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Literature Review

Literature review is an essential part of any work of analysis and especially in the case of research work where it is complete focuses around the analysis of practical sample, which is processed to retrieve results and do comparison with the work and study available. The primary data used in is collected, analysed and interpreted based on the practical analysis.

In this chapter we will discuss the core concept of Islamic banking in accordance with the belief and sources of Islamic principles and its purpose and also its implementation in order to estimate and evaluate 'to what extent the Islamic banking system in United kingdom follow Islamic principles' in the chosen bank that is HSBC Amanah.

INTRODUCTION:

Islamic banking system is the most demanded and preferred system in Muslim countries. It is also increasing in United Kingdom where there are approximately 1.3 million believers of Islam. Islam and Islamic principles are in existence since last 1430 years. The main focus of Islamic banking is exclusion or prohibition of (riba) interest. 1.2 billion Muslims around the world are united with the belief system of Islam, which is approximately quarter of the world's population. (Sarwar 1989, p.209). There are no differentiations in temporal and religious affairs in Islam, neither on the business activities and personal conduct as all these are regulated in accordance with shari'ah Islamic laws and teachings.

Sunnah as described by Ramadan (1961, p.31-32) that the Sunnah is human prophetic practical approach of the Holy Quran. The main purpose of the Sunnah is to make Men understand the ways through a man. Following the holy Quran Prophet's instruction and Sunnah are the primary source of Islamic shari'ah.

Islamic banking mainly revolves around the ban on riba (interest) as its mention the verses of Holy Quran:

"O you who believe! Fear Allah, and give up what remains of your demand for usury, if you are indeed believers. If you do it not, take notice of war from Allah and His Apostle. But if you turn back you will have your capital sums. Deal not unjustly and you shall not dealt with unjustly". (Holy Quran, chapter 2:verse 278-279)

The basic essence of banning riba in Islamic banking is that if a transaction, which guarantees a return to one party without even considering the situation and circumstances of the other party what and how will the other party manage, is unjust and unfair. Although earning on advances of money is permitted as both parties have the risk of loss. Islamic banking doesn't only concentrate on banking without interest but it also prohibits unjust and unfair conducts and unethical activities. On the other hand it supports in actively participating for achieving objectives and goals of Islamic economy and growth.

Islamic banking exists since the time of the Holy Prophet Muhammad peace be upon him but it has increased in recent years in investment and trades because of the principles its based on. The Islamic principles are based upon the verses of Hadees and Holy Quran that is the teachings and life of Holy Prophet Peace be upon him. Islamic banks are now the active players since the last two decades according to institute of Islamic banking and insurance.

Islamic banking system in recognized and accepted throughout the world. Many authors and scholars in the 19th century wrote about it for example Shakespeare also denied the acceptance of Usury and its also prohibited in the old testimony of bible. Islamic banking is in operation since 7th century, but the institute of Islamic banking and insurance in the west say that Islamic banking is a recent trend.

Principles of Islamic Banking:

The most important and significant factor in Islamic banking is the ban of riba (interest). There seem to be two types of usuries, 'usury of trade (riba al buyu) and usury of debt (riba al diyun).

Usury of trade (riba al buyu) is basically the exchange of services or goods for an equal amount like barter trade and the delivery is delayed. And in order to avoid the usury of trade, the exchange of the services or goods must be equalled immediately. Holy Prophet Muhammad peace be upon him forbidden usury of trade from creeping into the economy.

Usury of debt (riba al diyun) on the other hand is imposing a fine or compulsion on the borrower that is a further incremental amount is implied on the top of the principle, which considered compulsory condition of giving a loan. If the borrower is not able to return the loan amount, excess amount is again charged on the top of the principle amount and if the borrower fails again to pay it again charges like chain to excess amount increasing.

As Abu Saeed Al khudri explains the words of Holy Prophet Muhammad peace be upon him:

"The Prophet peace be upon Him said: Gold for gold, silver for silver, wheat for wheat, barley for barley, dates of dates and salt for salt - like for like, hand to hand. Whoever pays more or takes more has indulged in riba (interest), the taker and the giver are alike (in guilt)." (Ahmad 1995)

Thus, this is the reason the Islamic financial institution do not use riba interest because it is ban in Islam. There is no such term as Islamic banking in Islam but Islamic financial institutions. But now a day it is these are referred as Islamic banking. And being a Muslim its their responsibility to be on the right path that is to follow Islamic laws and principles in their daily life and in their dealing with other humans not only Muslims and with other Muslims also to become a good Muslim.

The holy Quran teaches the Muslims the right way of living their lives, it states that the first and most important duty is towards Allah and on the second step the duty towards society for the welfare and justice of the society and last is to think about self benefit. Second step thinking about society includes financial activities and dealing with other humans which financial institutions also stands in this category.

"Trusteeship, care for others, moderation in consumption, productive effort as a means of serving the cause of Allah..., it will b our endeavour in what follows to elaborate upon these ideas to see what kind of economic and financial concepts result from them." (Siddiqi, 1995)

First and foremost Islam does not allow receiving or giving riba interest to Muslims regardless of the terms and condition and interest rate at which they are delivered. The extent to what extent riba is prohibited in Islam is mentioned in the verses:

"And their taking usury, though they were forbidden it, and their devouring people's wealth falsely; and we have prepared for the unbelievers among them a painful punishment." (Holy Quran chapter 3:verse 161)

There are some measures and assessment carried out to differentiate between interest and usury. The Muslim scholars have not approved some Islamic people dispute that riba is a form usury that is carried through small creditors and does not relate to the interest charged by modern banks, and the riba is allowed in Islam if it used for productive loan but these disputes. So Muslim scholars have decided between them selves that there is no distinguish in interest and riba.

It is indicated several times in the holy Quran that riba (interest) is forbidden in Islam. And the extent to which its mentioned in the holy Quran that Allah's blessings go away from the wealth if interest has been used. The message conveyed by Holy Quran that if somebody disregards the prohibition of riba (interest) than it's a disagreement with Allah and his Prophet Muhammad peace be upon him. It is mention in the Quranic Verses as:

"Those who devour usury stand not but as stands one whom Devil has confounded with touch; that is because they say, `trading is only like usury'; but Allah has permitted trading and forbidden usury. Now to whom an admonition from his Lord reaches and he gives over, he may have what is past, and his affair is committed to Allah. But those who revert, they are the people of the Fire; they shall dwell therein forever." (Holy Quran chapter 2:verse 275)

"Allah blots out usury but adds to alms; and Allah does not love any thankless sinner." (Holy Quran chapter 2:verse 276)

"O Believers, fear Allah and give up what remains of usury, if you are Believers." (Holy Quran chapter 2:verse 278)

Holy Prophet peace be upon him said that some one who give or take interest and one who witness such transaction are all equally guilty. Even though it is clearly mentioned in holy Quran that Riba (interest) is haram (unlawful), which is a sin, but still people try to perform this sin and argue on this in the favor of riba (interest).

It has been observed that some of the writers have composed the concept of unjustified income and interest payments, and justified them in order to set rules of Islam. There also seemed to have conflicts few years back in property renting that it was taken as (halal) lawful, but this was been discarded because of the reason that both interest on borrowing and rent on property were considered similar. The benefit for the occupier on the rented property is positive and there would be wear and tear for the assets on the property. On the other hand borrowings are uncertain, as usury is negative as there would be repayment plus the interest in full. Even though if the Islamic panel of jury have forbidden the reimbursement for the devaluation of money value, but as a Muslim one can not deny the verses of holy Quran that interest has been forbidden and thus it is compulsion for the Muslim to follow Allah's orders.

As interest is ban in Islam, this does not mean that money is complimentary and is for nothing. Islam believes and agrees for the capital as for the factor of production but it does not mean that it beliefs in extra production which is interest. According to Kahf (1982a and 1982b) interest rates can be an alternate in relation with profit sharing.

The basic method for the development of Islamic economic system is Islamic banking. And so the institute of Islamic banking and insurance (2005) have given some characteristics of Islamic banking to run an Islamic states economy which are:

  • To seek or improve individuals well being Islam clearly differentiated between (halal and haram) lawful and unlawful characteristics to achieve economic activities. It is always forbidden in Islam to perform such economic activities that can harm the society socially and morally.
  • According to the laws of inheritance Islam does not allow to distribute the wealth in few hands this can be harmful for the society because Islam has the proper knowledge of human nature.
  • In Islam it is not allow to spend the wealth insensibly which has be earn in halal (lawful) way or keep it hoard an individual should spent it sensibly and be moderate. Despite that Islam accepts a person right for the ownership of halal (lawful) wealth.
  • There is also a concept of zakah in Islam. Although Islam allows keeping hold of any excess wealth but on the other hand it advises to decrease the margin of surplus for the sake of society, for the underprivileged and low areas of society and community.
  • The Islamic economic system visualizes the social justice by limiting an individual to stay away form such deeds, which are harmful for society and individual itself.

In the case of profit and loss sharing basis these allow the financial dealing with company and to identify the performances either good or bad for an average performing investment. Therefore it helps to promote better resources of management. The structure of Islamic banking is developed in such a way that client's deposits and shareholders capital is clearly and properly differentiated. These are to make sure that profit and loss sharing activities take place according to shari'ah law. (Ariff 1985)

Structure of Islamic banking

Shari'ah Islamia is a comprehensive system that is based on the Quran (word of Allah) and the Hadith (saying and actions of prophet Muhammad peace be upon him). In the absence of an explicit answer to the issue in question the Muslim scholars do the Ijma which means unanimity and the final source is Qiyas which is represented in analogical reasoning from the other three sources for current issues that are not directly pointed out in those sources but have similar characteristics as those that existed in the past. Once either 'Ijma' or Qiyas makes any decision, it becomes compulsory and cannot be overruled by future generations. The foundation of the Islamic banking is Shari'ah Islamia and it runs using this Islamic system.

Islamic banking, which is based on the shriah islamia, is not against the gains on capital but it prohibits only interest on capital. According to the shari'ah the interest or gain should be considered on the basis of the performance of the capital. Islam permits joint venture on the basis of profit and loss and the provision of the services through trading both credit and cash and leasing activities.

The Islamic banking is based on the following:

  • Sharing the risk
  • Managing and Owning of physical goods
  • Association in the process of trading
  • Construction and Leasing contracts using various modes of Islamic finance
  • Asset management for income generation

The Islamic system doesn't allow the fixed rate profit share in the business and divide the reward in an uncertain rate else it becomes Haram (unlawful). The Islamic banking is following this rule and any investor in a business has no right to decide or demand for a fixed rate of return and he has to contribute on the basis of the profit and loss and will have to share the risk. This feature makes the Islamic banking different from the conventional banking. The arrangement for the loans and investments are similar what other banks are doing but the procedure and its handling is different e.g. the money is borrowed at a rate and there is full payment of the money. The investor (rabbul maal) invest the money in the bank and the expert bankers utilise the money in useful projects or invest it in the companies to make the profit following the halal way of business. Regarding of the fact that company makes profit or loss; both the rabbul maal (investor) and the mubarib (borrower) have bearded the loss. This term in the banking is known as Mudarabah.

In the Islamic banking there is no fixed salary or share for the madarib for his contribution in the deal but he receives an agreed amount of the share agreed with the rabul-mal. This motivates the mudarib to invest the money in a profitable business earn more profit.

"...the Mudarabah agreement could be formal or informal, and written or oral. However, in view of the Quranic emphasis on the writing and formalizing of loan agreements (Quran, 2:282-3), it would be preferable for all Mudarabah agreements to be in writing, with proper witnesses to avoid any misunderstanding." (Chapra 1985)

In the Quran and also the prophet Muhammad peace be upon Him was seen before those verses of Quran were sent down. Cizakca (1995) says: "the earliest Islamic business partnership can be traced back to the Prophet Muhammad peace be upon Him Himself, Who acted as a Mudarib with His wife."

There is a second way of doing business by which you can do the investment following Islamic rules. This is based on the equity participation and is known as Musharakah. The profit and loss share partnership in proportion to the capital investment is best described as Musharakah. This type of partnership is best suitable for the investor because the investor gets an agreed amount of profit from the business. The benefit depends upon the success of the business. According to the Muslim jurists only liquid capital can be used in the formation of the Musharakah agreement. Any assets contributed in the business remain in the possession of the investor/contributor.

The Musharakah is a traditional way of doing Islamic investment. There are no set of rules and regulations to do the agreement for this type of investments. The agreement should follow the guiding principle set out in Islamic shari'ah.

In Malaysia a survey was conducted to bring the poverty level to zero percent by 2000 and a plan was prepared to implement this system on the poor community of the fishermen. A detailed document was produced in 1994 in which it was explained that how the establishment of the Musharakah structure could towards the poverty suppression. The 90% of the community was contacted by the survey conductors about their applications to the financial institutions had been blocked. Compare to this system the applications where the applicant asked for the Musharakah funding was successful and it was found that 85 out of 132 fishermen responded positively to this proposal. As the introduction of the study argues:

...undoubtedly, Musharakah financing through its incentive elements have given more hopes [sic] to young and poor farmers (especially in Sudan through the experience of Sudanese Islamic bank in helping the small farmers) to work hard and cultivate their land. They became a partner through the new system, sharing the risk and profit with the bank. A major success in Musharakah financing appears to be tackling rural to urban migration. Therefore, Musharakah has the potential for addressing successfully some of the important issues in rural development. (ibid, Islamic finance a partner for growth p. 36)

Among the Islamic banking system the most successful and the popular form of financing is Murabaha. According to this system a bank provides the fund to purchase a given asset by charging a markup for the goods. The banks do this by buying the goods for the third party and then sell it at the agreed price to the customer. Basically it's the selling of goods against deferred payments and is also known as bayal mu ajjal. The main objective of this type of financing is that it should not be beyond the reach of everybody but semantic to conventional banking. The way the Islamic banking deals following Murabaha structure is very different from the conventional banking. For Example. If a bank buys a product for £100 and sell it to his customer for £107, and a straightforward £100 loan advanced at an interest rate of 7%. The Islamic bankers argue that this form of banking is better and different to an overdraft organized because it offers several benefits to the bank and his customer the same which would not arise from a simple interest based overdraft facility. T he investment bankers have modified the Murabaha financing and its individual transaction is expanded to reflect the growing demand for Islamically customized product for international blue chip companies. This modified system is implemented in several organization and they have done several transactions following these new rules and have adopted the structure. The first record transaction was made in 1995 in the aviation industry between the Bahrain based Islamic Investment Company of the (IICG) and the Pakistan international airline (PIA). Following this structure they have finalized a US $25 million deal. Reporting on the deal MEED explained:

...airlines usually buy fuel through cash flow, but the jet fuel Murabaha financing facility enables payment over a period of one or two years....IICG officials say the agreement will prove cheaper for the airline because fuel purchases can now be treated as a medium-term financing requirement, and need not be financed through a more expensive overdraft account. This will address the airline's liquidity needs. (MEED, London, July 14 1995)

There is a concept in the Islamic world known as Ijara. The Ijara is a leased based transaction. The investor is known as lessor and the lender is known as lessee. In this deal the investor or lessor, would purchases the product from the manufacturers and lease it on to the company or lessee for an agreed period of time and during the whole period or life of asset, the lesser is at risk of ownership and lessee is responsible for the usage of the asset.

Another concept of providing loans to people without any interest is known as Qard-hasan in the Islamic banking. Normally these types of loan are for the corporate customers in financial suffering, which can be rehabilitated in to equity afterwards. The qard-hasan financing helps to restore profitability. An individual person suffering from injury, unemployment or some other unexpected development can also avail this facility and can get the Qard-hasan. This could also be used for one-off large-scale requirements such as financing of wedding. The mechanism for the qard-hasan is documented and outlined in the Jordan Islamic bank 1996 annual report.

As per qard-hasan structure the bank accepts the contributions from benefactors who wish to grant interest free loans, through the bank for special purpose. These types of contributions are deposited into the Al_Qard Al-Hassan fund.

The Istisna is an agreement for the buying the manufactured goods by their specifications or order. The price of the goods is paid progressively in stages accordance with the growth of the job. For example, this system is used in the housing industry where the builder is paid at specified stages of the building process. The specifications in an Istisna sale have to be very clear as to type, size, materials used, delivery date and place. This type of sale cannot be used for natural produce.

The payment for the future goods to be furnished in future in advance is known as Bai' Salam. This is opposite to the Istisna. The specifications for the goods are determined and recorded in to the contract at the time of agreement. The cash price is paid and the delivery is agreed at a future date. The seller of the goods is bounded to make the delivery of the goods of determined specification on a definite future due date. The goods need not be already manufactured at the time of the sale contract.

From the above features it is crystal clear that the Islamic banking is not only different from the conventional banking but it also gives the pure form of financing and approaches to the needy people in the community first without taking advantage of their needs and putting any extra pressure on them. This is more robust and useful for the community. The Islamic banks take higher risk in financing as compared to the conventional banks in the UK and all over the world. A distinctive and prominent feature of the Islamic banking is that it keeps its reserves that help the bank in its recovery if the bank faces any huge losses.

Accounting prospective of Islam

Islamic banking is started into the Great Britain. It is structured on the Islamic principles but to find out that up to what extent it is using Islamic principles needs looking at the Islamic perspective of the accounting as a major source and then need analysing the Islamic banking in UK.

"The Islamic journal" is the book, which can best describe the Islamic accounting. This journal was published by Roszaini Hanifa and Muhammad Abdullah Hudaib. To bring the stability and socio economic prosperity in the society fulfil rights and obligations of Allah, and performing the ibadah (worship) the Islamic perspective of accounting is helping to achieve the goals and objectives of Islamic shari'ah and develops a system where everyone has the opportunity to live well and work easily without any financial problems.

Objectives set by IPA can only be achieved if both the technical system and the humans follow the shari'ah. Islam has setup a fixed Zakah of 2.5% for the poor people and to give them the opportunity to move forward in the society. The Zakah and the Sadaqah riba (interest) free resources should be clearly and properly disclosed and needs dealing according to the shari'ah procedures. If these basic things have been ignored and not dealt properly will result in a major sin and violation of the shari'ah rules. Interest free resources and transactions are structures developed to help the poor and needy people not exploiting them and putting some extra pressure on them.

Further more in these principle other things are also of vital importance like payments of taxes, handling of debts, distribution assets and liabilities. These all should be disclosed and should have been fulfilled that they are in accordance with Islamic shari'ah. Further these concepts are elaborated with their aim and principles.

HALAL Transactions, the basic essence of this concept is that Almighty Allah has forbidden all Muslims from doing Haram (unlawful) and doing such things will result, as a sin other than forbidden things Haram rest of all the things are halal (lawful).

Principles

  • All dealing in the business should be halal (lawful) which means that avoid all business relating alcohol, gambling and other Haram (unlawful) products and services.
  • The contract made for business must be in accordance with the Islamic shari'ah law that is the financing must be done interest free services shall be pain full and fair wages everything thing should be clearly mentioned in the contract, fair pricing shall be done for the contracts of sales and purchases without and bribery involved.
  • Financial sources must in accordance with Islamic shari'ah that is Mudarabah, Musharakah, Ijarah etc.
  • The source of capital must be halal (lawful), that is avoiding all preference shares and interest baring bonds, notes receivable and payable and interest leasing transactions

ZAKAH helps the Muslims to in a way thanks Almighty Allah for his blessings and rewards he has given and ask for more to be continued and to avoid any impurities from immoral acts, this is the way to make Allah glad by spending wealth.

Principles

  • To calculated right amount of Zakah proper accounts shall be maintained during the whole year so that correct amount of Zakah can be calculated.
  • Current market value must be consider while calculating the Zakah, like assets shall be considered on the current market value and bad debts can be deducted on the actual amount of the debt. For the case of insolvency, creditors must be paid before if nothing is there then owner is not accountable.
  • Savings that are kept less then one year are not accountable for Zakah but it's more than a year than its accountable at the rate of 2.5% in excess of equivalent of 86 gm of gold. And same for the personal income
  • 10% in the excess of equivalent of 86gm worth of gold value at income of investment.
  • 10% of net profit in case of manufacturing industry.
  • 1 sheep for every 5 camels and for every 30 cattle its 1 cattle for Zakah
  • For 40 sheep 1 sheep shall be given for Zakah
  • Agriculture: 10% for non-irrigated crops if it exceeds 1,568 kg and 5% for the irrigated crops.
  • For minerals and buried treasure it is 20 % of the total value.
  • For gold and silver it is 2.5% in excess of 725 gms

The valuation principle of Zakah is that it is calculated on the items that are Zakah able. According to Gambling and Karim (1991) in corporate sector net working capital including the cash is used for the calculating Zakah that is current assent less current liabilities considering the value of the stock adding to this according to Muslim scholar El Askher (1987) current market value of the stock less the distribution expenses should be considered. For the case of debts only the actual amount of debts are deducted from the calculation amount for Zakah, rest provision of debt and other provision shall not be deducted. And for the case of insolvency first priority is given to the creditor of the company if the creditor are not paid then owner is not liable for Zakah.

According to Siddiqui (1995) discusses about the corporate sector that disclosure of accounting information is an essential factor as it helps the internal management and users in decision-making process that helps them to provide them with a true and complete picture. IPA considers all users of the process are equal and all are liable to have proper information for spirit of justice in Islam which is quiet different from conventional banking, in conventional banking only the investors are the primary group whose informational needs are catered.

Theory Behind Islamic banking:

The main concept behind the Islamic banking is the requirement of the Muslims that are clearly mention in the holy Quran and Sunnah which are in existence since the time of holy prophet Muhammad (peace be upon him) that explains the way to deal with day to day situations and way of living life properly. There have been many misconception and misunderstanding for the notion of Islamic banking. The basic essence of Islamic banking is that it helps the financial institutions to provide same services as conventional banking but riba free. (Ariff, 1988).

In 1985 chapra a famous author mentioned that Islamic banking is not just a interest free banking, he further described that Islamic banking and conventional banking are totally different particularly in carrying out their operations with interest plus their approach and nature of business on the other hand Islamic banking works for the strengthening of the society and for its welfare not just to make money for its own and shareholders. Chapra further states that Islamic banking is a complete financial institution that offers a range of services on the other hand conventional banking main focuses on minimum risk for profit maximization.

Chapra (1985) also stated that Islamic banking offers its customer more attractive and convenient banking. But for this it has to go through a detailed analysis before financing any business for investment. As Islamic banking is both profit and loss sharing sort of banking it develops a special bond with its customers. For the cases of liquidation Islamic banks keep their reserves to deal with the problem as there is a shortage of cash, and as there are no returns like interests to keep themselves risk free and safer it is more difficult for the Islamic banks to manage and to manage such problem Islamic banks share there accommodation to avoid any more losses and money shortage can be met.

Chapra (1985) also discussed about the equity based transactions for Islamic banking, as in Mudarabah way of banking was facing criticism. As equity based transactions cannot be considered halal (lawful) as the already fixed interest in included in the profit of the Islamic banking and it is more the profit would be shown as unjust interest.

According to Naqvi (1981) Mudarabah does not exist in shari'ah law neither it is been driven from Quran and Sunnah but it was a tradition used before Islam. Further more though because of his own criticism he also described that Mudarabah was used by the people who had money like old aged, women and children so that they can invest their money for trading on the basis of profit and loss sharing as if there was a loss in the business the investor also had to bear the loss. And the fact that holy prophet (peace be up him) did not criticise Mudarabah so it is considered to be accepted in Islam.

In 1995 Siddiqui discussed about Islamic banking and he discussed the diverse side of Islamic banking like modesty, trusteeship, conduct and work ethics. Work ethics is a most important part of Islamic banking as it is related with norms and moral value of the people. He discussed that do the people really think for the welfare of the society or just their own business and benefits to serve the cause of Allah. But still the questions Siddiqui ask remain unanswered. As mentioned in the holy Quran

"And spend (freely) in Allah's cause, and let not your own hand throw you into destruction; and persevere in doing good; behold, Allah loves the doers of good" (Holy Quran, chapter 2:verse195)

Cizakca (1995) discussed about the two different types of usury Mudarabah and Musharakah. On the other hand another author Ahmad (1995) also talk on the background of Islamic banking but his man focus was the difference between Islamic and conventional banking. He also discussed that Islamic banking has been developing for centuries. On the other hand the fact is Islamic banking has recently been recognised and established by the world in last two decades. Ahmad (1995) says that:

"Islamic injunction against riba is fourteen hundred years old and that, Islamic banks have emerged only in the last fifteen years, a question which may legitimately be asked by any observer of Islamic banking is why the Islamic world took so long to come up with the alternative to interest based banking"

Principles Required For Conventional Banking to Start Islamic Banking:

In recent years many conventional financial institutions and banks are heading towards and offering Islamic banking and investment with rising interest rates more specifically in Europe and Middle East. And as per the Accounting and Auditing Organization for Islamic financial institutions offers that the conventional banks need look at as if they want to start Islamic services for their customers. The first and most important step towards Islamic banking system is to look are their Articles of Association that it must comply with Islamic laws. As per Sheikh Nizam Yaqooby a famous scholar in Bahrain has highlighted some aspects in details in his articles.

Forms of collaboration and their permissibility

Prior to explaining the subject in great detail, sheikh has advised that before overlap and cooperation between Islamic conventional institutions in managing investments has to take several forms that may include:

  • IFI Islamic financial institution offer an investment portfolio backed by shari'ah experts and vast management of the portfolio are in an external investment managers these undertake to comply with Islamic financial institution's conditions and apply the standards and criteria laid down by 'IFI' while managing investment. This can only be done in shari'ah law if the investment manager performs according to the Islamic conditions and is been proven successful more than once.
  • If a conventional bank that markets and sell Islamic services or product, planned and introduced by IFI through the shari'ah expertise, and if it has been a successfully proven in more than one practical example than this is also authorized by Shari'ah.
  • If a conventional bank offers products of services saying that they are Islamic or open a 'Islamic window' on their premises. Some scholar say that it is not permitted in Islamic law because of the conventional banks do not comply with shari'ah Islamiah in terms of statutes and incorporation. Thus how can a conventional bank provide services and product according to Islamic law?

Further more, many scholars believe that the funds of conventional banking system are drawn from unlawful sources, so as they are forbidden in Islam, thus how can such funds be invest in Islamic services and products? On the other hand some scholar permit these types of investment as far as shari'ah conditions are fulfilled. According to sheikh Nizam some scholar also explain that it is some allow to deal with these type of funds where the sources are not fully unlawful or mixed.

More over, some of the scholars agree that the conventional banks may convert their investments and dealings in full with compliance with shari'ah investment and IFI standards with time. The scholars who agree to this view are Mir Taqi Usmani, Abdullah bin Sualiman, Abdul-Sattar Abu Ghuddah, Abdullah Al Muslih, Nazih Hammad and Yusuf Al Qaradawi.

Fulfillment of conditions by conventional banks:

Few economists such as Monzer Kahf and M. Ali Elgari have described that any body that is willing to start offering Shariah compliance financial products and services must meet following conditions, and these conditions then also be approved by the Accounting and Auditing organization for Islamic Financial Institutions (AAOIFI).

Shari'ah 'Supervisory Board':

A supervisory board for shari'ah is essential for Islamic investment institutions that want to offer Islamic services and board must constitute of highly qualified and trustworthy scholar to give (Fatwa) on financial transactions. And in addition to that these people should also have the experience and knowledge of modern ways of transactions and dealings. The articles of association should also show the existence of shari'ah board. And this board should be incorporated with incorporation of the financial institution and should be independent to give its opinions and functions.

Segregation of Funds:

Complete segregation of funds must be observed according to the requirement of Islamic shari'ah for Islamic investment products. This is for the concern of those investors who do not want their funds to mixed with conventional funds and want their earning from the halal sources their fund should not be mixed with others according to shari'ah law. Thus the scholar have advised that there must be separate mechanism for transaction recording which is not separate from conventional like separate accounts, computer programs and books should be maintained in order to provide proof that the complete segregation of funds have been carried out.

Safeguard Of Muslim investors' funds:

Mudarib does not guarantee the Mudarabah capital for the contributor of capital in Islamic law, thus the investment account in Islamic finance is not guaranteed by the mudarib. A policy should be stated in the Articles of association or the prospectus of the institution. That precaution shall be taken to guard the Muslim investors funds against trespass, negligence and fraud. Major financial institutions may sometimes avoid their responsibilities give reasons and excuses.

Commitment Of Management:

The dedication and commitment is required for the management of the financial institution who is providing such services with full understanding and cleared concepts. And should be anxious to comply and implement such teachings regulating it. Until and unless the entire management in not convinced and committed the activities of business and enterprise will not be fault free. On the other hand in the starting there is no harm if the senior management implements resolutions and trains the staff member. The manager should individual make examples for others to follow in all respects.

AAOIFI Standards:

A number of accounting and auditing standards are mentioned that the Islamic financial institutions must implement and comply with by the Accounting and Auditing Organization for Islamic institutions. The (ijtihad) collective personal reasoning of AAOIFI is most important as for the vital aspect of Islamic economic life. Therefore strict adherence to these standards is necessary. Many governments and central banks in many countries have circulated obliged these standards to financial institutions to comply with them. There fore any institution wish to offer Islamic services and product as an Islamic financial institution must be following these standards in order to void any misunderstandings confusion and ambiguity and to have sound business.

Sheikh Nizam Yaquby, Shariah Scholar Bahrain Ibe-Taymiyyah (Institute of Islamic Banking and Finance London)

Conclusion

The information above concludes that the Islamic banking is in existence from the time of holy prophet Muhammad Peace be upon him. The basic theme and origin behind Islamic banking are the teaching of Holy Quran, Sunnah and Hadees. And It is Clearly mentioned in Holy Quran that Riba (interest) is prohibited in Islam and there is no ambiguity about it. Islamic banking is emerged in last two or three decades and is been growing very much in the market through out the world especially in Europe and Middle East. Further more Islam is a religion that welcomes every one so therefore Islamic banking is not limited for Muslims however non-Muslims can also used Islamic banking.

Hadees and holy Quran guide us about the way of life not only as individuals, but also as a whole community. For example respecting elders, looking after neighbors, loving young and helping poor people (which Zakah play a vital role). The main objective of the Islamic institutions is to please Almighty Allah that ultimately results in the thinking of welfare of the society.

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