptance of nuclear power makes a great deal of sense. As noted in the Financial Times (October 6, 2006), nuclear power has provided "an abundance of cheaply-produced electricity, made the country a leader in nuclear technology worldwide and reduced its vulnerability to the fluctuations of the turbulent oil and gas markets." France can also supply some electricity to neighbouring countries, which helps counterbalance the short sighted and unthinking foolishness being promoted by the European Union's directors and its Energy Directorate.

Strange Behaviour

I'm a social scientist, Michael. That means I can't explain electricity, or anything like that, but if you want to know about people I'm your man.
--J.B. Handelsman in Cartoonbank.com (The New Yorker Collection, 1986)

My situation is somewhat different, Michael. I knew enough about electricity to work on power lines for the U.S. Army during a brief period, and later to design terminal installations for the U.S. Navy, but although I have taught social science (i.e. economics) in 14 universities, I am still unable to understand why so many people are willing to risk the economic futures of themselves and their families because of the drivel being put into circulation by persons with a psychotic hatred of technological excellence, although they are quite capable of enjoying its material advantages. Something to be aware of here is that the rich will never be without reliable and plentiful energy, regardless of its availability or lack thereof to the less fortunate. One of the reasons that they will never be without it is that they are fully aware of its importance.

Perhaps the clearest argument for nuclear power has been presented by Rhodes and Beller (2000), which is similar to the basic contention of this article. They say that "Because diversity and redundancy are important for safety and security, renewable energy sources ought to retain a place in the energy economy of the century to come." The meaning here is clear, especially if you add that we probably will never possess what is known in intermediate economic theory as the optimal amount of nuclear power. But they do state that "nuclear power should be central….Nuclear power is environmentally safe, practical and affordable. It is not the problem - it is one of the solutions."

Velimir Lackovic
http://www.energetika.co.yu,

Implication of sharia toward social and economy

2010-01-08T10:53:00.000+07:00

The Social and Economic Implications of Sharia Law

by

Sam A. Aluko

Introduction

1. The Governor of Zamfara State, Alhaji Ahmed Sani Yerima, proclaimed and launched Sharia Law on Wednesday, October 27, 1999, at a mammoth rally in Gusau, the capital of Zamfara State. It must be remembered that Zamfara State is one of the newest states [CREATED OUT OF SOKOTO STATE] and poorest of the six states created at the same time as Ekiti State was created out of Ondo State in October, 1996.

2. His Excellency, Sani Yerima, declared at the said launching of Sharia that it marked a landmark, not only in Zamfara State but also throughout Nigeria which has a 'majority' of Muslim population. He berated the inactivity and docility of the Nigerian Muslims in the past and that the Muslim Ummah in Nigeria had for long been dormant, inactive, and remained in a state of slumber and stupor which had given the impression that the Muslims were a silent majority. The Muslims, Yerima continued, have for long yearned for the freedom to exercise their full rights since the period that they were invaded and colonised by the British. He said that the Muslims only partially achieved victory with Nigeria's attainment of independence in 1960 but that their neglect of planning robbed them of the fruits and practices of the Islamic Order. He declared that he has enthroned Sharia as the acme of the struggles started by the fore-sighted Muslim leaders, particularly the late Sir Ahmadu Bello, the Sardauna of Sokoto, who once proclaimed that the Muslims would not relent until the Koran was dipped in the Lagoon and in the Atlantic Coast in Lagos. It could thus be assumed that the Governor of Zamfara State was merely a forerunner to the real Sharia fundamentalists and that he floated the idea with a view to testing the pulse of the Nigerians of other faiths.

3. The Christian community across the country and the non-muslim, non-indigenes resident in Zamfara State have sharply denounced the action of not only Sani Yerima but also of the general and whole-hearted support which the action has received from leading Muslims, including the ambassadors of almost all the muslim countries in Nigeria. This is the more so, because to the majority of Nigerians, our muslim brothers had been in control of the political and administrative leadership of Nigeria, and by extension its economic policy direction, for a disproportionate period since Nigeria attained independence in 1960. If inspite of that leadership and control, Yerima now regrets the stupor and the inanity of the Muslims to practise their religion in Nigeria.

We all have cause to worry. If care is not taken and the likes of Yerima are not checkmated, the fragile but holding peace, harmony and religious freedom that had existed in Nigeria will be in great jeopardy. The "Muslim majority" may be out for a grand design either to Islamise Nigeria or throw it into a religios cataclysm that had wreaked havoc and disintegration in some multi-religious countries in some other parts of the world. We must realise that the Sharia is not just a legal system but also a way of life by which Muslim fundamentalists seek to regulate and control their entire religious, social, political, economic, and cultural actions, interactions and reactions even with non-Muslims.

4. Governor Yerima has justified his actions with sections under our 1999 Constitution (Sections 6 and 38). He has been supported by eminent Muslim lawyers even among us in South-Western Nigeria and from other states outside Zamfara. Since the Sharia issue has been with us since 1978 and it appears to be growing wings, the time is now for Nigerians to address the issue not only of what other faithfuls consider as threats to their own religion but also by trying to understand the main tennets of Sharia and its cooperant legislations. I intend to concentrate only on the Sharia as it impacts on the economic lives of not only the Muslims but also on those who interact or live with them.

The Economics of Sharia

5. Let me begin by quoting two incidents from outside Nigeria. Pakistan was created as an Islamic State out of India in 1947. In 1982, during the Military Regime of General (President) Muhammad Zia-Ul-Haq, the Pakistani entire foreign and domestic trade and its financial system and apparatus were threatend to their foundation by a Sharia court ruling. The Islamic High court judges in Pakistan ruled that a set of laws that sanctioned the charging of interest on loans was invalid because it contradicted the Koranic injunction against usury. It required the secular Supreme Court of Pakistan to upturn the judgement of the Sharia judges. In Afghanistan, the Sharia fundamentalists now forbid women from wearing white socks or high heel shoes, because they are considered sexual lucre. Music remains banned, including casettes in cars. Most forms of entertainment, like movies of any sort, are illegal, and many women, in the name of Sharia, have been prevented from not only pursuing their legitimate occupations and professions but some of them also had been driven to commit suicide, thrown into despair and depression, fled the country or driven back into a mediaeval way of life.

6. The Afghanistan men may not walk the streets unless and until they grow beard of a particular length as the Sharia says that the bear is "wealth from God" and must be worn. Men will not be awarded contracts or be employed unless they wear beard. Since almost all women are "unlucky" not to be endowed with growing beard, they are automatically and permanently ruled out of the economic benefits from the Government contracts of Afghanistan.

7. So, what Governor Sani Yerima has started and against which many Nigerians are protesting is the tip of the iceberg. What are to follow if he succeeds and if he spreads his ideology to other states of our country can only be imagined. The Sharia (Islamic) Economic Ethics and Economics are at times draconic and pervading.

Islamic Economic Ethics and Economics

8. For upwards of ten years, 1968-80, I had the opportunity to serve as one of twelve consultants to the World Council of Churches in Geneva in an organisation which we named "Advisory Committee on Technical Services (ACTS) which has nobee been renamed "Action by Churches Together (ACT)". The ACTS/ACT tried and continues to try to aid Christian churches worldwide. It was as a member of that organisation that some of us suggested that the time was ripe to intensify dialogues with our brothers and sisters of "other living faiths." One of the most prominent of the faiths is the Muslim faith. We had very close contacts with our Muslim brothers and, today, I have very important Muslim friends across the globe. I learn almost as much of the Koran as I learn and continue to learn about our Christian Bible. So, few Christians are as sympathetic to the Muslim religion as I am. Nevertheless, I never cease to let our Muslim brothers know that in the modern day and age religious fanaticism and the debasement of non-Muslim religious practitioners, including Muslim women, do more damage to the Muslim faith and the the Muslims than ever before.

The Two-Fold Nature of Islamic Economics

9. A grasp of the dualism inherent in Islam is essential for the understanding of the ideologcial basis of Islamic Economics and Islamic Economic Order.

(a) On the one hand, Islam is a monolithic religion which, like Christianity, is a set of doctrines which are supposed to be binding on the believer.

(b) on the other hand, Islam is also considered to be an official state ideology with the Islamic religion establishing the guidelines and the sets of values and thereby providing the legal basis for the entire political, social and economic spheres of the Islamic state. The Sharia regards Islam as a social order, a philosophy of life, a system of economic priniciples, a ruling order to which the Muslim believer must conform.

10. Muslims cannot, therefore, operate full Islamic law of Sharia, except in an Islamic State. So, Yerima is less than sincere, when, by launching Sharia, he denies declaring Zamfara an Islamic state. If and when the full Sharia Law becomes operational in Zamfara State in January 2000, we must accept that Zamfara has, ipso facto, become an Islamic state within the Federal Republic of Nigeria. Zamfara State would then be similar to when Christians operated a Theocratic State by which its internal contradictions had to cease when the church and state became separate and the "Protestant Ethics" ceased to be the dominant economic ethics of the modern state. The full Sharia advocates are still living in that 14-16th Century period of the Theocratic State. Just as we Christians lost the battle for theocratism to secularism, I have no doubt that the Muslims will more than lose the attempt to re-enact their own form of the Sharia State.

11. In the wake of the re-Islamisation that increased, especially since the 1970s of Ayatollah Khomeini in Iran, Islam became more associated with the idea that the capitalist and the socialist economic systems are alien to the essence of Islam and that a "third force" needs to be fashioned out, based on the Islamic concept of Justice, Fair Distrubtion of economic resources, property rights, inheritance and the right of "Will" on the death of the muslim. So Islamic economic salvation is being sought through obedience to the old traditional Islamic principles and orthodoxy. Economists have asked, and quite rightly, whether the relative economic backwardness of most of the Islamic countries today is not attributable to their desired to return to traditional, outmoded and impracticable Islamic principles, given the increasing inter-dependence in the world economy and the increasing emphasis on fundamental human rights, particularly of the women vis-a-vis their men folks.

Basic Principles of Islamic Economics

12. A major factor hindering the spirit of modern economic development in the countries where Islamic rule is sometimes seen in the Islamic belief in the doctrine of pre-destination, and even in magic which crops up in some Islamic suras of the Koran [Sura 2, line 102; Sura 7, line 117; Sura 10, lines 76-81; Sura 20, lines 37-49], though the highest authority in Islam subordinates magic to the will of God.

13. The Islamic economic ethics rejects undue concern for materialistic accumulation or excessive profit and is more concerned, or enjoined to be more concerned, with the 'lawful' acquisition of goods according to the principles of reward for work done and the social obligations to his community in the use of his wealth for the community well-being. Whether or not the injunction is obeyed is obvious to us in Nigeria today as well as in the recent past.

Contents of Orthodox Islamic Economic Thought and Practice

(i) Direct Taxes

15. Islam distinguishes between the direct taxation of Muslims and non-Muslims, tax discrimination against non-Muslims being essentially intended to encourage their conversion to Islam. Sometimes, direct levies and taxes, known as Jisyah, which are either a lump sum or a poll tax, are levied on Non-muslims but the amount of the taxes and levies are considerably reduced if and when the tax payers convert to Islam. There are four types of such direct taxes:

1. Zakat - proportiona tax of about 1/40th of 2 1/2 of income or wealth.

2. Land and yield taxes from property, 1/20th - 1/10th of value (not specifically mentioned in the Koran.)

3. Taxation of Mining and Minerals.

4. Mugataa system - community tax payments.

(ii) Indirect Taxes

16. The Indirect Taxes consist of Customs Duties, Consumption taxes and other taxes. Although not all the indirect taxes are provided for in the Koran, import duties can be and are usually levied discriminatingly between Muslims and non-Muslims or between resident Muslim indigenes and Muslim foreigners. For instance, in Iran, during the era of the Sharia fundamentalists, the following import duties were imposed on the value of imports:

(a) 10% for foreign non-muslims;

(b) 5% for indigene non-muslims

(c) 2 1/2 % for Indigene muslims. When the rates rose to 20-30%, pro-rata import duty rates were levied on foreign non-muslim importers, non-muslim indigenes and muslim indigenes. Currently, in Afghanistan, such discriminating taxes are used as instruments of conversion to Islam.

Credit, Interest Rate and the Bank Clearing System

17. Trade, money lending and credit financing in return for interest were common in Muhammad times. The prohibition of interest or Riba (from which the Yoruba word 'Riba', bribery) is thus one of the fiercest controversies in Islam. A major reason for this is the definition of interest, established at the time of Prophet Mohammed, and the interpretation to which it was later subjected to by different Islamic scholars. It is tantamount to the discriminatory usury in our Bible (Deuteronomy 23, verse 19, which says that "unto a stranger thou may lend upon usury, but unto thy brother thou shall not lend upon usury.")

18. Riba, in the sense of interest on credit extended for consumption purposes, like our Biblical interest ban on usury, was strictly forbidden for Muslims. However, if interest, in money or kind, is understood to mean profit rate, then, all recognised schools and all modern educated Islamic scholars, with very few exceptions, consider intereste to be compatible with Islamic Laws of Sharia. A loan constitutes an opportunity cost to the lender who should be compensated for the loss in use of his money. The level of interest (profit rate) is determined by the circumstances of the market and/or the rate of returns on investment. The Muslims do not term it "interest" but "profit-sharing." In commerce too, such profit-sharing is considered legal by Islam. (See Psalm 15, verse 5; Proverbs 28, verse 8 whic condemn usury. However, see Mathew 25, verse 27, Luke 19, verse 23, which seem to approve usury.) However, if the money is sleeping, as in savings or deposit account, no interest should be paid. Thus, fixed interest-bearing securities, say on treasury bills, bonds, commercial papers or deposits overseas, are not expected to yield interest under Sharia. Speculative money investments in the modern stocks and shares are regarded as gambling and are also condemned by the Sharia.

19. The possibility of creating interest-free banks crops up frequently in recent Islamic economic literature. It forms part of the re-Islamisation measures being propagated or already being adopted by some Islamic countries particularly Pakistan since 1977, inspite of its difficulty to apply and integrate into the normal banking system.

Property Law and Law of Succession

20. Property law and re-distribution are two controversial topics in Islamic economics. Private property is basically recognised by Islam in the Koran, the Sunna and the Sharia Law. However, it is subject to certain restrictions regarding the origin of the acquisition of the property and the use of the resultant income. Just distribution is proclaimed, although not between men and women or between male and female heirs to their father's property. Thus, the Koran lays it down that sons get double what daughters receve from inheritance. Not more than 1/3 of a person's wealth may be assigned in advance by means of a Will. According to Sharia Law, such Will is only valid when at least two thirds of the property left behind by the dead Muslim is assigned to charitable causes. A will favouring ony one's heirs is forbidden in the Sharia.

Distribution and Social Justice in Sharia

21. Islamic Fundamentalists rightly argue that neither hedonistic and individualistic system of capitalism nor the totalitarian collectivist system of socialism does justice to either the individual or to the community as a whole. The negative impact of large accumulaton of wealth by a few, particularly on the poor and the less privileged sectors of the population and on the less developed countries of the world, is regarded as un-Islamic, unjust and runs counter to Islamic morals and values. It violates the principles of national solidarity and common purpose which are fundamental principles of Islamic teaching. There are social imperatives to which the uses of property are subordinated. The Muslim is thus enjoined to accept restrictions in the individual use of his property in the interest of the common good. The Muslim is expected to give alms to the beggar, to the poor, and to the needy, and subscribe to or provide, according to his ability and means, for the needs of the community. This is why it is often the case that a rich Muslim builds a mosque or mosques for hism community or contributes substantially to social and community purposes. The Sharia conundrum enjoins the Muslim to follow a divine code of social justice that will justify his religious beliefs here on earth and attract for him divine favour in the life hereafter through his good works. Islam not only acclaims the good works by Muslims, it also regards good works as the main justification in the eyes of God and warns that not an iota of good works or mischief will be lost on the day of judgement. In Islam, good deeds earn merit with God, regardless of the religious adherence of their doers. Salvation consists of nothing more than good works, unlike the Christians who believe that not good works but the Grace of God leads to salvation in the life hereafter.

Conclusion

22. So long as the Islamic community remained small and its expansion was limited to the Arabian peninsular, and when economic activities were limited to the subsistence level, it was possible to control the entire behaviour of the Muslims along the lines laid down by Prophert Muhammead in the Koran, the Sunna and the Sharia.

23. As the Muslim empire expanded and its interactions with the world increased, some of the functions concentrated in the religious leaders by these Muslim revelations had to be separated, because neither the caliphs, the Bahs or the Sultans and the kings were capable of wielding complete religious and political power on their own. It became essential to hand over:

(a) administrative functions to a Prime Minister, Minister, Governor or President;

(b) Military functions to a Commander-in-Chief;

(c) Spiritual/religious functions to the Imams, the Ulama and the theologians;

(d) Judicial matters to Islamic legal officers, many of whom had to apply norms other than those provided only in the Sharia.

24. As a result, the binding , obligatory interpretation of the Koran and the Sunna along already established principles is no longer tenable, so that their re-introduction in the already mentioned condition of the Ijma remains only an idealistic but impracticable notion. Kemal Attarturk, the founder of modern Turkey, is the ideal leader and hero of the modern Islamic economy. Inspite of the fact that Turkey's population is 98% Muslim, Attarturk recognised secularity as the shortest path to rapid economic development and the protection of the minority Christians and Sikhs in Turkey. Today, Turkey is not only a modern state and the most developed in the Islamic World, it is also integrated into mainland Europe. Similarly, countries like Egypt, Lebanon, Syria, Palestine, Jordan, Kuwait, Tunisia, Iran and Indonesia (the largest Muslim country in the world, of over 200 million people) have, over the years, embraced the virtues of secularity as a principle of governing a multi-religious and plural society. There are no more than 2 countries in the whole world today where strict Islamic laws and the Sharia are the "Directive Principles of State Policy." They are Afghanistan under the Taleban Muslim Movement, and to an extent, the Royal Kingdom of Saudi Arabia, both of which are not multi-religious countries. The attempt to impose Islamic monotheism in Sudan has led to a seemingly endless war between the Muslim North and the Christian South there.

25. The expanding scope and economic activities of the Islamic empire increasingly make ridicule of any attempt to return to the primordial application of the Sharia Law to regulate and promote the economic affairs of the component states of the organisation of Islamic countries.

26. In 1972, the Organisation of Islamic Conference (OIC) was established. It consisted of 46 states with the following organs:

(i) the conference of kings and Heads of States and Governments as the supreme authority, holding a summit every three years; its Headquarters is in Saudi Arabia;

(ii) the Conference of Foreign Ministers as the main body for the adoption of resolutions of common interest. The Foreign Ministers meet annually or earlier as and when emergencies demand. Its Headquarters is in Saudi Arabia.

(iii) the Permanent General Secretariat in Jeddah, Saudi Arabia, which prepares the meetings of the OIC and implements its decisions and resolutions.

The resolutions and the declarations of the OIC require 2/3 majority. They become binding for a member state only after its government has ratified them.

27. The Organisation of Islamic Conference (OIC) pays special attention to economic issues, for which a special department exists to encourage and ensure closer economic relations among the Islamic countries, with a view to an ultimate creation of an Islamic Common Market. The special Economic Department of the OIC has promoted two major agreements among the OIC member states.

They are:

(a) the General Agreement for Economic, Technical and Commercial Cooperation (GAETCC), signed in 1977, and which became effective in 1981, after being ratified by at least half of the OIC members;

(b) the Agreement for the Promotion, Protection and Guarantee of Investments (APPGI) among member states, signed in 1981 but became effective in 1990.

28. The other main economic institutions and agenceis set up by the OIC include:

1. Islamic Commission for Economic, Cultural and Social Affairs (ICESCSA) in Jeddah, Saudi Arabia (1975);

2. Islamic Development Bank (in Jeddah), (1975);

3. Statistical, Economic and Social Research and Training for Islamic Countries (SESRTIC), Ankara (Turkey), 1977.

4. Islamic Chamber of Commerce, Industry and Commodity Exchange (ICCICE), Karachi, Pakistan (1978)

5. Islamic Centre for Vocational and Technical Training and Research (ICVTTR), Dacca, Bangladesh (1978);

6. Islamic Foundation for Science, Technology and Development (IFSTAD), Jeddah, 1978.

7. Islamic Centre for Development and Trade (ICDT), Casablanca (Morocco), 1981;

8. Islamic Research and Training Institute (IRTI), in Jeddah, 1982;

9. International Asociation of Islamic Banks (IAIB), Jeddah, 1987;

10. Islamic States Telecommunications Union (Jeddha), 1988;

11. Islamic Shipowners Association (Jeddah) 1988;

12. Islamic Cement Union (Ankara, Turkey), 1990;

29. Nigeria remains an observer member of the OIC as our national (Federal) Government has not formally ratified the OIC membership protocols. Also, the Islamic Development Bank membership currently stands at 43, because Brunei, Iran and Nigeria are yet to accede to the membership of the Bank. WIth all these multifarious agencies in so many countries and interacting worldwide, the application of the Sharia becomes more and more ridiculous for its impossibility.

Reforms to Sharia Economics

30. Three types of reforms are necessry if Islam is to move forward economically. They are:

1. the enthronement of secular-liberal policies aimed at bringing about a homogeneous and integrated economy and society;

2. social reform which acknowledges respect for the fundamental human rights of all citizens and the religious freedom and social needs of all citizens, similar to the situations in Iraq, Egypt, Syria, Turkey and Tunisia, Jordan, Kuwait, etc. and

3. the abandonment of undue radical Islamic fundamentalism of Iran, Afghanistan and Pakistan and which are incipient in Zamfara State.

There is the vital need to avoid social and political crisis in a multi-religious society where Muslims predominate. Rather, there should be an adaptation to the modern secular demands of the state and its citizens.

31. The morbid adoption of classical and unlimited Sharia Law by the Zamfara State Government is obviously a journey on the road not only to social disorder and chaos but also to economic stagnation and suicide of the state an an integral member of secular Nigerian nation. All of us should, therefore, appeal to the Government and the people of Zamfara State to limit the exercise of the Sharia Law to what the Nigerian constitution envisages, in order to avoid the ruins of the little progress made in Zamfara State since its creation in 1996.

32. It is necessary to remind our Muslim brothers that there is not much that is uniquely Sharia that has no counterpart in the Christian Bible. Like the Koran and the other Muslim books, the Christian Bible abhors adultery (Exodus 20:14, Mathew 5:27-28) and even sanctions it with the death penalty (Leviticus 20:10); stealing (Exodus 20:15); drunkenness (Deuteronomy 21; 20-21; Luke 21:34); Homosexuality (Leviticus 20:13); Murder (Genesis 9:6; Exodus 20:13); usury (Deuteronomy 23:20; Psalm 15:5); false witness (Exodus 20:16); lying (Leviticus 19:11; Psalm 31:18); belief in the day of judgement or Hell Fire (Luke 16: 19-25; Mathew 25:31-46); alms giving (Mathew 6:1-4) or fasting (Exodus 34:28; Mathew 4:2). The difference between us and our Muslim brothers is that Jesus Christ came to redeem the Christians from the brutalities of sin from which our Muslim brothers still need to be and should now be redeemed. The Christians believe that they do not live only under the law but also under the Grace of God.

33. Finally, it is incumbent on modern governments and their religious leaders and supporters to put in place such policies and programmes that will reduce, if not totally eliminate, the vices that are increasingly plaguing our country and our societies. Otherwise, we will be deceiving ourselves by using any legal system or government machineries to fight the consequences rather than the causes of the social and economic vices in our country.

Islamic banking

2010-01-08T10:31:00.000+07:00

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the payment or acceptance of interest fees for the lending and accepting of money respectively, (Riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.

[hide]

[edit] History of Islamic banking

[edit] Classical Islamic banking

Main article: Islamic economics in the world

Further information: Early reforms under Islam

During the Islamic Golden Age, early forms of proto-capitalism and free markets were present in the Caliphate,^[1] where an early market economy and an early form of mercantilism were developed between the 8th-12th centuries, which some refer to as "Islamic capitalism".^[2] A vigorous monetary economy was created on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent.
A number of innovative concepts and techniques were introduced in early Islamic banking, including bills of exchange, the first forms of partnership (mufawada) such as limited partnerships (mudaraba), and the earliest forms of capital (al-mal), capital accumulation (nama al-mal),^[3] cheques, promissory notes,^[4] trusts (see Waqf), startup companies,^[5], transactional accounts, loaning, ledgers and assignments.^[6] Organizational enterprises similar to corporations independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced during that time.^[7]^[8] Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.^[3]

[edit] Riba

The word "Riba" means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money). The definition of riba in classical Islamic jurisprudence was "surplus value without counterpart." or "to ensure equivalency in real value" and that "numerical value was immaterial." During this period, gold and silver currencies were the benchmark metals that defined the value of all other materials being traded. Applying interest to the benchmark itself (ex natura sua) made no logical sense as its value remained constant relative to all other materials: these metals could be added to but not created (from nothing).
Applying interest was acceptable under some circumstances. Currencies that were based on guarantees by a government to honor the stated value (i.e. fiat currency) or based on other materials such as paper or base metals were allowed to have interest applied to them.^[9] When base metal currencies were first introduced in the Islamic world, no jurist ever thought that "paying a debt in a higher number of units of this fiat money was riba" as they were concerned with the real value of money (determined by weight only) rather than the numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight (i.e., the value in terms of weight had to be same because all makes of coins did not carry exactly similar weight).

[edit] Modern Islamic banking

The first modern experiment with Islamic banking was undertaken in Egypt under cover without projecting an Islamic image—for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. The pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 1981), by which time there were nine such banks in the country.^[10]

This section requires expansion.

In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank which, till date, is still in business in Egypt. In 1975, the Islamic Development Bank was set-up with the mission to provide funding to projects in the member countries. The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services.
Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent future growth^[11]. Islamic banks have more than 300 institutions spread over 51 countries, including the United States through companies such as the Michigan-based University Bank, as well as an additional 250 mutual funds that comply with Islamic principles. It is estimated that over US$822 billion worldwide sharia-compliant assets are managed according to The Economist.^[12]. This represents approximately 0.5% of total world estimated assets as of 2005^[13].
The World Islamic Banking Conference, held annually in Bahrain since 1994, is internationally recognized as the largest and most significant gathering of Islamic banking and finance leaders in the world.
The Vatican has put forward the idea that "the principles of Islamic finance may represent a possible cure for ailing markets."^[14]

[edit] Principles

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Common terms used in Islamic banking include profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).
In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank's profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha. Another approach is EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).
An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank's share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party's current equity. This method allows for floating rates according to the current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia.
There are several other approaches used in business transactions. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy.
Islamic banking is restricted to Islamically acceptable transactions, which exclude those involving alcohol, pork, gambling, etc. The aim of this is to engage in only ethical investing, and moral purchasing.
In theory, Islamic banking is an example of full-reserve banking, with banks achieving a 100% reserve ratio.^[15] However, in practice, this is not the case, and no examples of 100 per cent reserve banking are observed.^[16]
Islamic banks have grown recently in the Muslim world but are a very small share of the global banking system. Micro-lending institutions founded by Muslims, notably Grameen Bank, use conventional lending practices and are popular in some Muslim nations, especially Bangladesh, but some do not consider them true Islamic banking. However, Muhammad Yunus, the founder of Grameen Bank and microfinance banking, and other supporters of microfinance, argue that the lack of collateral and lack of excessive interest in micro-lending is consistent with the Islamic prohibition of usury (riba).^[17]^[18]

[edit] Shariah Advisory Council/Consultant

Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish a Shariah Supervisory Board (SSB) to advise them and to ensure that the operations and activities of the bank comply with Shariah principles. On the other hand, there are also those who believe that no form of banking can ever comply with the Shariah.^[19]
In Malaysia, the National Shariah Advisory Council, which additionally set up at Bank Negara Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these institutions and on their products and services. (See: Islamic banking in Malaysia). In Indonesia the Ulama Council serves a similar purpose.
A number of Shariah advisory firms (either standalone or subsidiaries of larger financial groups) have now emerged to offer Shariah advisory services to the institutions offering Islamic financial services. Issue of independence, impartiality and conflicts of interest have also been recently voiced.

[edit] Islamic financial transaction terminology

[edit] Bai' al-inah (sale and buy-back agreement)

The financier sells an asset to the customer on a deferred-payment basis, and then the asset is immediately repurchased by the financier for cash at a discount. The buying back agreement allows the bank to assume ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency. Some scholars believe that this is not compliant with Shariah principles.^[20]^[21] There is an another definition of this bai as per the Imam ibn-e-Hijam if three persons are involved in this Sale (buy back finance) than, this bai Inah change into bai Tawarruq. He defines this bai as ; suppose Zhaid is in need of 2000 Rs, and he(Zhaid)goes to Jamshed for 2000Rs,In answer to this Jamshed says I will not give u qard (Loan)instead u can buy this item for Rs 2500 from me,so Zhaid buys this item from Jamshed for Rs 2500,immediately Aslam (3rd)person buys the same item from Zhaid for Rs 2000 and take the possession of the item and handover the item to Seller i.e (Jamshed) the amount which is due to be paid to Zhaid by Aslam is now referred to seller no 1 i.e Jamshed , Jamshed after receiving back the same item from Aslam(which was sold to Zhaid for 2500)pays Zhaid Rs 2000 and writes Rs 2500 in his book against Zhaid.In this way Jamshed earns a interest of Rs 500 This is termed as bai Tawarruq .

[edit] Bai' bithaman ajil (deferred payment sale)

This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. This is similar to Murabahah, except that the debtor makes only a single installment on the maturity date of the loan. By the application of a discount rate, an Islamic bank can collect the market rate of interest

[edit] Bai muajjal (credit sale)

Literally bai muajjal means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of murabaha muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price. (Deferred-payment sale)

[edit] Musharakah

Musharakah is an arrangement or agreement between the bank, or a capital provider, and an entrepreneur, whereby the entrepreneur can mobilize the funds of the former for its business activity. The entrepreneur provides expertise, labor and management. Profits made are shared between the bank and the entrepreneur according to predetermined ratio. In case of loss, the bank loses the capital, while the entrepreneur loses his provision of labor. It is this financial risk, according to the Shariah, that justifies the bank's claim to part of the profit.^[22] The profit-sharing continues until the loan is repaid. The bank is compensated for the time value of its money in the form of a floating rate that is pegged to the debtor's profits.^{[citation needed]}

[edit] Mudarabah

Main article: Mudarabah

"Mudarabah" is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called "rabb-ul-mal", while the management and work is an exclusive responsibility of the other, who is called "mudarib".

[edit] Murabaha

Main article: Murabaha

This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the default is settled.
This type of transaction is similar to rent-to-own arrangements for furniture or appliances that are very common in North American stores.

[edit] Musawamah

Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. This difference in obligation by the seller is the key distinction between Murabaha and Musawamah with all other rules as described in Murabaha remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce.

[edit] Bai salam

Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.

[edit] Basic features and conditions of Salam

The transaction is considered Salam if the buyer has paid the purchase price to the seller in full at the time of sale. This is necessary so that the buyer can show that they are not entering into debt with a second party in order to eliminate the debt with the first party, an act prohibited under Sharia. The idea of Salam is to provide a mechanism that ensures that the seller has the liquidity they expected from entering into the transaction in the first place. If the price were not paid in full, the basic purpose of the transaction would have been defeated. Muslim jurists are unanimous in their opinion that full payment of the purchase price is key for Salam to exist. Imam Malik is also of the opinion that the seller may defer accepting the funds from the buyer for two or three days, but this delay should not form part of the agreement.
Salam can be effected in those commodities only the quality and quantity of which can be specified exactly. The things whose quality or quantity is not determined by specification cannot be sold through the contract of salam. For example, precious stones cannot be sold on the basis of salam, because every piece of precious stones is normally different from the other either in its quality or in its size or weight and their exact specification is not generally possible.
Salam cannot be effected on a particular commodity or on a product of a particular field or farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit of a particular tree, the salam will not be valid, because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery, and, given such possibility, the delivery remains uncertain. The same rule is applicable to every commodity the supply of which is not certain.
It is necessary that the quality of the commodity (intended to be purchased through salam) is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned.
It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known. What is normally weighed cannot be quantified in measures and vice versa.
The exact date and place of delivery must be specified in the contract.
Salam cannot be effected in respect of things which must be delivered at spot. For example, if gold is purchased in exchange of silver, it is necessary, according to Shari'ah, that the delivery of both be simultaneous. Here, salam cannot work. Similarly, if wheat is bartered for barley, the simultaneous delivery of both is necessary for the validity of sale. Therefore the contract of salam in this case is not allowed.

[edit] Hibah (gift)

This is a token given voluntarily by a debtor to a creditor in return for a loan. Hibah usually arises in practice when Islamic banks voluntarily pay their customers a 'gift' on savings account balances, representing a portion of the profit made by using those savings account balances in other activities.
It is important to note that while it appears similar to interest, and may, in effect, have the same outcome, Hibah is a voluntary payment made (or not made) at the bank's discretion, and cannot be 'guaranteed.' However, the opportunity of receiving high Hibah will draw in customers' savings, providing the bank with capital necessary to create its profits; if the ventures are profitable, then some of those profits may be gifted back to its customers as Hibah.^[23]

[edit] Ijarah

Ijarah means lease, rent or wage. Generally, Ijarah concept means selling the benefit of use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price.

[edit] Advantages of Ijarah

Ijarah provides the following advantages to the Lessee:

Ijarah conserves the Lessee' capital since it allows up to 100% financing.

Ijarah gives the Lessee the right to access the equipment on payment of the first installment. This is important as it is the access and use (and not ownership) of equipment that generates income.

Ijarah arrangements aid corporate planning and budgeting by allowing the negotiation of flexible terms

Ijarah is not considered Debt Financing so it does not appear on the Lessee' Balance Sheet as a Liability. This method of "off-balance-sheet" financing means that it is not included in the Debt Ratios used by bankers to determine financing limits. This allows the Lessee to enter into other lease financing arrangements without impacting his overall debt rating.

All payments towards Ijarah contracts are treated as operating expenses and are therefore fully tax-deductible. Leasing thus offers tax-advantages to for-profit operations.

Many types of equipment (i.e computers) become obsolete before the end of their actual economic life. Ijarah contracts allow the transfer of risk from the Lesse to the Lessor in exchange for a higher lease rate. This higher rate can be viewed as insurance against obsolescence.

If the equipment is used for a relatively short period of time, it may be more profitable to lease than to buy.

If the equipment is used for a short period but has a very poor resale value, leasing avoids having to account for and depreciate the equipment under normal accounting principles.

[edit] Ijarah thumma al bai' (hire purchase)

Parties enter into contracts that come into effect serially, to form a complete lease/ buyback transaction. The first contract is an Ijarah that outlines the terms for leasing or renting over a fixed period, and the second contract is a Bai that triggers a sale or purchase once the term of the Ijarah is complete. For example, in a car financing facility, a customer enters into the first contract and leases the car from the owner (bank) at an agreed amount over a specific period. When the lease period expires, the second contract comes into effect, which enables the customer to purchase the car at an agreed to price.
The bank generates a profit by determining in advance the cost of the item, its residual value at the end of the term and the time value or profit margin for the money being invested in purchasing the product to be leased for the intended term. The combining of these three figures becomes the basis for the contract between the Bank and the client for the initial lease contract.
This type of transaction is similar to the contractum trinius, a legal maneuver used by European bankers and merchants during the Middle Ages to sidestep the Church's prohibition on interest bearing loans. In a contractum, two parties would enter into three concurrent and interrelated legal contracts, the net effect being the paying of a fee for the use of money for the term of the loan. The use of concurrent interrelated contracts is also prohibited under Shariah Law.

[edit] Ijarah-wal-iqtina

A contract under which an Islamic bank provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease.

[edit] Musharakah (joint venture)

Musharakah is a relationship between two parties or more, of whom contribute capital to a business, and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property. In the case of real estate or property, the bank assess an imputed rent and will share it as agreed in advance.^[22] All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixed-income investing (i.e. issuance of loans).^{[citation needed]}

[edit] Qard hassan/ Qardul hassan (good loan/benevolent loan)

This is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan. Some Muslims consider this to be the only type of loan that does not violate the prohibition on riba, since it is the one type of loan that truly does not compensate the creditor for the time value of money.^[24]

[edit] Sukuk (Islamic bonds)

Main article: Sukuk

Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law (Shariah) and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.

[edit] Takaful (Islamic insurance)

Main article: Takaful

Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers. See Takaful for details.

[edit] Wadiah (safekeeping)

In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank's discretion, may be rewarded with Hibah (see above) as a form of appreciation for the use of funds by the bank.

[edit] Wakalah (power of attorney)

This occurs when a person appoints a representative to undertake transactions on his/her behalf, similar to a power of attorney.

[edit] Islamic equity funds

Islamic investment equity funds market is one of the fastest-growing sectors within the Islamic financial system. Currently, there are approximately 100 Islamic equity funds worldwide. The total assets managed through these funds currently exceed US$5 billion and is growing by 12–15% per annum. With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched. Some Western majors have just joined the fray or are thinking of launching similar Islamic equity products.
Despite these successes, this market has seen a record of poor marketing as emphasis is on products and not on addressing the needs of investors. Over the last few years, quite a number of funds have closed down. Most of the funds tend to target high net worth individuals and corporate institutions, with minimum investments ranging from US$50,000 to as high as US$1 million. Target markets for Islamic funds vary, some cater for their local markets, e.g., Malaysia and Gulf-based investment funds. Others clearly target the Middle East and Gulf regions, neglecting local markets and have been accused of failing to serve Muslim communities.
Since the launch of Islamic equity funds in the early 1990s, there has been the establishment of credible equity benchmarks by Dow Jones Islamic market index (Dow Jones Indexes pioneered Islamic investment indexing in 1999) and the FTSE Global Islamic Index Series. The Web site failaka.com monitors the performance of Islamic equity funds and provide a comprehensive list of the Islamic funds worldwide.

[edit] Islamic laws on trading

The Qur'an prohibits gambling (games of chance involving money) and insuring ones' health or property (also considered a game of chance). The hadith, in addition to prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in risk, where the Arabic word gharar is taken to mean "risk" or excessive uncertainty).
The Hanafi madhab (legal school) in Islam defines gharar as "that whose consequences are hidden." The Shafi legal school defined gharar as "that whose nature and consequences are hidden" or "that which admits two possibilities, with the less desirable one being more likely." The Hanbali school defined it as "that whose consequences are unknown" or "that which is undeliverable, whether it exists or not." Ibn Hazm of the Zahiri school wrote "Gharar is where the buyer does not know what he bought, or the seller does not know what he sold." The modern scholar of Islam, Professor Mustafa Al-Zarqa, wrote that "Gharar is the sale of probable items whose existence or characteristics are not certain, due to the risky nature that makes the trade similar to gambling." There are a number of hadith that forbid trading in gharar, often giving specific examples of gharhar transactions (e.g., selling the birds in the sky or the fish in the water, the catch of the diver, an unborn calf in its mother's womb etc.). Jurists have sought many complete definitions of the term. They also came up with the concept of yasir (minor risk); a financial transaction with a minor risk is deemed to be halal (permissible) while trading in non-minor risk (bayu al-ghasar) is deemed to be haram.^[25]
What gharar is, exactly, was never fully decided upon by the Muslim jurists. This was mainly due to the complication of having to decide what is and is not a minor risk. Derivatives instruments (such as stock options) have only become common relatively recently. Some Islamic banks do provide brokerage services for stock trading.

[edit] Microfinance

Microfinance is a key concern for Muslims states and recently Islamic banks also. Islamic microfinance tools can enhance security of tenure and contribute to transformation of lives of the poor.^[26] Already, several microfinance institutions (MFIs) such as FINCA Afghanistan have introduced Islamic-compliant financial instruments that accommodate sharia criteria.

[edit] Controversy

In Islamabad, Pakistan, on June 16, 2004: Members of leading Islamist political party in Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a protest walkout from the National Assembly of Pakistan against what they termed derogatory remarks by a minority member on interest banking:

Taking part in the budget debate, M.P. Bhindara, a minority MNA [Member of the National Assembly]...referred to a decree by an Al-Azhar University's scholar that bank interest was not un-Islamic. He said without interest the country could not get foreign loans and could not achieve the desired progress. A pandemonium broke out in the house over his remarks as a number of MMA members...rose from their seats in protest and tried to respond to Mr Bhindara's observations. However, they were not allowed to speak on a point of order that led to their walkout.... Later, the opposition members were persuaded by a team of ministers...to return to the house...the government team accepted the right of the MMA to respond to the minority member's remarks.... Sahibzada Fazal Karim said the Council of Islamic ideology had decreed that interest in all its forms was haram in an Islamic society. Hence, he said, no member had the right to negate this settled issue.^[27]

Some Islamic banks charge for the time value of money, the common economic definition of Interest (Riba). These institutions are criticized in some quarters of the Muslim community for their lack of strict adherence to Sharia.
The concept of Ijarah is used by some Islamic Banks (the Islami Bank in Bangladesh, for example) to apply to the use of money instead of the more accepted application of supplying goods or services using money as a vehicle. A fixed fee is added to the amount of the loan that must be paid to the bank regardless if the loan generates a return on investment or not. The reasoning is that if the amount owed does not change over time, it is profit and not interest and therefore acceptable under Sharia.
Islamic banks are also criticized by some for not applying the principle of Mudarabah in an acceptable manner. Where Mudarabah stresses the sharing of risk, critics point out that these banks are eager to take part in profit-sharing but they have little tolerance for risk. To some in the Muslim community, these banks may be conforming to the strict legal interpretations of Sharia but avoid recognizing the intent that made the law necessary in the first place.^{[citation needed]}
The majority of Islamic banking clients are found in the Gulf states and in developed countries. With 60% of muslims living in poverty, Islamic banking is of little benefit to the general population. The majority of financial institutions that offer Islamic banking services are majority owned by Non-Muslims. With Muslims working within these organizations being employed in the marketing of these services and having little input into the actual day to day management, the veracity of these institutions and their services are viewed with suspicion. One Malaysian Bank offering Islamic based investment funds was found to have the majority of these funds invested in the gaming industry; the managers administering these funds were non muslim. ^[28] These types of stories contribute to the general impression within the muslim populance that islamic banking is simply another means for banks to increase profits through growth of deposits and that only the rich derive benefits from inplementation of Islamic Banking principles.

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Dinar history

Value and denomination

Adoption

Indonesia

Malaysia

Libya

Use

See also

Notes

Citations

References

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Islamic banking

Contents

[edit] History of Islamic banking

[edit] Classical Islamic banking

[edit] Riba

[edit] Modern Islamic banking

[edit] Principles

[edit] Shariah Advisory Council/Consultant

[edit] Islamic financial transaction terminology

[edit] Bai' al-inah (sale and buy-back agreement)

[edit] Bai' bithaman ajil (deferred payment sale)

[edit] Bai muajjal (credit sale)

[edit] Musharakah

[edit] Mudarabah

[edit] Murabaha

[edit] Musawamah

[edit] Bai salam

[edit] Basic features and conditions of Salam

[edit] Hibah (gift)

[edit] Ijarah

[edit] Advantages of Ijarah

[edit] Ijarah thumma al bai' (hire purchase)

[edit] Ijarah-wal-iqtina

[edit] Musharakah (joint venture)

[edit] Qard hassan/ Qardul hassan (good loan/benevolent loan)

[edit] Sukuk (Islamic bonds)

[edit] Takaful (Islamic insurance)

[edit] Wadiah (safekeeping)

[edit] Wakalah (power of attorney)

[edit] Islamic equity funds

[edit] Islamic laws on trading

[edit] Microfinance

[edit] Controversy