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Definition of bank
An association which usually run by a state or peoples of federal government, which do these activities honors instruments drawn on them pays interest on them; time deposits, invests in securities, discounts notes, makes loans, , receives demand deposits , drafts, and notes, collects checks, certifies depositor's checks , issues drafts and cashier's checks.
Islamic bank definition
Islamic banking mean providing banking services that is match with the rule of (Sharia) and promoting of Islamic economics through its real application the. Sharia does not permits the acceptance or payment of riba fees for giving loan and accepting of currency respectively for certain time period and investing in businesses that render goods or services which are in clash with islamic rules. islamic rules were used before as base for making economy healthy in old times. in 20th century lots of Islamic banks were come into being to apply the islamic rules within the Muslim community
History of Islamic banking.
Classical Islamic banking
In the Golden era of Islam proto-capitalism and free markets concept were develop in the Caliphate from 8th-12th centuries market economy and mercantilism concept were come to scene . which mean "Islamic capitalism" A stronger monetary economy was established on the ground of the spreading levels of distributing of secure high-value currency (the dinar) and the coordinating of monetary areas that were independent before
Lots of innovative ideas and techniques were bright to Islamic banking at the start , including bills of exchange, the new form of partnership (mufawada) such as limited partnerships (mudaraba), and simple forms of capital (al-mal), capital accumulation (nama al-mal), cheques, promissory notes, trusts ( Waqf), startup firm, transactional accounts, lending, ledgers and assignments corporation were same to organizational enterprises does not dependent from the country also existed in the medieval Islamic regions , at the same time agency institution was also come to scene. almost all early capitalist ideas were adopted and develop in Europe in 13tth century
"Riba" means extra , increase or addition, which is rightly interpreted in Shariah terminology, mean any extra incentives excluding due consideration (consideration does not include time value of money). The definition of usury in old Islamic Sharia law was "extra value without counterpart." or "to make sure equality in real value" and that "extra value was immaterial." At that time gold and silver currencies were the appreciated metals that identify the value of all other things being traded. Adding interest to the benchmark itself (ex natura sua) does not make any logical sense as its value does not disturb in relation to all other materials..
Adding interest was acceptable in some cases . money that were based on guarantees by a state to give the stated value (i.e. fiat currency) or based on other things like paper or base metals were permitted to have riba applied to them With the introduction of metal base currencies in Islamic regions , no such rule was present that paying a high debt of this fiat money was interest their concerned was the real value of money rather than the digits value. For example, at the start for a lending of 1000 gold dinars to be return as 1050 dinars of equal total weight
Modern Islamic banking.
The first modern islamic banking experiment was take place in Egypt to avoid objection on that at that time Islamic bank name was keep secret and the man who did this honorable and gallant act was Ahmad Elnaggarat that time he take the form of a savings bank which was based on profit-sharing in the town of Mit Ghamr at Egypt from 1963 to 1967 the experiment was successful and there were nine more islamic banks opened in the country With opening of Nasr Social Bank in 1972 the mit ghamr project become their part which still operating in Egypt in 1975 to facilities the islamic countries and make fund available for their different projects the islamic development bank in 1975 first islamic commercial bank was opened and name was Dubai islamic bank the bank at beginning offer products which was basic and similar conventional banks products but the major development take place later on and new islamic products come into stage .
The islamic banks show 10% to 15% growth per year . round about 300islamic institutions are open in 51 countries, including the US 250 mutual funds that match with Islamic rules has been open almost US$822 billion sharia-compliant assets are generated allover the world The Economist say which is 0.5% of total world estimated assets in 2005 due to recent economic crisis 25% decrease was occur in total world asset value. 0.7%.contirbution is sharia compliant assets.
THE PHILOSOPHY OF ISLAMIC BANKING AND FINANCE
Islamic Shariah discourage 'riba' but it does not discourage all kinds of gains on capital. It only discourage the incremental amount that paid with returning of loan or debt that is not permitted . sharia rules simply need that performance of capital must be bring into attention in giving the capital. The rejecting of risk free return and allowing of trading is in the following place of Holy Quran Verse 2:275. makes the financial activities in an Islamic set-up real asset-backed with ability to cause 'value addition'.
risk-sharing, owning and handle goods physical make islamic banks different from conventional. to use different Islamic modes of finance for trading, leasing and construction contracts for bringing income into islamic banks it deal in asset management and they have to tackle unique risks of management assets by adopting practices of corporate governance. the banks must open itself to Halal income, depositors will also receive Halal income.
Different businesses permitted by Islam when the Holy Quran was revealed are joint ventures must be based on sharing of risks & profits and temporary services through trading. Include cash and credit, and leasing activities. In the Verse II:275, Allah the Almighty did not deny the apparent similarity between trade profit in credit sale and Riba in loaning, but resolutely informed that Allah has permitted trade and prohibited Riba.
Profit mean as 'reward' for (use of) capital and sharia rules encourage gainful deployment of extra resources for increasing of their value. but along with the profit. the capital itself bear the burden of loss. The Financial transactions which are allowed must be attached with goods, services or benefits. At macro level, the Islamic finance this quality may help in making good discipline in conduct of fiscal and monetary policies.
Not only trading is allowed in Islam. Islam also allows leasing of assets and receive rent against that by the lessee. All things/assets which is not consumed with their use can be leased out against . in leased the asset remain in custody of lesser who take risks and gets compensation of his ownership.
Function of islamic banks
all interest-free banks has got success in developing consensus on some points but you will find differentiation in their application. These differences have many factors that should also take into count laws of the country, objectives of banks are vary. bank's experiences, the require to attach with other interest-based banks.
All Islamic banks offer three kinds of deposit accounts: current, savings and investment.
Current or demand deposit accounts is same as in conventional banks
Savings deposit accounts work in various ways. In many banks permit the withdraw to money but banks may demand the guarantee to receive back the amount from them. . Banks adopt several methods of inducing their clients to deposit with them, but no profit is promised. In others, there is no difference between saving and investment accounts withdrawal and minimum balance is not matter . your in islamic bank is not free of risk but bank try to invest in low duration project .profit normally low from islamic bank islamic bank also keep reserve
Principle amount that are going to invested are not guaranteed in investment account the are taken from customer for fix unlimited time on basis of profit and loss share
Modes of financing
Islamic bank make investment in in different project and buy assets that can divide into three different ways investment, trade and lending.
Investment financing operates in three ways a) Musharaka in this bank enter into join venture with other party both contributing their share in project. Profit and loss are distribute according to agree percentage the may withdraw himself after initial period. b) Mudarabha bank offer money and customer contribution is expertise management and labour and loss is bear by bank and profit is distributed according to agree term . c) the bank offer money for the project but the fix rate of profit at the end of project bank also study it that profit that they demanding is reasonable or not if the project end in profit the bank take their share and remaining left for other parties but if the loss occur the bank will take their share in loss also.
Work in different ways : a) Mark-up the bank buy demanding goods for customer and customer agree to repay the amount with profit. b) Leasing the bank purchase goods for customer and leases for him for specific time period the lessee pays the agree amount for bringing that assets under his own ownership . c) Hire-purchase the bank purchase goods for customers and give that to customer on agree rent for certain duration the customer automatically become the owner of that after overing that time period. d) Sell-and-buy-back the bank purchase properties from customer with condition the customer will repurchase that properties from bank at agree . e) Letters of credit the bank agree to pay his fund on behave of customer to share profit with customer
Lending is another function : a) Loans with a service charge then bank provide funds to customer but they get charges for that to full fill their expenses these charges depend on loan size b) No-cost loans bank also established fund give to those peoples who are need of it with out any charges like cultivators manufactures etc c)Overdrafts the bank some time offer draft facilities to their loyal customers
The islamic banks perform so many other activities also like transferring money bill collections, trade in foreign currencies at spot rate etc..
Feature and benefits of islamic banking
The Islam always discourage the riba which is the most important feature of it therefore islamic offer riba free transaction to their customer the islamic bank need more to be done like equal division of income and wealth plus it increase the participation of equity in the economy simply there is no place for riba in Islam
Islam does not allowed Muslims to do such transaction which involve riba loan made to any one and taking or giving charges for it is riba loan may for consumption or for production
The discouragement of riba in Quran is The first revelation emphasizes that interest deprives wealth of God's blessings. The second revelation condemns it, placing interest in juxtaposition with wrongful appropriation of property belonging to others.
The third revelation enjoins Muslims to stay clear of interest for the sake of their own welfare.
The fourth revelation establishes a clear distinction between interest and trade, urging Muslims to take only the principal sum and to forgo even this sum if the borrower is unable to repay.
In hadith The Prophet (p b u h) discourage all those who take riba record or witness the transaction, they all are guilt.
If peoples think that discouragement of riba mean capital is costless not infect Islam know that capital is factor of production but factor of production are not permitted to have any pre-determined claim on the production increase in shape of riba the profit and loss is the best alternative for it
Profit and loss sharing help to bitterly allocate the resources the profit and loss ratio will affect by market fluctuation and capital flow to that sector will increase.
the basic rule of Islam is to follow justice which is very important for profit and loss sharing in funding the projects. The peoples who provide fund and the beneficiary take the equal part in profit and loss the risk is not bear by share entrepreneur. This mean follow the rule of fairness and justice divide the output of The project equally both in profit and loss comparing islamic with conventional banking. Islamic banks focus worthiness and what is the project profit scenario which is good formula for islamic funding while returning the loan is sub-segmented the important feature of islamic bank that it brought together ethical and moral values into banking operation. ethical and moral value cannot separate from islamic banks and moral and ethical standards show consistent behavior set by Islamic jurisprudence islamic banks have limited option in funding the goods and services. The islamic bank discouraging to fund alcoholic beverages and tobacco or morally rejected services like casinos and pornography. in any country these things is legal or illegal islamic bank does not offer fund for it as the goods which is produce have good result on over all economy but they some side effect on society which also need to be address islamic bank does not reject that factor also which they think is their moral and ethical responsibility.
Islamic bank treat their depositor client as investor because they invest their money in high profitable projects they do complete verification and then offer find to the projects and profit and loss are share equally
The islamic banks does not offer fix profits to customer they have to perform well to beat other competitor in the market other wise depositor will go to other banks
Islamic banks bring together the investors and those who save in market threats between them is finished islamic banks change intermediation role form conventional banks.
Literature survey is the documentation of a comprehensive review of the published and unpublished work from secondary sources of data in the areas of specific interest to the researcher. Thus we have studied books, newspapers, magazines, reports and searched on internet for the topic of our interest .
The maryum ayaz manager at business development of apvison she claim in her research that islamic bank grow in double digit in pakistan but in spite of that islamic bank face few problem that need to be address on right time the major problem is
Human resource for Sharia'h compliance
Unresolved Fiqh Issues
Technology islamic banks have the problem of diverting from what they said Under-Utilization of Partnership-based contracts Limited Maturity Structure
Separation of Investor Classes
Investor's Rights and Governance
Because of diverting from it path the islamic bank loosing popularity among the Muslim since islamic banks are new idea so it require time to make itself more adjust to pure islamic rules
In another research by salman ahmed sheikh in 2007 he identify the problem with islamic mode of finance the rent can be only on hard goods rent can not be charge on money the current islamic practice shift money into assets and then sell that assets to or give that assets on rent to earn profit. He criticizes the bank practice mode of finance and risk taking by the banks .
The theoretical framework is the foundation on which the research project is based because it is logically developed, described and elaborated network o relevant to the problem situation and identified through such processes as , observations and literature survey. Experience and intuition also guide in developing the theoretical framework.
The dependent variable is the variable of primary interest to the researcher .the researcher goal is to understand and describe the dependent variable
Role of islamic bank in NWFP economy
The role of islamic banks is keen interest area we will make their relationship With other variable which are directly affecting them
An independent variable is one that influences the dependent variable in either a positive or negative way.
The suitable environment have direct relationship with increasing or decreasing role of islamic banks in economy if environment peaceful more peoples willl come to bank vice versa
Peoples does not aware of islamic banks fully they think that nothing is change in islamic banks they said it is second name of conventional banks and they afraid of it due to that islamic banks role is limited so far in society
Experience and train staff
Since islamic banks is new born baby as compare to conventional banks so it does not have experience staff the existing staff require training which is very costly for bank to train every member so again lack of train and experience staff limited the role of islamic banks
Riba free banking
Riba free banking is wish of peoples of NWFP by completely making banks riba free will increase the role of islamic banks in economy
As the diagram shows that the problem under study is the role of islamic banks in NWFP economy and it is the basic key interest to the research so it is the dependent variable. The things which influence are the peoples awareness, riba free banking, experience and train staff, and suitable environment . by full filling these independent variable increase the role of islamic banks in economy
The hypothesis is a testable statement of the relationship among variables and it tests whether these are differences between two groups or among several groups with respect to any variable. The hypothesis for islamic banks role in economy of NWFP as follow
- If riba decrease then role of islamic banks will increase.
- If the suitable environment is improve then the islamic banks role will increase.
Ho: P=0 H1: P>0
p=Relationship between riba and role of islamic banks
p=Relationship between suitable environment and islamic banks role
the type and nature of study
The purpose of the study is to test the hypothesis. In this study will be examine the relationship between the two variables, the riba free banking i.e. independent variable and role of islamic banks i.e. dependent variable.
Type of investigation
In study our type of investigation is correlation. As we are trying to identify and workout the role of islamic banking in economy of NWFP.
Extent of research interference
This study is conducted in totally normal and routine atmosphere. There is no interference by the researcher, so we can say that it is minimal interference study.
The study setting
The research about role of islamic banking in NWFP economy is done in natural environment without any manipulation. Thus the study setting of this research is field studies / no contrived
Unit of analysis
The unit of analysis in role of islamic banks in NWFP economy is "individual" because the questionnaires were filled up by individuals.
The data is gathered only once that's why the study is cross-sectional.