Islamic Financing System

Introduction

Unique features of Islamic finance is primarily based on the concepts of trusteeship (amanah) of the resources, freedom, justice, co-operation and brotherhood and most importantly welfare and interest of the society in general. Islam never advocates people to asceticism; rather it encourages enjoying the Mother Nature, beauty of the natural surroundings, the splendid gift of Mother Nature and its bounties. It also teaches man to master on them especially from those gifts of God, knowledge provided by the Mother Nature, which is created by the Almighty for the human and animals and plants. This is a splendid co-existence with the nature and man. Islam considers this quality and capability of mastery over the nature for the benefit of humankind as a part of worship and God fearing.¹ There is nothing wrong in wealth for him who fears God. This also means Islam demands from Muslims to maintain a balanced life between the worldly and the spiritual lives, let alone neglecting the economic life. Thus, the economic structure of Islam teaches human kind to be inclusive with the Mother Nature and become perfect human being.

Economic well being and the moral norms of islam

The greatest virtue in Islam lies in the splendid value of righteous living that Islam propagates mingles into all strata of human activity. The goals of the fundamental perspectives of Islam formulate the Islamic economic system. The understanding of the Islamic way of life is the chief clue to understand the nature of the economic system of Islam. These goals and values are-

• Economic well being and the moral norms of Islam.
• Universal goodwill and justice.
• Equitable distribution of income; and
• Freedom of the individual within the context of social welfare.²

Islam directs all Muslims to enjoy the abundance gifts of nature to be enjoyed by them gifted by God, and sets no quantitative limits to the extent of material growth of Muslim society. It even equates the material struggle well – being, with an act of virtue. Muslims are not allowed to beg, they are advised to earn their lively hood. This advice indicates that one of the economic goals of a Muslim society should be to create such an economic environment, where people who are willing to work can find a gainful employment in accordance to their capabilities.³

If this is not followed perfectly then the Muslim society will not be able to succeed in its spiritual aims, because those unemployed would be facing a life of extreme difficulties unless they depend on donations, or resort to begging or immoral practices, all of which specially the last two, would be against the teaching of Islam. This emphasis on economic well being is the main objective of Islam to specify its clear message to the Muslim. Islam’s main objective is at making life richer, and worth living and not poorer, full of obstacles.

Prophet Mohamed was chosen by God to be his last prophet and messenger at the age of forty. Before that, he was involved in business. He was born in Mecca, which was a popular trading center in Arabia. Caravans from Syria in the north and Yemen in the south used by pass by Mecca. Prophet Mohamed joined in these caravans. It was learned he traveled to Syria, Yemen, Bahrain, and so many other places in Arabia, Iraq, Ethiopia. From his very early age, he was engaged in trade and commerce. He had a good reputation as a hard working, down to earth, straight forward, honest, truthful and very successful businessperson.⁴ The Prophet is very particular about honesty and kind in his dealings with customers. These are the secrets of success in business according to Prophet Mohamed. He also advised fair business dealings according to Islam which is given below as per His advice.

1. There must be no cheating, when a sale is done.
2. A seller of any product should not make too much of oaths in a sale. However, it opens up market, but it reduces abundance.
3. The mutual consent between a buyer and seller must be agreed.
4. The cheating of weights and measures is not allowed.
5. The monopolizing is not allowed.
6. The products’ prices should not be fixed unless there is a situation of crisis or extreme necessity.
7. The product’s hoarding is not allowed.
8. The transaction of any intoxicants harmful to human beings is not allowed.⁵

Business ethics in shariah

Islamic religious law that governs not only religious rituals, but all aspects of our human beings daily life style in Islam, the literal translated meaning is “ the way “. The interpretation and implementing parts are extremely variable which can be found in the Muslim societies of today. Shariah-Complaint Finance is an area of modern finance that is being increasingly adopted by many banks and investment houses. The increase in prices of oil may be one of the reasons the investors are more inclined to do business with Middle East. The Western Financial services are beginning to offer Shariah –complaint investment instruments that neither pay interest, nor benefit from gambling. In the late 2007, a Sharia index was launched in Tokyo Stock Exchange. This index includes companies that comply with Sharia law. The list of the companies in this particular index is screened daily. Casinos, alcohol and tobacco companies are excluded as non-Sharia complaint companies.⁶

In the Islamic finance system, there are unique rules, restrictions and requirements regarding the business and investing. To be considered acceptable, the transaction must strictly follow to the principals of Sharia. The Accounting and Auditing Organization for Islamic Financial Institutions lays down complaisance standards for institutions that wish to gain access to the Islamic banking market scenario.⁷

Concepts and operation of islamic banking system

An Islamic finance term “Gharar” signifies the risk factors of a sale procedure where the terms, conditions and details are not fully certain or known. Gharar is forbidden by the Islamic Text Quran, which forbids trades that are considered to have extreme risks due to uncertainty. There are strict rules governed in Islamic finance against transactions that are highly uncertain or may cause injustice or deceit against any of the parties. Some principals establish the terms, conditions and details of the sale or transaction and modern principal organization in this context is IFSB. The IFSB is based in Kuala Lumpur, Malaysia; the IFSB began operations in 2003.⁸

The main objective of the IFSB is to promote awareness of issues that could have an impact on the Islamic financial services industry. It issues Sharia – complaint standards, holds conferences and seminars, and provides guidance and supervision, among other initiatives.⁹

Key differences between conventional banking and islamic banking

Islam forbids making money on money, but it allows you rent, and to trade and from these net proceeds dividends are given to the bank customers.¹⁰ The conventional Banks makes money on money, by keeping the money as fixed deposits and other various methods and pays interest in simple, compound methods. This is the key difference between conventional banking and Islamic banking techniques.

Takaful as an alternative to insurance

Takaful is a typical type of Islamic insurance, where members contribute money into a pooling system to guarantee each other against loss or damage. Takaful branded insurance is based on Sharia Islamic religious laws, and explains how it is the responsibility of individuals to co-operate each other and protect among themselves. Several institutions operate under the principals of Takaful. Under these institutions there are different plans such as Mudaraba which are Capital trust financing where the basic implementation is the contact which accumulates the capital along with the cost. However other schemes are marked up. Then there are also other plans under which leasing comes into consideration. This called Ijara. Another technique is defined Ijara wa Iktin wa which is the contract of hire purchase.

It can well be stated that Islamic fund and bond specified in today’s world are an extremely important factor for any individual or social establishment within the parameters of Islamic world. This is where instruments like Islamic fund and bond come into play. The company offers various modes of social systems based primarily on the developments of dynamic and ever changing society. They negotiate the social developments well enough to formulate systems that would help the researcher to monitor the needful areas. The basic concept of the events regarding their market structure is to become the leading supplier of materials. Alongside, it is the mission to become the best possible that would be responsible to employ every arrangements of events that would be at par with the satisfaction limit of the most demanding customer. Similarly, Islamic fund and bond strategy analysis of their successes and failures of their strategy hold its belief to become the most developed sector in the perimeter of financial section. Alongside, the organizers want to become the leader in the area of installation and support of integrated event with a commitment to total customer satisfaction. Broadly speaking the financial organizers’ concept of business is based on these firmly stated principals.

Fourth pillar of zakat and the waqf system

The fourth pillar of Islam is Zakat. The term ‘Zakat’ indicates the savings by an individual out of his or her wealth (generally 2.5 percent) to use the amount on social and religious causes. In a way, this is a social and religious welfare tax instructed to be paid by an individual to construct a welfare state. The very essence of this practice is to prove, all one has is in trust for Allah.¹¹

The lending of money with a hope of getting back with interests is a wrong way in of conducting one self in any social set up as per Islam. Therefore, the whole society becomes disorderly. Rich and poor, none can be happy in such surroundings. A person is properly motivated, he will be in service to the fellow human beings only in the hope of receiving a reward from Allah, he will give to others with divine assurance that he will be repaid in the next world. The society clean from exploitation, feelings of mutual distrust and disorder cannot flourish.

In the Islamic system of finance, the unique feature is basic human values, which are respected and reminded in every step of living beings to lead a better world where all citizens live harmoniously and become humane. Humanity is the basic principle, which the Islam and all religions of the world teach us.¹²

The overall islamic financing system

The concept of Islamic banking system is developing throughout couple of decades now. It could be mentioned that Islamic banking is a different approach to conventional banking and financial institutions. This is because the fundamentals of the Islamic banking and financial specifications that based on the religious norms and regulations. It could also be mentioned that behind the formulation of Islamic banking and financial institutions the major reasons were instrumented by demography, historical and political influences.

According to the estimation of the ‘Islamic Banking and Financial Institutions: The Progress and Probability’ published in 2005, there are around $521 billion worth of financial assets that are circulating in the fiscal market as per year ending March 2005.¹³ The entire amount of this investment regulated by principals of Islamic investment plans it could be enumerated that the entire procedure is regulated by the moral and spiritual obligations of the ‘Shari’ah’.

Therefore, it is seen that the Islamic financials instruments traded on GCC financials markets are huge and several countries regularly uses this form of banking. The countries can be enumerated as USA, UK, Yemen, UAE, Turkey, Tunisia, Switzerland, Sudan, Sri Lanka, South Africa, Senegal, Saudi Arabia, Russia, Qatar, Palestine, Pakistan and around 150 countries all over the world. Malaysia is one of the key players of this form of banking. Dallah Al Baraka (Malaysia) Holding Sdn Bhd, Malayan Banking Berhad (Maybank), Kuala Lumpur, Islamic banking & Takaful Dept, Bank Negara Malaysia, United Malayan Banking Corp. Berhad, Kuala Lumpur, Labuan Offshore Financial Services Authority (LOFSA) and Lembaga Urusan Dan Tabung Haji (Fund), Kuala Lumpur are the few most important financial institutions of the country. ¹⁴

The financial institutions that that deal with the instruments can be enumerated as International Islamic Financial Markets, Mudaraba Companies, Takaful Companies (These are insurance companies), Islamic Mortgage Companies, Islamic Windows, Islamic Investment Funds, Banks, and Islamic Banks.¹⁵ Under these institutions, there are different plans such as Mudaraba, which are Capital trust, financing where the basic implementation is the contact, which accumulates the capital along with the cost. However, also other schemes are marked up. Then there are also other plans under which leasing comes into consideration. This called Ijara. Another technique is defined Ijara wa Iktin wa which is the contract of hire purchase.¹⁶

The basic limitations of these plans are based on the contracts between the parties but the over all scenarios are based on the principals of Islam where a financial instrument like Musharaka is treated as long termed investment under the parameters of equity arrangement. The capital supplied in this case is the bank and the clients. The profit in this case is shared among the concerned parties in according to prior agreement whereas the loss is shared in accordance to the capital invested. On the other hand, another financial instrument like Mudaraba is treated as a financial credit on a short termed basis. Here the capital is supplied by the bank and the investor. The profit in this case is shared among the concerned parties in accordance to the agreed ratio and the loss is bearded by the investor alone.¹⁷

Therefore, it could be termed that the advantages and the disadvantages along with the limitations of the market are based on different aspect of the Islamic law but in an over, all sense this system is working quite well and the turn over and the volume of the entire formulation seems to develop over time. Further more it can be enumerated that the success of the GCC market is not only based on the religious beliefs but it has its financial values too that enables the uses to enjoy certain notion of tax free up to a limit and it works fine under controlled environment of the finance sector. However, the parameters of Establishing Islamic Fund to issue Islamic Bonds for Infrastructure Projects lies in the feasibility section of the economic aspects that are juxtaposed with social and international image.¹⁸

The existence of high market saturation, intense competition for customers and the pressure to produce profits provide conflicting incentives to issuers concerning the financial well-being of consumers. Responses to this series of forces by issuers depend upon their business strategy and corporate principles. Some of these issuers place a higher value on consumer protection than others would manage. Those successful consumers who can live within their means and use credit wisely are capable of establishing a solid credit history. They may manage this by paying careful attention and careful compliance with terms and conditions regarding their Islamic fund and bond. The less successful consumers can easily find themselves in scenarios of increasing debt that may ultimately end in a personal financial disaster. Issuers could assist consumers in the effort to be successful credit holders by providing clear information consumers may use to make wise choices regardless of whether regulations require it.¹⁹

Conclusion

Unfortunately for issuers and Islamic fund and bondholders there would not be a distinct line between the responsibilities held by either party. The responsibilities often overlap between the two. The Islamic fund and bondholder has responsibility for their knowledge regarding terms and conditions of each Islamic fund and bond. They also have responsibility monitoring the company’s marketing and account management practices along with changing issuers under appropriate conditions. Issuers would have responsibility in the provision of statements, solicitations and agreements that are not misleading. These statements, solicitations and agreements must notify cardholders of changes in terms and conditions, and alert them when risky.²⁰

The troubling concern would be that there would be several people not financially literate who do not accurately perceive consequences regarding not being financially successful. The successful use of debt and insurance toward not descending into debt to avoid default and bankruptcy is ultimately in the best interest of the issuer, cardholder and society itself as a whole. An opposite effect may have been afforded in the requirements intended to assist consumers with information. The reason for this would be that the information is far too complex to attract consumers’ attention or the presentation of information fails to be understood.²¹

Bibliography

Arthur, D., Scott, D. and Woods, T. 2007. ‘A Conceptual Model of the Corporate Decision-Making Process’ Journal of Financial Management, 3 (11), 223-233.

Asif, MAL; 2005. Islamic Banking and Financial Institutions: The Progress and Probability; Auckland: Book Resonance; 337, paragraph 3.

Banyard, P. 2008, Ethical Issues and Guidelines in Sociology, London, New York: Flanagan, Cara Publication.

Carrigan, M. and Carrigan, J. 1997. ‘UK Sponsorship: Fair Play or Foul?’ Business Ethics, 6 (2), 22-34.

Hayhoe, Celia R. Leach, L. Turner, Pamela R.1999. Discriminating Social issues on Economy, Journal of Economic Psychology, 20 (6) 643-656.

Hood, J. 2003, Financial Management systems, Journal of Risk Research 6 (3), 233–251.

Hutt, M. & Speh T. 2001, Business Financial Management: A Strategic View of Industrial and Organizational Markets, Philadelphia: Harcourt Collage Publishers.

Iqbal, D; 1999. Birth of Islamic Banking; Part II; Wellington: HDT Ltd, 33, 5-7.

Kumar, H. 2005, Win Some, Lose None: The Approach of a Successful Salesman, New Delhi: HBT & Brooks Ltd.

Lamb, D. 2004, Cult to Culture: The Development of Civilization on the Strategic Strata; Kolkata: National Book Trust.

Manning, C S. 2003, Principals and Practices: Society Today, Kolkata: National Book Trust.

Powell, M. 2004, Anatomy of a Social Event: Case Studies of Changing Strategies, Wellington: AB Publications Ltd.

Prawer, H A. 2005, Birth of Society: The Evolving Intelligence, Part II, Dunedin: Allied Publications.

Rigby, B & Porges, F. 2005, Design of Services for Events, 4 Ed. New York: Taylor & Francis Routledge.

Syyed, S; 2001. Thinking and Acting in Islamic Finance Market; Kolkata: ABP Ltd, 98, 1.

Footnotes

1. Syyed, S; 2001. Thinking and Acting in Islamic Finance Market; Kolkata: ABP Ltd, 98, 1.
2. Hayhoe, Celia R. Leach, L. Turner, Pamela R.1999. Discriminating Social issues on Economy, Journal of Economic Psychology, 20 (6) 643-656.
3. Syyed, S; 2001. Thinking and Acting in Islamic Finance Market; Kolkata: ABP Ltd, 98, 1.
4. Hayhoe, Celia R. Leach, L. Turner, Pamela R.1999. Discriminating Social issues on Economy, Journal of Economic Psychology, 20 (6) 643-656.
5. Carrigan, M. and Carrigan, J. 1997. ‘UK Sponsorship: Fair Play or Foul?’ Business Ethics, 6 (2), 22-34.
6. Banyard, P. 2008, Ethical Issues and Guidelines in Sociology, London, New York: Flanagan, Cara Publication.
7. Asif, M A L; 2005. Islamic Banking and Financial Institutions: The Progress and Probability; Auckland: Book Resonance; 337, paragraph 3.
8. Hood, J. 2003, Financial Management systems, Journal of Risk Research 6 (3), 233–251.
9. Hutt, M. & Speh T. 2001, Business Financial Management: A Strategic View of Industrial and Organizational Markets, Philadelphia: Harcourt Collage Publishers.
10. Arthur, D., Scott, D. and Woods, T. 2007. ‘A Conceptual Model of the Corporate Decision-Making Process’ Journal of Financial Management, 3 (11), 223-233.
11. Hutt, M. & Speh T. 2001, Business Financial Management: A Strategic View of Industrial and Organizational Markets, Philadelphia: Harcourt Collage Publishers.
12. Rigby, B & Porges, F. 2005, Design of Services for Events, 4 Ed. New York: Taylor & Francis Routledge.
13. Asif, M A L; Islamic Banking and Financial Institutions: The Progress and Probability; Book Resonance; 2005, 337, paragraph 3.
14. Syyed, S; Thinking and Acting in Islamic Finance Market; ABP Ltd, 2001, 98, 1.
15. Iqbal, D; 1999. Birth of Islamic Banking; Part II; Wellington: HDT Ltd, 33, 5-7.
16. Iqbal, D; Birth of Islamic Banking; Part II; HDT Ltd. 1999, 33, 5-7.
17. Prawer, H A. 2005, Birth of Society: The Evolving Intelligence, Part II, Dunedin: Allied Publications.
18. Kumar, H. 2005, Win Some, Lose None: The Approach of a Successful Salesman, New Delhi: HBT & Brooks Ltd.
19. Powell, M. 2004, Anatomy of a Social Event: Case Studies of Changing Strategies, Wellington: AB Publications Ltd.
20. Manning, C S. 2003, Principals and Practices: Society Today, Kolkata: National Book Trust.
21. Lamb, D. 2004, Cult to Culture: The Development of Civilization on the Strategic Strata; Kolkata: National Book Trust.