literature review -...
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Chapter II
LITERATURE REVIEW
2.1. Introduction 2.2. Major Studies
Reference
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Chapter II LITERATURE REVIEW
2.1. Introduction
The objectives and hypothesis of the study explained in the previous chapter
are formulated in accordance with a detailed and thorough review of the relevant
literatures comprising of books, journals, periodicals, Ph.D. theses etc. of national and
international importance. While a few of them are focusing on theoretical propositions
a good many are related to the practical applications of the concept. Interest-free
Banking is a newly emerging area in which the philanthropists and research scholars
have been showing active interest since the closing decades of the 20th century. It is a
banking system which completely eliminates interest. Banking transactions such as
accepting deposits, advancing loans etc. are done without interest.
The origin and development of interest-free financial institutions can be traced
back to the 1950s. But the functional beginning in real terms portraying the theoretical
features started only after 1970s. Countries like UAE, Kuwait, Egypt, Saudi Arabia,
Sudan, Iran, Pakistan and Malaysia can be traced as the pioneers in this field. At
present about 60 countries in the world is successfully conducting interest-free
banking having an asset value of US $1000 billion. Around 200 Islamic banks are in
operation throughout the globe, including Jeddah based Islamic Development Bank
(IDB).
A few non-banking financial institutions on interest-free basis are also in
operation in various countries of the world. They function as non-banking institutions
as the laws of the land of those countries do not allow such institutions to operate as
banking institutions on interest-free basis.
In the unorganized sector too thousands of institutions are functioning in
different parts of the world offering micro financing facilities to the downtrodden
sections of the society to save them from the clutches of indigenous money lenders.
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Interest-free financial institutions are also established in some western European
countries like Luxemburg, Denmark, U.K., Switzerland etc. Several conventional
banks in different countries also opened interest-free windows with the main aim of
tapping the potential of Islamic investments and savings. In the USA more than a
dozen interest-free financial institutions (IFFI) are in operation and a few conventional
banks are offering transactions through interest-free (IF) windows. Reports from
Germany reveal that some of the conventional banks there are already decided to shift
their working towards the interest-free set up. In India too there is a recent awareness
in this field on the basis of declaration of the Hon’ble Prime Minister Dr. Manmohan
Singh to appoint a committee to inquire into the possibilities and potentialities of
Islamic banking. The officials and experts from RBI and SBI are the members in this
committee (Economic Times, July 5th 2005). Even though the committee reported to
keep the matter in pending for the time being, a live discussion is being initiated
throughout the country on the implementation of Islamic banking at least on a trial
basis.
A good many number of articles, books, reports and a few research works etc.
have been published. Pioneer among them are subsequently reviewed.
2.2. Major Studies
Almost all major aspects of IF Banking have been discussed in detail in the
book, ‘Islamic Finance – Innovation and growth’1, published by Euromoney Books,
London. The book comprises 13 chapters written by international professionals. It
provides practical information to those who have business relations with IFFI. It
examines the present practices of IF financing in detail and discusses its future
development. “A volume like this will not only improve the technical appreciation of a
complex economic topic, but also serve to build bridges of cultural understanding
among communities with different social and religious heritages; as a non-Muslim, my
interest was sparked by the intellectual challenges of designing a system that could
Chapter II Literature Review
23
mobilize and allocate savings without the device of a fixed price for the time value of
money”. (Crockett)2.
The book provides detailed practical analysis of methods and instruments
used in IF finance. It facilitates academic information about the operations of IF
accounting systems for the use of international financial community. Based on factual
data, it provides figures and analysis to show the practicability of this financial
methodology at par with the ‘Sharia’ (basic rules) principles of Islamic finance. The
book also provides information on how a financial system could work without
traditional interest rate.
In the following paragraphs we propose to discuss the different aspects
discussed in the book and the articles referred.
Simon Archer and Rifaat Abdel Karim3 in the introductory chapter of the book
provide the features and historical development of IFFIs. The different types of
financial services offered, the future prospects, innovation and growth etc. are also
given
Yusuf Talal Delorenzo,4 has introduced the theoretical framework for IF
finance based on ‘Sharia’ principles. Every aspects of a Muslim’s life is governed by
‘Sharia’ principles that are permitted (halal) and forbidden (haram). In ‘Sharia’ point
of view, money on its own may not generate profit. Capital may earn profit only when
it is combined with the sort of risk or liability inherent in business enterprises. The
gain from capital is linked not only with profits but also with the possibility of losses.
This is the reason why the ‘interest’ is prohibited by the religion.
In interest-free banking the conventional lending and depositing contracts
based on interest are given way to ‘partnership’ and ‘cooperation’ based on ‘profit and
loss sharing’ (PLS). This new relationship leads to a ‘performance incentive’ where
capital is utilized for actual investments and asset creation. A variety of IF alternatives
to conventional finance are listed. Ample explanations are given on the basis of facts
that business can indeed be conducted effectively without interest.
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Prof. Rodney Wilson,5 introduces ‘Mudaraba’ as a traditional profit-loss
sharing (PLS) method as an alternative to interest based system which had been used
since the time of Prophet Muhammed. The evolutionary phases of worldwide
development of IFFIs since 1950 are given in a systematic manner.
The establishment of Islamic Development Bank (IDB) in 1975 in Jeddah and
the spread of commercial interest-free banking to countries like UAE, Kuwait,
Bahrain, Qatar, Saudi Arabic, Egypt, Sudan, Iran, and Malaysia etc are depicted.
Malaysia pioneered in this field with the establishment of the central Bank called Bank
“Negara Malaysia”. By 1990 conventional banks throughout the world started to open
‘interest-free windows’ to offer deposit facilities to their conventional clients on
interest-free basis.
Diversification of IF banking from the traditional form ‘Mudaraba’ to other
forms such as ‘Musharaka’, ‘Murabahah’, ‘Ijarah’, ‘Istisna’ etc. and how IF banks
also offer other services like expansion of personal finance, housing loans, car
purchase schemes, real estates, debit card facilities, international money transfers etc.
are shown in detail.
The theoretical models of various interest-free financial investments like
Islamic mortgage, Islamic insurance (Tekaf) etc. are also given. For sustainability of
IFIs working in various countries, earnest efforts are taken to establish an International
Islamic Financial Market (IIFM). The involvement of IMF, WB and International
Financial Corporation (IFC) with the IFFIs and stresses the need for strengthening this
relationship in view of the potentiality inherent in IFFIs.
Zamir Iqbal and Abbas Mirakhor6 explain various forms of Islamic Financial
institutions and its future challenges in Chapter 4.
The matters related to corporate governance, regulatory, legal and accounting
issues in respect of IF banks are examined buy the author Micheal Clode7.
Unlike the conventional banking IF banking is basically associated with
‘Sharia’ principles. Consequently, a ‘Sharia’ Supervisory Board (SSB) is constituted
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for all IFFIs. The main function of the board is to interact with ‘Sharia’ jurists in
deliberating any issues faced by IFFIs (Muhammed Daud Baker)8.
Fadeel Muhammed Nasreldin Ahammed9 gives an insight to some practical
legal problems confronted with interest-free finance mainly concerned with
‘Murabahah’, ‘Mudaraba’ and ‘Ijarah’ transactions. He stressed the need for an
effective legal provision to deal with the disputes related with the above transactions.
The disputes are related with the securities and inter-creditor issues, default and its
consequences, the impact of loss and damage etc. Tax consideration is another
challenge which the IF banking faces so as to make the investment viable for the
investors. The author brings forth the examples of US to explain how the IF banks can
face the problem of corporate income tax levied on the profit of enterprises.
Ahammed Thaha Eltayeb10, examines the recent developments in the area of
‘financial accounting’. He probes in to the details of the establishment of AAOFI, how
it differs from the conventional accounting standards propounded by Generally
Accepted Accounting Principles (GAAP) of International Accounting Standards
(IAS). The Islamic accounting standards in respect of financial statements, asset
valuation, fixing liability, income recognition, profit allocation, reserve provision,
allocation for the ‘zakah’ (charity fund) etc. are peculiar to IFFIs and hence the
function of a separate accounting and auditing organization in the place of IAS
become very essential.
Stella Cox11, describes a spectrum of financial services that are ‘Sharia’
compliant. The initial concentration of IF banks on domestic banking business and its
successful operation is displayed. More significance is attached to retail banking,
private client service and consumer finance through ‘Murabahah’ contract. The author
provides the history of successful operation of interest-free retail banking in some
Asian countries and UK through which he observes that the IF banking has immense
opportunity in Western European non Muslim countries where the Muslim population
is in a minority.
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“Project Financing” as a well suited financing solution is introduced by Syed
Thariq Hussain12. Since interest-free banking is basically associated with PLS, it has
very strong emphasis on project financing which leads to productive endeavors. He
also brings forth the examples of project financing which are successfully operated in
Pakistan, Kuwait, UAE, Malaysia and in IDB at Jeddah.
Islamic equity investment has gained importance for the Muslim investors who
do not wish to invest in shares of interest based companies. Muhammed A. Elgari13
throws light to the purification aspects of equity shares, which allows the investors to
invest in ‘Sharia’ compliant investment.
Youssef Shaheed Maroun14 deals with the problem of ‘liquidity management’
faced by the IFFIs. The problem of liquidity management arises due to the absence of
‘lender of last resort’ facility, the deposit insurance schemes and inter-bank money
market. This problem is created by the maturity mismatching between deposits
(liabilities) and loans (assets). The conventional banks overcome this problem very
easily by depositing the excess cash and by borrowing for the shortages. The IF banks
overcome this problem partially through short term trade financing. But there is no
efficient mechanism for funding the shortage. The author suggests the introduction of
a group of acceptable financial instruments as a solution for the problem. Risk
management portfolio is another significant area of interest-free finance since it is
based on the risk sharing principles both for depositors as well as share holders. The
use of some specialized products available in IF finance for hedging the risks such as
‘salam’, ‘urboun’, ‘khiyar–al–shart’, ‘murabahah’ etc. are reviewed. The author
stresses the need for the development of ‘secondary markets’ to achieve active trading
of Islamic securities.
The appendices of the book comprise the lists of IF banks (175 numbers spread
over 44 countries) and the list of conventional banks offering IF windows (87 numbers
spread over 16 countries). The end part of the book gives a profile of leading IF Banks
operating successfully in various parts of the world like Al-Rajhi Bank, Al-Thoufeek
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Company, Dubai Islamic Bank, First Islamic (investment bank), Gulf Finance House
etc.
Mohamed Mansoor Alam15 elucidates the practical application of Islamic
Economics in a systematic manner in the book ‘Perspective on Islamic Economics’.
The book deals with the value perspective of Islamic Economics and finds solution to
the basic challenges of modern society. The academic and analytical studies published
in various research articles of the book fulfils the need for filling the gap so far existed
in the studies of Islamic Economics. The book has two parts. The first part deals with
the ideological and philosophical perspective of Islamic Economics. The second part
deals with the issues in Islamic Economics like Economic Development, Factors of
Production, Distribution of Income and Wealth.
The prohibition of interest by Islam and its justification is clearly explained in
the portion where the book deals with the mechanism of Islamic Economic System. In
the case of consumption loans, the charging of interest violates the basic principle of
Islam that it lays an obligation on those who have surplus income and wealth to
support and help the needy and the poor. In the case of investment loan the interest is
unjust because it is based on the guaranteed return of capital while uncertainty
surrounds on profit.
The genuine answer to the question why Islam has abolished interest is
portrayed by listing several adverse effects of interest. Various forms of
entrepreneurial activities such as private proprietorship, Sharikah or musharikah,
mudharabha or quiradh etc. which avoid involvement of interest are also depicted in
detail. The distinguishing feature of Islamic Economic System in comparison with
capitalism and communism is another specialty of this book.
Mufti Muhammed Shafi16 in a small book in Urdu by name Distribution of
Wealth in Islam which is translated into English by Muhammed Hassan Askari Karrar
Hussain. The book starts by differentiating Islamic Economics from Capitalism and
Communism. “Capitalism affirms an absolute and unconditional right to private
property. Socialism, on the other hand, totally denies the right to private property. But
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the truth lies between these two extremes and that is Islam. Islam admits the right to
private property but does not consider it to be an absolute and unconditional right
which is bound to cause disorder on the earth”17. By explaining these three views in
detail and by compromising the capitalistic and social views the book reveals how the
Islamic system eradicates the concentration of wealth. The book also points out the
fact that why a fixed return is not allowed as interest for lending capital or money,
where as the rewards for land and labor are allowed in fixed rate.
“The basic difference between capitalist system and Islamic system with
regard to the distribution of wealth is that capitalism allows interest, while Islam
forbids it”18. Money is not utilizable in itself where as land and labor are utilized and
exploited in the process of production. Money can only be increased either through
partnership (Shirkath) or through co-operation (Mudarahbaha). In both the cases the
profits and losses should be shared between the owners of money and investors. One
can lend money to another person by way of help and no reward is entitled from it.
The book illustrates how prohibition of interest led to reduce inequality in distribution
of wealth.
Islamic view of distribution of wealth is also explained indicating two kinds of
people who have the right to share the wealth. First is those who have the “primary
right”; viz. those who have the right to have wealth directly due to their participation
in production; they are called as factors of production. They get the distribution of
wealth in the form of rent, wages and profit. The second is those who have the
secondary right; for those who have no direct participation but entitled to get the
distribution of wealth through Charity (Zakath), Ushr (another form of zakath levied
on land produce), Kaffarath (compensation for breaking a law), Sadaqa (non-statutory
charities), Nafaqat (helps to the close relatives), Wirasat (systems of inheritance), etc.
It is not interest but profit which has been considered as a reward for capital. The
entrepreneur is not an independent factor, but is included in any one of the three
factors.
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Abdul Wadood Khan, a Pakistani writer, who had been keenly interested in the
elimination of interest from the banking system, wrote a booklet entitled ‘Method for
Starting Interest-free Banking’19. This booklet is printed and distributed among the
public free of cost by the author. The early part of the booklet reveals the Quranic
prohibition of interest in its true sense and explains various disastrous consequences of
interest not only for the people but also for the economy as a whole. It shows that the
main cause of inflation and unemployment in Pakistan is ‘interest’. Various ailing
symptoms of interest based economies are illustrated by quoting the reports of eminent
scholars and economists in various journals and periodicals. The booklet suggests a
viable banking instrument called as TMCL (Time Multiple Counter Loan) which can
replace interest.
TMCL is a peculiar concept introduced by the author to counter the interest
based system. It is a method of granting interest-free loans of large amounts in
exchange of TMCL of much smaller amount for a larger period. An entrepreneur, who
wants to get a loan for the amount of two million rupees for a period of one year, can
get this loan free of interest by depositing 2 lakh rupees for 10 years. If the borrower is
unable to repay the loan in time the delay in recovery may be compensated by
retaining the counter loan for an appropriate additional period.
The bank can invest the counter loan amounts in profitable investments like
stock exchange, real estate, venture capital, and in industrial or commercial
undertaking working in PLS basis. The deposits received in the banks are also
invested as above. The comments of eminent Islamic economists like Umer Chapra,
Mohammed Ali Elgari etc. are also given.
Mohammed Najathulla Siddiqi20 is one of the few Islamic economists who
pioneered the work on interest-free banking set up. He has striven hard to introduce a
system of economic finance which evolved a strong sense of honesty and moral
integrity. He served as Associate Professor of Economics and Professor of Islamic
studies in Aligarh Muslim University and as Professor of Economics at King Abdul
Aziz University, Jeddah. A viable model of banking without interest was developed by
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him. His book “Banking without Interest” was his first book in interest-free banking.
Kurshid Ahmed, Institute of Policy Studies, Islamabad, wrote in the foreword of the
book, “The book made its mark both in intellectual as well as practical circles. It was
read and acclaimed as a pioneering work in its field. It also inspired many groups to
start practicing interest-free banking, even though on a small scale. A number of credit
societies were formed due to the impact of this book and a movement towards
elimination of ‘riba’ (Quranic term for interest) was generated”.
The book presents an overall working of interest-free banking and tries to find
out ways and means on how the interest-free banking discharge all the functions of
conventional banking. A banking system can be set up even without interest and it can
perform all the functions of conventional banking.
The first chapter of the book describes how the banking system without
interest is established on partnership (Shirkat-e-Enan). In this case two or more
persons provide share capital and jointly invest and agree to share the profit or loss in
specified proportions. To expand the banking business additional capital can be
acquired on the basis of ‘mudharabha’ (co operation). The bank performs the usual
banking business of advancing loans to the needy and accepting deposits from
customers. The detailed structure of ‘Shirkat–e–Enan’ and ‘Mudarabha’ is given in
chapter two. It also explains how the profit is distributed among the entrepreneurs and
banks. If the business results in a loss, then that also has been shared between the bank
and entrepreneur in predetermined proportion. The banks can also do the purchase and
sale of shares of commercial or industrial enterprises; provided that it should be in line
with ‘Sharia’ principles so as to avoid speculative investments. The other services of
banks like providing safe deposit lockers, transfer of money through cheques, drafts
and letter of credit, alternative for discounting the bills of exchange etc. are also
undertaken in an interest-free set up. The third chapter again covers the detailed
operation of Mudarabha account.
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One of the important aspects of Islamic Banking is the provision of short-term
loans to the needy people like business men, agriculturalists, traders and consumers.
The nature of advancing these loans on interest-free basis is explained in chapter four.
All banks need to keep only a small fraction of the total amount of its current
loan accounts for the purpose of meeting the withdrawal demands. A part of the
remaining portion can be utilized for advancing short-term loans and another part is
used to earn profit by investing on ‘mudarabha’ basis. The right to utilize a part of the
current account for profit generation is justified on the point that the other part is
utilized for advancing short term loans to needy people on interest-free basis.
The stationary and service expenses of such loans can be met either by
charging a fee for the service or by using a part of the profit which are earned from the
profitable use of loan accounts. The alternative system to re-discount the bills of
exchange is also explained in this chapter.
The process of money creation in an interest-free set up is illustrated in detail
in chapter V. How the creation of bank money or credit creation is possible in IF
banking is clearly depicted citing examples.
A central bank functions in interest-free banking just as it does in the interest
charging set up. All the necessary functions of central banks are applicable in an
interest-free set up too. The functions like issue of currency notes, banker to banks,
variable reserve ratio, open market operation, monetary policies, changing the lending
and borrowing ratio etc. can be operated successfully in IF banking through the system
of loan, partnership and ‘Mudarabha’. Chapter VI of the book is earmarked for such
detailed analysis. New instruments like preferential use of borrowing ratio, purchase
and sale of commercial shares, changes in the lending ratio etc. are substituted for
bank rate policy of central bank for the purpose of credit control.
Public finance is also linked with IF banking. The state expenditures are
channallised towards the attainment of the welfare of the community. “The Islamic
state would guarantee the basic needs of all people resident in its territories up to a
reasonable standard; it would see to it that food, clothing, housing, medical treatment
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and education are provided to every individual”. Apart from the sources of revenue
like taxes, fees, ‘zakath’(charity fund) the expenses of the government would be met
from the savings of the people procured by the government through ‘Mudarabha’ or
partnership basis and through the public issue of loan certificates. The government.
also resorts to deficit financing through the creation of new money. All these aspects
of fiscal operations of the government linked with IF banking is explained in chapter
VII of the book.
Another contribution of Najathulla siddiqui towards the literature on Islamic
economic system is the book published in 2002 entitled “Some Aspects of Islamic
Economy”21. This is the revised edition of April 1972. Though the topic “Interest-free
Banking” is discussed in the fourth chapter of the book, the chapters 1 to 4 deals with
the fundamental philosophical approaches on various aspects of Islamic economy. It
actually throws light into the value perspective, moral and ethical considerations.
Islamic outlook on life, Quranic approach on life and death, etc. are philosophically
explained in the first two chapters.
The Islamic concept of right to property is in sharp distinction from that of
other systems like capitalism and socialism. The real owner of the property is God
Himself. The man is given the Trusteeship. Man is entitled to operate the property as
per the directions of Quran and ‘Sunnah’ (prophet’s proclaims). This peculiar type of
right to property is illustrated in chapter 3 of the book supported by Quranic verses.
The relation between individual, society and the state is also shown in the same
chapter. A brief description of Islamic laws framed out of ‘Sharia’ principles which
are on the basis of Quran and ‘Sunnah‘(preachings of Prophet Mohamed) is also
given.
The theoretical model of working of interest-free banking is explained in brief
in the fourth chapter of the book. The banking system replaces interest by the principle
of ‘mudarabha’, both in the case of deposits and advances. Deposits are accepted both
in ‘current account’ and ‘investment account’. No profit or loss is shared for the
deposits in ‘current account’. The repayment is guaranteed. A portion of this account
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is utilized to advance interest-free short term loans to business men, traders, farmers
and consumers. Another portion is invested on ‘mudarabha’ basis. A fractional
reserve (usually10%) is earmarked for the purpose of withdrawal by the depositors.
The ‘investment accounts’ are long term accounts the amount of which are
utilized for advancing loans on ‘mudarabha’ basis; the profit is shared between
investors and bank in pre-determined proportions. Profits are assessed periodically and
distributed among the share holders. The bank also receives a share from profit. If
losses occurs that also are shared by investors, share holders and bank. The methods of
credit creation, the function of central bank like acting as a guide to commercial
banks, variable reserve ratio, re-finance facilities; selective credit control, purchase
and sale of industrial shares so as to replace open market operation etc. are briefly
explained in this chapter. The bank rate policy alone is absent in the interest-free
system. Financing the government is also undertaken through the system of
‘mudarabha’ and ‘partnership’ and also through the issue of loan certificates among
the public. A brief description of Islamic economic system based on the Quranic
revelations is the content of the fifth chapter of the book. Here the Islamic economic
system is introduced as a unique system having its own identity in relation to
capitalism and socialism.
Among the several works of Siddiqi22, the ‘Riba, Bank, Interest and the
Rationale of its Prohibition’ is a unique work. It mainly pours light to the issues
related to the topics like what is ‘Riba’ , why does Islam prohibits interest, whether the
bank interest of the conventional banks comes under the ‘Riba’ or not, the role of
interest in the daily life of human beings etc. The book gives answers to the questions
how can the people in the modern time lead a life without involving with interest.
Majority of Muslim scholars consider the bank interest to be Riba while a few
of them treat it as not interest. The issue has acquired political significance since many
of Muslim countries are trying to enforce prohibition of ‘Riba’.
The first chapter of the book refers the fundamental rules and regulations in
Islam based on ‘Sharia’ principles. All major aspects concerned with ‘Riba’, such as
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the matter related to prohibition of Riba’ and the issues connected with bank interest
and arguments in favour of bank interest not to treat it as Riba are portrayed in the
chapter. After examining all the arguments the concluding part of this chapter asserts
that bank interest is also ‘Riba’.
The working of IF banks and non-banking financial institutions in several
countries for the last three decades is shown in the third chapter. It also explains how
the modern economy can function as such by abolishing interest based system. How
the countries offering interest-free finance interact with IMF and other international
financial institutions are portrayed. The alternatives available for the interest bearing
set up are clearly explained. The method in which the conventional banks and non-
banking financial institutions can implement a system successfully on interest-free
basis is shown clearly. The functions of stock exchange, mutual funds, insurance
companies etc on an interest-free financial environment are available in this chapter.
The fourth chapter of the book examines the implications of IF finance as an
alternative to interest based system, how it becomes more conducive for economic
growth and progress and works more efficiently comparing to the conventional
finance system. The financial intermediations on the basis of ‘profit loss sharing’
(PLS) are successfully introduced as an alternative to interest based financial
transactions. It harmonizes the interest of both the savers and investors. The chapter
explains that, the monetary system in an Islamic economy in which money creations
take place more on the basis of equity generation and less on the basis of debt creation,
will be far more stable than a system in which money is created by extending loans
and expanding credit. Absence of interest reduces the scope of speculations, promises
greater stability and will have more equitable distribution of income and wealth. The
fifth chapter deals with how interest-free finance is able to meet the special financial
requirements like government finance, consumer finance, house finance, credit cards,
agricultural finance and deficit financing.
The regulatory measures for attaining stability in the economy, the system of
monetary management etc. are depicted in the sixth chapter of the book. The tools
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used in conventional finance for monetary management are substituted with sufficient
alternatives. The conventional tools like open market operation, bank rate policy,
variable reserve ratio, letters of credit, direct controls etc. are applied in a different
manner by using other non-interest tools available in the system.
The author vehemently argues and proves that an interest-free setup will be
more favorable for entrepreneurship and the monetary management with interest-free
finance creates greater financial discipline; hence the economy would be less prone to
inflation.
In the concluding chapter of the book the author gives a clear picture on the
future prospects of interest-free banking. The future is bright because of three reasons.
First is the growing crisis of modern banking and second is the recent success of
interest-free banking in several countries of the world. Finally, the moral values and
social considerations are getting momentous in the field of money, banking and
finance which found to be relevant in Islamic approach.
Shashi K. Gupta, Nisha Aggarval and Neeti Gupta23, in their book ‘Financial
Markets and Institutions’ tried to elucidate various aspects of financial markets and
financial institutions in India. The chapter wise distribution of topics makes it helpful
to study the matter in a systematic manner. The book is relevant to the present study
since it explains working of conventional financial market mechanism. The researcher
is able to get an idea about the role and function of financial markets in India in the
conventional field. The financial institutions categorized as banking and non-banking
are working both in organized and unorganized sectors. The division of financial
markets into Money markets and Capital Markets based on the credit requirements of
short and long term are depicted in detail in the first, second and fifth chapter of the
book. As a secondary market to capital money market, the functions and dealings of
stock exchange are given. The concept, rate of interest and various theories associated
with it helps the investigator to have an idea about the banking set up based on
interest.
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The role and functions of RBI given in the book is very useful to compare the
role of central bank in an interest-free system. The chapter explaining about the issue
of government securities as a major financial instrument in controlling and
establishing the financial market throws light to explore the possibility of alternative
financial instruments in the interest-free set up.
Chapter nine of the book deals with the role and working of financial
institutions both in banking and non-banking sectors. The financial institutions like
Unit Trust of India (UTI) and Mutual Funds are in resemblance with interest-free
banks in several aspects like profit - loss - sharing, mobilization of savings etc. The
book gives basic picture about the working of such institutions. The unit trusts provide
opportunity for small investors to make investments indirectly. The trust invests this
money in shares of companies and the income or capital gain from these investments
is shared with the unit holders. Similarly ‘mutual fund’ is an investment company
which collects the savings of the investors and invests in diversified portfolio of
securities. The share of the returns earned from such investments is paid to the share
holders on demand.
A brief description of ‘venture capital’ is also given. Venture capital represents
financial investment in ‘high risk’ firms expecting ‘high gain’. The capital is
mobilized by those firms which are too small to raise capital from public issue of
shares/ securities. The venture capitalist acts as a partner with entrepreneurs, hence
this type of investment has close relationship with ‘shirkath’ (partnership) and
‘Mudarabha’ (co-operation) in interest-free set up. This is because the structure of
both interest-free banking and VC is basically the same- both involved in profit and
loss sharing (PLS). Both use the same criteria in evaluating projects to invest in,
namely, the ability of the entrepreneur and the profit potential of the project.
Another book entitled ‘Studies in Islamic Economics’24 edited by Kurshid
Ahamed, contributes significantly to Islamic Economics. This book comprises the
selected papers introduced in the first International Conference on Islamic Economics
held at Mekka under the auspices of King Abdul Aziz University, Jeddah on February
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21 to 26, 1976. The book aims to promote Islamic Economics as a rigorous academic
discipline and tries to re-discover its true aspects and translate its principles into socio-
economic reality. The articles in the book assert that the scope of Islamic Economics is
wider in its approaches and radically different from that of conventional economics. It
affirms that life is an organic whole and that man has a moral personality and that
social science cannot be value neutral. Economics neither is, nor can be, totally value
free. The real contribution of this volume lies in identifying issues and problems
which seem to be creating a gap in the existing works on Islamic Economics. This
facilitates further research in this area.
The first paper of this book is by Anas Zarqa, the then associate Professor of
Economics, King Abdul Aziz University, Jeddah. It reveals a picture how the Islamic
Economics stands for the welfare of humanity and its approaches to deal the economic
problems based on ‘normative principles’. An effort is being made by the author to
shed some light on certain methodological and philosophical aspects of Islamic
Economics and to illustrate its unique approach by reflecting up on an Islamic social
welfare function.
The most important paper presented in the seminar related to the present study
is given in the third chapter by Muhammed Uzair who is the consultant of Investment
Corporation of Pakistan. He introduces a system of interest-free banking not as a
supplement, but as a substitute to conventional banking. A redefining is given for the
concept of factors of production. In Islamic economics, capital as a separate factor of
production does not exist, but is a part of enterprise. The reward for capital is not
‘interest’ but the ‘profit’. The resemblance between the ‘capital’ and ‘enterprise’ as
factors of production is noted clearly. It is very difficult to establish a justification for
separate existence of ‘capital’ as a factor of production. The conventional theories of
interest have many weaknesses and flaws in interpreting the interest as the reward for
capital. After merging capital as a part of enterprise banks can act as an intermediary
between the savers and entrepreneurs. Hence, in interest-free banking there is a
triangular relationship between the bank, savers and investors. There is two-tier
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38
arrangement in profit-loss sharing – one is between the entrepreneur and the bank and
the other is between the savers and the bank. The banks which advance finance for
investment purposes “can shift from interest earning bodies to profit - sharing or
dividend earning bodies”.
The conceptual clarification of the term ‘money’ and ‘interest’ is illustrated by
Mahmud Abu Saud, senior Egyptian economist. Accordingly, money should be
regarded as a medium of exchange. It cannot be treated as a commodity. Hence,
lending money in its own and earning an amount in the form of interest is not
supportive as per the arguments given in conceptual clarifications. The basic system of
interest-free banking is ‘mudarabha’ or ‘Qirad’ which is operated through profit –
loss - sharing. The paper gives an idea how such a system can act as a substitute to the
conventional banking.
How can interest-free system function relatively more efficiently is explained
by Mabid Ali Mohammed Mahmoud Al Jarhi who served in the Institute of National
Planning, Cario and in Islamic Development Bank, Jeddah. How can Islamic economy
is able to constitute a welfare state is also illustrated by Umar Chapra who was the
then Economic Advisor of Saudi Monetary Agency. The editor of the book Mr.
Kurshid Ahamed himself has also presented a paper revealing Islamic concepts of
economic development.
C.N.Ahamed25, in the book ‘Principles and Practice of Islamic Economy’ gives
a simple description of Islamic economy as understandable to layman irrespective of
caste, creed or religion. He is the translator and commentator of Holy Quran. Even
though the author enters into the discussion on interest-free banking only in the end
part, the book is highly relevant to a researcher in Islamic economics as it throws light
to the basic characteristic features of an Islamic economy. The book offers solutions to
various economic problems faced by the present day world. The author succeeded in
elucidating a system in which justice and equity as the prime motto behind any
economic activity. The measures adopted for the achievement of distributive justice,
the solution of complex economic problems, building up of a welfare state etc. are
Chapter II Literature Review
39
illustrated in a simple manner. The author attempted to reject the claims of modern
world that the religion is incapable of formulating principles which help for the
economic well being of man and society.
As per the Islamic doctrine the ownership of material means of production or
all the wealth on earth is vested with the God Almighty. The men are entitled with the
trusteeship. They are bound to operate it with utmost care.
Eventually the wealth is the common property; but, Islamic economics does
not mean equal distribution of wealth among the people. Private property and the right
to earn as much wealth is allowed; but it should not be against the social interest. The
man must be prepared to relinquish any surplus wealth he has got, if the others or
society are in need of it. Hoarding of wealth when men suffer from poverty and
starvation is a sin.
Islamic economics is of the view that anything spent on social development, in
its turn, benefits the individual himself. The book also cites examples to prove the
proceedings of Islam that it wants the wealth to be in circulation and never to stagnate
with the rich alone. Real ownership of land is vested with the God. The present owners
of land are the namesake owners who are supposed to utilize it by cultivating properly.
As per Islamic law, the land, if not tilled for two years, the excuse if any, of the
present land holder may be accepted. But if it is not cultivated for the third year, the
state is entitled to take over it.
The Islamic system of taxation is called ‘zakath’ which is imposed on the
surplus wealth of all individuals. For cultivating land the tax is imposed in proportion
to the yield of land and not in proportion of the area.
The trade in Islamic economic system is an exchange for mutual help. It is
necessary that the price and quality should be fixed before the sale. The sale of
unknown commodities and selling the produce before it attains full growth are
prohibited. Similarly the speculation, hoarding, black marketing, lottery and gambling
are also banned. Fixing of two rates in cash purchase and credit purchase, the practice
of paying advance for a future trade, reselling of goods just after its purchase etc. are
Chapter II Literature Review
40
regarded as unfair attitudes and hence prohibited. At the same time a sale of good by
auction is allowed in Islam. The government under Islamic economic system can
interfere and control the price fixed by the merchants if such prices are exorbitant or
against interest of the society.
In the last portion of the book the author gives a narration of interest and
consequent evils. He stresses on the need for eradication of interest from any society
since it causes exploitation of the poor by the rich.
Muhammad Al Bashir, Muhammad Al-amine26 in the book, ‘Istisna’ in Islamic
Banking and Finance explains ‘Istinsa’ as a manufacturing contract made between the
manufacturers and seller and in turn with the buyer. It is a contract with a
manufacturer to produce a commodity in a specific way and to deliver within a
prescribed time at a determined price. The ‘Istisna’ contract is applied by Islamic
banks as one of its functions. Islamic banks first enter into ‘Istisna’ contract in the
capacity of seller with those who demand the purchase of a particular commodity.
Then it will draw a parallel contract in the capacity of buyer with another party to
manufacture the commodity as agreed upon in the first contract. The ‘istisna’ plays an
important and leading role in Islamic banking system.
The book addresses the nature of this contract, its binding character, the
liability of the seller, if there is any defect in the manufactured commodity, the
practical application of ‘Istisna’, legal aspects of the contract etc. the book reveals the
difference between the ‘Istisna’ contract with other similar forms of transactions such
as ‘salam’ (sale of a thing at a fixed price in future); ‘ijarah’ (leasing contract); ‘juala’
(a contract for bringing back a lost property); Murabahah (sale of goods at price with
profit margin).
“’Istisna’ opens a wide area of finance for Islamic banks by directly financing
the manufacturing of commodities, paying salaries to workers and bearing
administrative costs”. The specific legal basis of ‘istisna’ contract, where the subject
matter is a non-existent commodity at the time of contract, is illustrated by narrating
the Quranic verses and sayings of Prophet and their interpretations.
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41
The binding effect of istisna contract is evident in its provision of ‘options of
inspection’ and ‘option of defect and violation of desired description’. The buyers
have given the right to inspect the commodities before the delivery and if any defects
are noted they can be compensated. The goods delivered should be in exact
conformity with the contract of description which includes specification like quality,
quantity measurement, color, packing etc. As per ‘Istisna’ contract the Islamic banks
are liable to bear responsibility for any defective products.
Provisions are also there in ‘istisna’ contract to claim compensation or
penalties in the event of one party failing to complete or delaying his contractual
obligations.
The settlement of disputes arising in the istisna contract is referred by the
chapter eight of the book. Arbitration is the preferred form of dispute settlement, if
negotiation or conciliation is not successful. Settlement of disputes by litigation is very
unlikely and undesirable.
The termination of the ‘istisna’ contract normally occurs when the
manufacturer supplies the product to the buyer and receives the final payment. The
contract is liable to be terminated before its maturity by the death of one of the
contracting parties. This is applicable only if the contract is between individuals. In the
case of contract between corporations and companies contract will not be ended by the
death of a person who has signed the contract.
The role played by ‘istisna’ for the promotion of economic development of a
country is listed as development of manufacturing sector, stabilization of the prices of
manufacturing goods, enhancement of real economic activities and promoting
individual and technological advancement.
Major manufacturing sectors where ‘istisna’ contract usually made are food
processing, air craft industries, locomotives, ships, cars, electronics, machines,
electricity, gas, house building and other construction industries.
The mode of operation of the contract is given in detail with a step by step
illustration of its practical implementation.
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42
The manner in which the ‘istisna’ contract avoids the problem confronted with
‘murabahah’ transactions are depicted by enlisting the advantages of the former over
the latter.
The process of risk management and insurance against risk are part and parcel
of ‘istisna’ contract. Samples of ‘istisna’ contracts applied by some Islamic banks are
given in the appendix of the book.
S.A. Siddiqi27 made an earnest attempt in the book Public Finance in Islam to
introduce the fundamentals of Islamic Public Finance through the systematic
compilation of its various aspects. The book illustrates a new model of economic
system and its financial operations which is neither capitalistic nor socialistic, but died
out and vanished with the emergence of other materialistic systems. The practical
application of Islamic economic system confined mainly to the period of Prophet and
his four immediate successors. The book is mainly divided into three parts where the
part one deals with ‘revenue’, the second part- ‘the expenditure’ and third part about
the ‘budgeting’ in the Islamic state. Though the book does not provide any literature
on Islamic banking; it gives a clear idea to the student of Islamic economics about the
sources of public revenue, its various types and the norms of public expenditure and
procedure of budgeting etc.
Most important source of revenue to the government is ‘Zakath’ (basic tax),
the payment of which is compulsory and mandatory to all people who are having
surplus wealth. ‘Zkath’ is a compulsory tax levied by an Islamic state on the members
of the Muslim community, so as to take the surplus money from the comparatively
well – to - do members and give it to the destitute and needy. Detailed analysis of
various types of ‘Zakath’ which are levied in different rates and general rules
governing ‘zakath’ are also mentioned. The assessment period is usually one year.
By giving reference to the conventional tax theories and canons of taxation, the
author attempts to give a theoretical frame work for ‘Zakath’. It also lays down eight
beneficiaries of ‘Zakath’ fund as laid down by Quran.
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43
Though the Islamic state believes in free trade and stands for free flow of
materials from country to another, it allows customs duties and tolls. As the
neighboring countries resort to such duties the Islamic state also compelled to levy
customs duties as a reciprocal measure.
Islamic Budgeting is entirely different to that of the Budgeting of modern
states. The present system starts with calculating the indispensable expenditures and
proceeds to find the revenue. On the other hand, in the Islamic state the expenditure is
determined on the basis of revenue. During the emergencies special taxes are imposed
or contributions are invited and after that these taxes are withdrawn. This budgeting
system is supposed to be more convenient and scientific.
All the property coming under the general community is the assets and all
expenditure which is incurred in the general interest is the liability of public
Exchequer which is termed as ‘Baith-ul-mal’. The practical implementation of
financial operation in the provincial administration of ten dynasties in different
countries is also given in the appendix of the book.
Najathulla Siddiqi28, has made another remarkable contribution to Islamic
economic system by specifically pointing to the real motive of economic enterprises in
Islamic system. In his book Economic Enterprise in Islam, he makes a shift from the
materialistic culture of contemporary system to a system where the combination of
materialistic and spiritual culture exists. In the Islamic economic system the ultimate
end of every economic activity or enterprises is the achievement of ‘Falah’ (Welfare
both material and spiritual). This system coordinates both economic and moral values.
Man’s efforts to produce, distribute and exchange economic goods; all become an
endeavor to achieve ‘Falah’. This is the distinguishing feature of Islamic economic
system up on the other systems like Capitalism, Communism and Democratic
Socialism where the material end is the main objective.
The entrepreneurial behavior is supposed to be on the basis of justice and
equity. The business policies and entrepreneurial activities should not involve any
injurious consequences either to the individuals or to the society in general. Gamble
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44
some dealings based on pure speculation are also against the basic principles of
Islamic economic system. In this respect the author seems to be anxious about the
modern stock exchange market. Even though the element of speculation in some
degree is essential to facilitate trade the pure gamble some speculation should not be
regarded as ideal.
With regard to the allocation of resources Islamic economics also relies up on
market mechanism to a very great extent. At the same time, as far as the achievement
of definite objectives like equity and justice are concerned, it has resemblance with
socialism. It depends on the central planning as a corrective measure on the flaws of
market mechanism. A rational consumer in Islamic economy will try to maximize his
satisfaction in conformity with Islamic norms. He may forgo some of his economic
satisfaction when it clashes with any of the Islamic norms.
Regarding the redistributive function, an Islamic state would see that every
individual is supplied with primary needs of life and the achievement of distributive
justice is the prime motto.
An entrepreneur has the motive of profit maximization but limited to a certain
extent on which the Islamic ideals control him. His economic rationality is similar to
that of rationality of the consumer behavior and it is confined to the limits of Islamic
ideals. Entrepreneurial decisions will be taken giving due consideration to social
welfare. The entrepreneur is eager to see that the necessaries and comforts needed by
the poor are produced in larger quantities and offered at cheaper rates than they are
under the prevailing conditions of demand.
A monopolist under such system is also deeply influenced by Islamic ideals.
He deliberately lowers his price and is content with satisfactory profit in contrast with
maximum possible profit under monopoly in a capitalist system. He increases his
output up to a very close to the level of competitive enterprises. He cuts his profit
below the level of normal profit that would have been obtained under competitions.
Even a small rate of profit is satisfied by the monopolist. Since, he being a large seller,
even a small rate of profit would mean a large income to him. The impact of Islamic
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45
ideals would dissolve the monopoly and make the industry competitive. Prices would
not be higher nor the output smaller than under competitive conditions. In the
oligopoly market also the out put and price determination is the same as in the case of
monopoly. Moreover under Islamic oligopoly the firms reach in agreement or co-
operation for the good of the society and not for the purpose of charging maximum
price to exploit customers. It is not tacit agreement as in conventional oligopoly. The
intention behind such co-operation is the elimination of waste of economic resources
and to avoid the competitive advertisement.
The monopolistic competition does exist in the Islamic economic system and
the firms gain normal profit in the long run but, ‘price discrimination’ and destructive
and immoral advertisements are prohibited. The product differentiation is genuine,
based upon real qualitative difference between a particular brand and the other brand.
Thus the objective of maximization of profit of an individual entrepreneur is replaced
by the twin objectives of satisfactory profits and social service leading to co-operative
efforts of all firms in the industry. The book gives a clear idea to the reader to know
the basic principles on which Islamic economics is built in. Such a set up is congenial
and ideal to the formulation and successful implementation of interest-free banking set
up.
Another notable contribution is of F.R.Faridi29, the compilation of the papers
presented in the Economic Seminar, jointly sponsored by the International Institute of
Islamic Thought (Washington) and Economic Discipline Council (USA). The book
Essays in Islamic Economic Analysis makes significant contributions to frame an
alternative economic model in the Islamic perspective. The topic discussed in various
chapters of the book range over a wider span supported by empirical analysis to prove
the viability of the Islamic economic system. The theoretical implications given in the
book facilitates the researchers in this field to identify the areas of practical
applications.
Mohammed Anwar30 (International Institute of Economic Thought) in his
paper outlines Islamic criteria for validating economic theories and models and to
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46
frame the methodology for the construction of economic theories. Asad Zaman31 of
Colombia University tries to analyze the conventional theory of consumer behavior
and attempts to formulate an innovative consumption theory based on Islamic
principles. He states that “some of the consumers will have satiation points beyond
which they would not prefer to consume”.
Syed Iqbal Mahdi and Saif Al-Asly32 attempt to introduce a unique principle of
profit – loss - sharing (PLS) which can replace interest in modern economy. The PLS
ratio between the bank, savers and entrepreneurs can be determined by central bank
and can be used as a tool of controlling money supply. The ‘bank rate’ or ‘discount
rate’ is substituted by PLS ratio. Tools like additional tax as ‘Zakath’ and issue of
‘mudharabha’ securities etc. are also available for the effective implementation of
fiscal policy. According to PLS principle, in case of losses, the burden is not totally on
the investor, where as it is shared by the savers and banks also. Hence such an
economy is less inclined to cyclical fluctuations. The paper also tries to develop a
simple macro-economic model of interest-free economy using the traditional IS-LM
frame work and validates that such a system is not only feasible and viable but also a
better alternative to the traditional approach.
Efforts are taken by Zaidi Sattar33 the scholar from the Catholic University of
America to prepare a model of interest-free economic system where lending,
borrowing and investing are undertaken based on profit sharing. He illustrates a macro
economic model of consumption function, investment function and government
expenditure function achieving static and dynamic equilibrium.
Nadir Habibi34 focuses attention on the macro-economic consequences on
switching over from a conventional to an interest-free financial system. He attempts to
find out the effects of elimination of interest in the volume of real investment and
output. The conduct of monetary and fiscal policies in the absence of government
bond market is also shown by framing economic models. He categorically proves how
the fiscal and monetary policies are effectively implemented in situation where the
government bonds are eliminated.
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Distinguishing characteristics of IF banking in Pakistan is discussed in chapter
eight of the book by John Harrington35, who is from Seton Hall University, New
Jersey, USA. He comments on the effect of interest-free set up on Pakistan’s economic
development when interest was prohibited in domestic transactions on July 1st 1985.
Brief explanation is given on the major uses of PLS funds through ‘Musharaka’,
‘Mudharabha’, Leasing etc. The working of the state bank of Pakistan (SBP) and the
implementation of control measures like variable reserve ratio, selective credit control,
moral suasion, re-financing programs etc. are also briefed.
Another notable contribution made for substantiating the arguments in favor of
interest-free banking is made by A.F.Darrat36, Dept. of Economics and Finance, New
Orleans. In his paper, “Islamic Interest-free Banking System – an Empirical Analysis”
he provides some evidences to prove that the financial system without interest has
become more stable than the traditional system with interest. He struggled hard to test
this hypothesis and in the endeavor he utilized time series data from Tunisia- the
country which has credible data regarding interest-free financial operations. This
attempt to substantiate the validity of the system through empirical analysis is
regarded as the first of its kind, as claimed by Darrat himself. Based on Fisher’s
equation MV = Y (Where M-Money, V-Velocity, Y-Total income), he provided some
empirical evidence to prove the viability of interest-free system.
Raquibuz- Zaman37, School of Business, Ithaca College, New York, has made
a peculiar contribution towards risk management and insurance system to be
applicable to Muslims living in non-Muslim countries. He envisages a system of
insurance based on mutual co-operation. With the help of sensible explanations he also
clears the apprehension regarding the most controversial life insurance system. A
mutual insurance company can provide insurance protection and can operate as a non-
profit venture. The author points out the existence of such mutual investment
companies in United States.
The book ‘Interest and Interest-free Banking’ by Aboo Shakir38, starts with the
viewpoint of religions regarding interest. The Old and New Testament are actually
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48
against interest. Quran prohibited interest very much vehemently. Ancient Greek
philosophers like Aristotle and Plateau were against interest. Ancient Indian religions
show that interest originated even before 220 centuries.
In the modern time Jews and Christians are in favor of interest where as Islam
strongly prohibited interest. The book also ascertains that the interest is not only an
inevitable factor in the field of economic activities but also an unnecessary thing. Only
the moneylenders are favoring it.
The origin of modern banking with a clear picture on historical perspective is
illustrated in the book. While it strongly put forward so many evils of the interest,
some arguments in favor of it are also enlisted. However, the counter arguments are
clearly depicted for each and every point. The end of the book reveals the salient
features if Interest-free Banking and explains its practical applicability in the daily life
so as to save the millions from the clutches of interest.
Interest-free Banking Institutions in Kerala – An Economic Analysis is a
research work done in this area by K. T. Abdul Rahiman39 as a part of his M.Phil.
programme. This is a study done first in Kerala in empirical and exploratory nature.
This study identifies the working of various interest-free financial institutions in the
state of Kerala like no profit lending institutions (Nidhis) and profit earning
institutions. The study highlighted the aspects like, the evils persistent in the interest
ridden financial transactions, evolution and growth of interest-free financial
institutions, various features of IF banking, differences between the IF banking and
conventional banking, the problems faced by the IFFIs etc.
Following gaps are seen in the study so that further research can be pursued
• The role played by IFFIs for the socio-economic uplift of beneficiaries and
their satisfaction level.
• A detailed analysis of problems and prospects, possible and feasible design
of the functioning of IFFIs
• Can these institutions be worked in a co-operative set up to function as a
viable alternative for the short term micro-credit expansion of rural people
Chapter II Literature Review
49
• The working of the organized sector in some more extent and depth.
• Whether the working of such institutions in the organized sector under PLS
system is more attractive both in the case of depositors and investors or
not.
Justice Taqi Usmani40, made a landmark judgment in the appellate bench of the
Supreme Court of Pakistan, banning interest in all its forms and by whatever names it
may be called. This is the final verdict of Pakistan’s highest court by disposing 67
appeals filed against the decision of Federal Court of Pakistan in 1991. Even though
the full judgment consists of 1100 pages, the text of judgment has only 100 pages.
The Quranic verses dealing with ‘Riba’ (interest) is given in the early part of
the judgment to dispose the arguments put forward by the supporters of interest. The
obvious quotations from the Old Testament are also quoted to show about the
prohibition of interest. The Quranic and Biblical verses clearly show that the ‘Riba’
and ‘Ushury’ are one and the same.
The meaning of Riba covers “any stipulated additional amount over the
principal in a transaction of loan or debt”. By quoting ‘Hadith’ (sayings of prophet),
the judgment proves that even during the time of prophet the interest on loans were
prohibited. The judgment also fortified the fact that the existing laws on interest do not
differentiate between Muslims and non-Muslims in their application. The argument
that “the laws relating to bank interest stand excluded from the jurisdiction of federal
court” is also disposed off.
The rationale and logic behind the prohibition of interest is explained
elaborately discussing the nature of money not as a ‘commodity’ but as a medium and
measure of value. Since money has no intrinsic value it should not be traded as
consumption goods or productive goods and it cannot be used as an object for
profitable trade.
The remarks given on the evil effects of interest on allocation of recourses, on
production as well as distribution of wealth are a valuable and authentic portion of the
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judgment. An interest based system works to favour the rich rather than the poor. It
also creates expansion of artificial money and there by inflation.
The argument that the interest charged and paid by the bank are to compensate
the loss suffered by the financer due to the loss of value of money through inflation is
also proved to be fallacious, since the rate of interest is not based on inflation but
determined by the demand and supply of money. Many alternatives other than interest
have been put forward by the court to solve the problem of the erosion of the value of
money, but the court itself did not discuss it in detail and left the problem for further
thorough research.
The court also questions the system of ‘mark–up sale’ which was introduced as
another alternative to interest. The mark-up sale is the payment of an additional
amount by the debtor which is at par with the reduction in the value of money due to
inflation. The court finds that the ‘mark-up sale’ is just similar to interest.
The ‘riba’ is also supported by the argument of ‘doctrine of necessity’ that the
interest based system is a universal necessity and hence it cannot be abolished
altogether. The judgment vehemently questioned this doctrine of necessity and
declared that the so called universal necessity is not real and is exaggerated by
imaginary apprehensions. It also revealed that the shifting towards an interest-free
system is much easier if it is implemented by the government. The conventional laws
and regulations are the main hurdles to implement the system.
The judgment, by explaining the favorable effects of interest-free system,
explains the superiority of the profit loss sharing (PLS) as equity based financial
arrangement. The judgment made several quoting of non-Muslim economists like
James Robertson, John Tomlinson, Michael Rowbotham, Philip Moore, Peter
Warburton etc. who suggested the equity based banking system as superior to interest
based system.
It is also argued in the court that the investment on PLS basis likely to have
frequent losses and due to the inherent risk of losses the depositors will be hesitant to
deposit in Islamic banks. This argument is also objected in the judgment by pointing
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51
that before financing on PLS the banks will study the feasibility of the proposed
business and majority of them will not result in loss. Moreover, the PLS system is
expected to give more return to the investors than the interest based system.
Another apprehension against the PLS system is the dishonesty shown by the
entrepreneurs by deliberately concealing the actual profit. This problem can also be
solved in a system where a perfect banking network under the supervision of central
bank is in operation. The system of credit rating, auditing, control, supervision etc.
may solve this problem to a great extent. Even with all these precautions, if a
particular entrepreneur shows dishonesty; he himself will be black listed in the entire
banking network.
In the case of government borrowing the judgment aptly suggested that all
internal borrowings may be redesigned on the basis of project-related financing. As far
as external borrowings are concerned it required a well designed program and a firm
commitment to implement it. But the judgment has declared its optimism that since
the World Bank has already expressed its willingness to use some of Islamic modes of
financing; it might not be much difficult to renegotiate the existing loans on interest-
free lines.
The judgment finally concluded by dismissing all the appeals filed against the
ban on interest at Pakistan by proving that the interest-free banking is not only feasible
but also more beneficial to bring about a balanced and stable economy.
Notable contribution to the literature of Islamic Economics have been made by
F.R. Faridi41, a great scholar and experienced personality in Islamic Economics, by
compiling selected papers presented in the International Seminar on Islamic
Economics and Economy of Indian Muslims, organized by the Institute of Objective
Studies, New Delhi on July 21 to 24, 1989.
The theme of the papers presented in the Seminar aims at the introduction of
Islamic economics and its application in Indian economy. Apart from the fact that
Islamic Economics is formally associated to certain religion, its relevance lies in its
approach towards the integrated development of the economy. Efficient and equitable
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52
allocation of resources are possible only if the outlook of man, both economic and
other wise is subjected to purification at par with natural order and justice. One and
half dozen papers are particularly selected to compile the volume which is divided into
two parts. Part one deals with introductory and conceptual clarification of various
aspects of Islamic Economics. The second part gives light to the economic situation of
Indian Muslims with empirical analysis of case studies in various parts of the country
regarding employment situation, entrepreneurship, women studies and other socio-
economic surveys.
The papers given in chapters 8 to 11 are very much useful to a research scholar
in interest-free banking since they are dealt with the principles, practices and
conceptual frame work of interest-free banking. The cultural heritage of interest-free
banking practiced in the earlier periods of Islamic state is briefly summarized. The
detailed explanation of banking services and the structure and use of credit
instruments, the optimum utilization of cash balances in the banks etc: are also
presented. In the interest-free set up, the role of conventional banks - merely acting as
a mediator between debtor and creditor – is eliminated and substituted by its role as a
‘capital partner’ with entrepreneurs and investors under some pre-determined
arrangements.
Jaferhusen42 in chapter 9 describes a clear picture of superiority of profit-
sharing system over the interest- bearing system. He also clarifies how the problems
related to the tax policy and deficit financing are tackled. The theoretical frame work
up on which the interest-free set up is brought up as an alternative to interest based
system is explained by pointing into the irrationality of the conventional interest
theories.
The arguments put forward to redefine the factors of production and to treat
capital and enterprise as one single factor of production are also found to be sensible
and justifiable. Meaningful arguments are also listed in favour of prohibition of
interest. Operational methods of Islamic banking – Pakistan model – reflect some
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53
limitations on application of the system both at internal and external transactions. This
enables the system to improve much further in its pursuit of implementation.
A detailed and authentic paper has been presented on Islamic Finance by
Shariq Nisar43, in the seminar organized by Indian Association For Islamic Economics
(IAFIE), Kerala Chapter at Calicut on May 24, 2006. He highlighted the potential
power inherent in Islamic finance to redress the serious threat in the modern global
financial stability. He analytically rejects the misgivings of conventional financial
experts by propounding that even if the return of capital is determined expost, the
savings and investment are possible in Islamic finance. He elucidates authentic figures
showing the growth trends of Islamic banking with special mentioning of Indian
conditions. The problem of attitude towards Islamic banking is the main hurdle over
its implementation. The western countries allow the Islamic finance with special status
due to the economic sense involved with it. In the Indian continent the attitude is
different. To keep its secular image intact the policy makers are anxious to give
importance to a system which has got its inspiration from a religious principle. Indian
regulators are also famous for their conservative approach and lack of dynamism. He
also mentioned that even though the banking law does not explicitly prohibit Islamic
banking; but some of its provisions make it an unviable option. The banking
regulation act defines banking in such a way that the banks can accept deposits from
the public only for further lending. It do not allow investment on PLS basis. At
present, the only viable option is the investment on NBFC and mutual funds. They
themselves have their own limitations in implementing interest-free finance in its true
sense.
He is optimistic in his view that being the world’s second most populous
Muslim country the interest-free finance has very high scope and prospects in India.
The financial potentials of Indian Muslims still remained untapped and underutilized.
Moreover, the Indians working in the Middle East can also be a good source of
financial resources for Indian financial institutions which can offer islamically
permissible financial services. That may be the reason why the present Prime Minister
Chapter II Literature Review
54
Manmohan Singh has constituted a committee of Experts under the RBI to enquire in
to the possibility of Islamic banking in India.
New Delhi, the capital of India witnessed a fabulous event in transmitting the
message of Islamic banking through the seminar papers presented by eminent Islamic
economists from various countries. In the international seminar on “Justice and
Equity- the Message of Islamic Banking” on 18-19 February 2006, a dozen papers
were presented on various aspects.
F.R.Faridi44 the chairman of the organizing committee highlighted the need for
an alternative to interest based capitalist economy which promotes growth with equity
and humaneness. The interest-free economy may be called as loan free economy
where capital and credit instruments are provided through methods of partnership,
cooperation, equity schemes etc. The debtor creditor relationship and capital enterprise
contract makes the debtor burden free. While the debtor and creditor share the profits,
they are liable to share the losses also. In such a system the productive and distributive
justice merge together.
Muhammed Anaz Zarka45 makes a noble contribution to Islamic finance by
presenting the methods of mobilization of funds from ‘Monetary Waqf’ for the
purpose of ‘micro finance’ or financing the small scale productive poor, very weakest
and needy section who are unable to offer any collateral to sanction loans from
conventional banks. ‘Waqaf’ fund is the fund derived from the donors, dedicated
funds, net income from operations of ‘waqqf’ properties etc. The donors earmark the
fund to utilize for charitable purpose like running educational institutions, orphanage,
Mosques etc. Some donors earmark such funds for ‘Qard hasan’ (charitable finance).
The paper also portrays the limitations and prospects of such financing.
The rationale of prohibition of ‘Riba’ in a simple and easy way is introduced
by Monzer Kahf46. The paper concludes with the findings that financing without
interest is the ideal financing compared with the traditional approaches of interest
based banking.
Chapter II Literature Review
55
The main theme of the paper presented by Muhamed Ismail Bin Muhammed
Sheriff47 is the overall experience of Malaysian Islamic Banking- the legal basis on
which Malaysian banks established. He also elucidates some facts and figures on the
development of Islamic banking over the years and its potential growth in future.
Rahmathulla48 presents the crisis of Islamic financial institutions in India- the
reasons for the collapse of ten of such organized institutions functioned as Non-
Banking Financial Institutions. He observes that the failure of such institutions is not
because of the non-applicability of interest-free banking principles but because of
some other economic and non-economic reasons. His study reveals the fact that fairly
good number of people is interested to invest their funds in PLS basis. A few remedial
steps can give a fillip to the movement in India.
Javed Ahammed Khan49 introduces a clear picture on the growing trend of
interest-free financing in Gulf-Arab region. The investors in these countries are
becoming more and more inclined to non-interest based financing. He brings forth
some data showing superior performance of Islamic funds over the conventional
equity operations of mutual funds and other financial institutions. Both Muslim and
non-Muslim investors are attracted to interest-free finance and such funds are
searching for investment opportunities in Indian market where lies huge potentiality
for the operation of interest-free financial investments.
The contents of the paper introduced by M. I. Bagisiraj50, Director, HRD
Academy, Belgaum, provides the basic guidelines to establish different types of
interest-free financial institutions in India. He introduces four models of financial
institutions which are suited to Indian conditions. He also provides valuable
instructions and programs for the successful working of such institutions.
Ausaf Ahammed51 gave a brief description of the concentration of Islamic
banking in Muslim countries of the world. He observes the chances and prospects to
expand the system to other non-Muslim countries also.
P. Ibrahim52 elucidates the functioning of IFFIs in India. He observes that they
are somewhat similar to the conventional banks in their role as financial
Chapter II Literature Review
56
intermediaries. The difference is in the methods of mobilization and investment of
savings. He also examines the relevance and prospects of such banks in Indian
context. He enlists the major hurdles faced by such institutions from the law of land.
The evolution of Islamic finance from its fluid state to advanced stage with
special reference to India is the theme of Shariq Nisar’s 53 paper-“Challenges for
Islamic Banking in India”. He explains how the banking regulations in India make
Islamic banking as an unviable option to investors and suggests positive measures to
implement the same through Non-Banking Financial Companies (NBFCs), Mutual
funds, Developmental Institutions etc. Among them he has given more priority to
NBFCs. He concludes his paper by stressing a major point that since the country is the
world’s second most populous Muslim country Indian economy has every potential to
attract capital both from within the country and Middle East, if the financial system
suits the Muslim requirements.
Abuzar Kamaluddin54 highlights the economic ills of interest affecting the
society both in micro and macro levels. While there have been the problems of
massive exploitation in the micro level; misallocation of resources, formation of
monopolies, cyclical fluctuations, massive business failures etc. are the consequences
in the macro level. He convincingly reveals the fact that the interest is fallacious for
the whole economic and social order of the country and hoped that the situation
wanted an immediate alternative through interest-free set up.
Arshad Ajmal55 introduces the story of the successful experiment in interest-
free micro credit in co-operative model practiced by the Al-Khair Co-operative Credit
Society at Patna. This society has been registered under the Multi State Co-operative
Societies Act having the membership of Hindus and Muslims in the ratio 40:60. The
society accepts deposits and advances short term finances on PLS basis. Consumer
durables are also supplied on interest-free basis.
“Massive problems created by the system of interest and its inability to solve
those problems, presents a great opportunity to the Islamic banks”- Hifzur Rab56
proclaims various problems confronted with the interest based economy and draws a
Chapter II Literature Review
57
clear picture of appropriate remedies through interest-free banking. The existence of
interest based economy is basically associated with ‘money manipulation’ which
results in the economic enslavement of have notes. Interest-free banking has the
potential to redress the problems associated with the interest based set up.
Notable Islamic economist from Netherlands, A.L.M. Abdul Gafoor57 in his
book Islamic Banking and Finance analyses in detail various aspects of interest-free
banking in its historical perspective. He divides the historical development of
‘interest-free banking’ as (a) when it remained as an idea and (b) when it became the
reality. The day to day affairs of accepting deposits and advancing loans are briefed.
The successful operation of interest-free banks and opening of interest-free windows
in conventional banks of the world is also given.
He elaborates the practical difficulties in implementing PLS in complex
banking sector. The situations in publication of audited accounts and imposing of
taxes in total profit make the investment unviable in Islamic banking. Interest is a
passive income and profit is an earned income which is treated differently in
determination of tax. The inability of the banks to find out apt clients creates the
problem of excess liquidity even in situation when the general credit demand is at a
higher level. The author also quoted the apprehension of several economists that the
practices of interest-free banks are not in full conformity with ‘sharia’ principles and
they have failed to do away with the undesirable aspects of interest since most of their
PLS earnings are comparable with the prevalent interest. Other problems confronted
with the control and supervision of central bank are mainly relating to ‘liquidity
requirements’, ‘adequacy of capital’, ‘Certainty of return’ etc.
The author concludes his discussion by pointing out certain suggestions for the
improvement in the working of interest-free banking. He put forward some simple
solutions by elucidating the provisions given in Iranian, Pakistan and Siddiqi models
of interest-free banking. He hopes that such a modified system will not only act as an
effective banking but also a powerful alternative to conventional banking where both
type of banking co-exist.
Chapter II Literature Review
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A.L.M.Abdul Gafoor58 brings forth a new version of commercial banking
which is easy and practicable on interest-free basis. In the article published in his own
web-site he introduces a banking system designed to address the concern of Muslims
to avoid ‘riba’. It is a confined form of commercial banking by avoiding the complex
and uncertain activities of Islamic banking such as PLS and Qard Hasan. Regarding
the deposits on PLS basis the returns are uncertain, hence, it should be handled by a
separate institution operating under the rules of ‘Mudarabha’.
Regarding the charitable loans (Qard Hasan) the repayment is uncertain since
by provision, if the debtor is unable to pay back he may be allowed to postpone the
payment or it should be written off and regarded as charity. This type of charitable
functions may be done by charitable organizations. Thus the author introduces a
banking that is free of the involvement of PLS investments and charitable loans. All
other generally required banking functions can be easily operated by his model of
Riba-free commercial banking.
The bank accepts current and savings deposits and guarantees their safety and
full return. It provides all conventional facilities to the depositors like cash receipts,
Cheques and draft collections and payments, electronic and other kinds of fund
transactions etc. The depositors do not demand any interest or return on their deposits.
They wanted the safety and guaranteed return of their money. Hence such transactions
do not involve any ‘riba’. The borrowers are liable to pay a service charge which
includes the costs incurred by the bank and remuneration for the service. Thus lending
operation is also free of ‘riba’. Thus riba-free commercial bank is a service provider
in the field of accepting deposits and advancing loans.
The author assumes that this type of compatible Commercial Banking is
suitable not only to Muslim but also to non - Muslim clients, since the bank offers all
the generally used facilities of a conventional bank. Moreover, in due course there is
the chance of conversion of such banks into full fledged interest-free banks
functioning on PLS basis.
Chapter II Literature Review
59
The author explains the example of successful operation of interest-free
“gramin banking” in Bangladesh making the ‘un-bankable’ section of people
‘bankable’. They were mercilessly exploited by moneylenders till the introduction of
such banking in remote areas.
Muhammed Arrif59 University of Malaya, has made a serious attempt to
elucidate the various aspects of interest-free banking. He tries to trace the growth and
development in Islamic banking worldwide and highlighted its salient features. The
evolution of the interest-free banking in its historic perspective is given with its
beginning in 1963 in Egypt and its growth and expansion to other countries till 1990.
References were also made to such institutions established in countries where Muslims
are minorities. He quoted the text of Quranic verses and ‘Hadith’ (sayings of Prophet)
and also the quoting of contemporary writers on the subject to establish the rationale
of prohibition of interest in Islam. Capital has no right to demand a fixed return in the
form of interest. Capital when used for production, there involves risks or uncertainty.
The article also explains various methods of interest-free banking which is based on
profit loss sharing. The author also points out various deposit accounts opened by
Islamic bank. He concludes the article with the optimism that the Islamic banks can
play a catalytic role in stimulating economic development of country by working in an
interest-free set up.
Bishnoy. T. R.60 makes a review of the article ‘Banking Regulations and
Islamic Finance’ of S. Ramachandran61. Even though the topic seemed to be
interesting for him he points two important aspects on which Mr. Ramachandran was
silent. At first, he argues that the concept of interest and profit in Islamic finance are
different to those in Classic and Keynesian Economics. Secondly he is doubtful on the
viability of Islamic banking since it led to the decline of deposit after the introduction
of interest-free banking in Pakistan. Moreover the conventional profit concept is not
compatible with the Islamic profit. The profit generated by innovation (Schumpeter)
and by uncertainty (Knight) is not productivity linked alone, but the mix of some other
elements. The Islamic profit is the pure profit which is productivity linked. In Islamic
Chapter II Literature Review
60
point of view, the profit over and above the productivity linked may be treated as
‘Riba’; hence in compliance of Islamic norms people are compelled to keep away
from imperfect market conditions which generate non-productivity linked products.
Evident with adequate data the author substantiated his argument.
This view may not be taken seriously since under Islamic economic system the
market imperfections and impure profit generations can be gradually eliminated. In
author’s own opinion the declining trend of deposits has happened due to the political
uncertainty and the risk aversion tendency shown by the bankers in the initial days of
introduction of Islamic banking.
Muhammed Yunus62 the Nobel Prize winner of 2006, in the website
www.grameen.info.org provides brief details about the successful working of grameen
banks in Bangladesh. While working as the Professor and Head of Rural Economic
Programme, University of Chittagong; he has made a remarkable achievement in
promoting grameen banking and creating opportunities for self-employment for the
vast multitude of unemployed people in rural Bangladesh. The origin of grameen bank
can be traced back to 1976 and today 90% of its shares are owned by the rural poor to
whom it serves, the remaining 10% of its shares are owned by the government By
extending the banking facilities to poor especially women the grameen banks fulfilled
its prime objective of breaking the vicious circle of poverty of rural masses through
micro credit. It was a noble program of extension of banking facilities to un-banked
group, exclusively focusing on the poorest of the poor.
Various aspects of the operation of grameen banks are highly relevant to the
present study since they are almost similar to the working of IFFIs in rural areas. If the
working of IFFIs are co-ordinated and organized on scientific lines at par with
grameen banking together with adequate government support and control such
institutions can serve the rural people to a larger extend than what is so far achieved
by the grameen banks in Bangladesh. The main reason for this predicted victory is due
to the fact that while grameen banks charge interest for the loans at a rate of 16%, the
IFFIs charge no interest. While grameen banks are working under the sponsorship of
Chapter II Literature Review
61
Central Bank and on the support of nationalized commercial banks; the IFFIs get no
such support. Moreover 10% of the shares of grameen banks are owned by the
government
Various features of credit delivery system adopted by grameen banking seem
to be highly applicable and suitable to IFFIs. Forming up of the groups of five
prospective borrowers, loans of small denominations, short term credits, repayment in
small weekly installments, issue of loans to quick income generating activities,
promotion of self employment, undertaking of social development agenda, stress on
credit discipline, collective borrower responsibility, financing the social and physical
infrastructure projects like housing sanitation, drinking water and education, strict and
effective monitoring and supervision etc. are the operational procedure of grameen
banking which are closely related with the features of IFFIs. By breaking the
traditional concept of banking, the grameen banks achieved success by proving that
“lending is not impossible to the poor who are unable to produce collaterals as
security”. It has successfully proved its long lasting existence by enjoying a current
repayment rate of 95% on all loans. This is the area where IFFIs find difficulty and by
adopting the operational methods of grameen banking it can explore possibilities for
the solution for the problem.
While the grameen banking is able to mobilize resources through loanable
funds obtained from central banks, money markets, other financial institutions and
multi-lateral aid organizations; the IFFIs presently mobilize the funds only from the
share capital and donation of well wishers. A comparative study of grameen banks at
Bangaldesh and IFFIs may pave the way for the successful operation of IFFIs in
various parts of our country. An audited statement of profit and loss account for the
year ended 31st December 2005 reveals the transparency of the grameen banking and
shows how the net profits amounting of huge denominations are transferred to
‘rehabilitation’ funds.
Suhail Zubairi63 in the book Islamic Finance Today, do the compilation of his
articles on the latest developments of Islamic finance published periodically in English
Chapter II Literature Review
62
daily- Gulf News. The early part of the book analyses how the Islamic investment
funds are ‘sharia’ compliant so as to motivate the investors since the return on the
investment is tied up with actual performance of the fund. The role of Sharia
Supervisory Board (SSB) and its screening works to protect the interest of the
investors are also given. The articles give light to the detailed analysis of sharia
principles for ‘ijara’ (leasing) transactions. Various forms of finance operations in
Islamic banking such as ‘Musharika’, ‘Mudraba’, ‘Istisna’ etc. are conceptually
defined and clarified in a suitable manner. The successful adoption of Islamic bonds
(sakuk) in Germany and the issuance of Europe’s first Islamic banking license in
Britain are shown as the true indicators for gaining popularity of Islamic finance in
West. The ‘sharia’ based stock index is getting more and more attractive to investors-
both Muslims as well as non-Muslims. How an Islamic fund is different from a
conventional mutual fund and the impetus experienced in Islamic funds market is also,
analyzed. How the interest-free banks operate as ‘fund managers’ in contrast to the
conventional operation of other banks as deposit takers and loan advancers are clearly
explained in an interesting manner.
P. Ibrahim64 in his article, ‘Interest-free Banking, Contemporary Relevance’
elucidates the rational theory and practice of Interest-free Banking and introduces a
true picture of operational success of such system. He examines the working of
interest-free financial institutions in various states of India and brings forth their
relevance in Indian context. The view point of ancient thinkers about the interest is
aptly synchronized with the preaching of major religions. He points out how the
interest based system leads to economic inequalities and dampens economic growth.
The evolution and growth of Interest-free banks in various countries are also depicted
in the order of sequence. The paper also explains the operational methods, of IF
banking like deposit creation and various forms of advancing loans. While exploring
the merits of such financial operations he finds out justifiable answers to the
apprehensions raised against such a system. When he elucidates its potential prospects
Chapter II Literature Review
63
he expects a green signal and positive response from the authorities to introduce such
a rational system in a prospective country like India.
Aqdas Ali Kazmi65 elucidates that Islamic banking both in theory and practice
is nothing more than an anthology. He interprets it as a series of myth involved in its
conceptual frame work like ‘Riba’, whether it is synonymous to interest or not,
whether the interest-free banking represents alternative model for interest based
banking and whether the PLS (Profit Loss Sharing) can replace interest or not. He
categorically asserts that by its definition, structure, organization, functions and
methodology, a bank cannot exist without interest.
Qassimi66 critically review the Islamic banking as a brief finance system which
has been emerged as a trick to grab the share capital and capture the idle savings of the
pious people who treat ‘interest’ as morally unacceptable. “In today’s world more and
more people are looking for salvation, even if it was a trick; in this case salvation got
an Islamic disguise” (Qassimi)
Shariq Nizar67, in his Ph.D. Thesis, ‘Recent Developments in Banking
Organisation with Special Reference to Islamic Banking and Finance’, examines and
analyses the issues related to the crisis of modern banking and elucidates how the
Islamic Economics pinpointed on ‘interest’ as the major cause of this crisis.
Briefing on the origin and growth of conventional banking on historical
perspective he gives a detailed explanation of recent banking crisis worldwide. Serious
efforts have been made to examine the real cause of this crisis. The mode of
implementation of ‘Basel Committee’ 68 recommendations on banking reforms and
how it is effective in various countries in the matter of restructuring of banking
operations are discussed in some detail.
In the core chapter ‘Banking organization: an Islamic Way’ he introduces the
evolution and development of Islamic Banking both in theoretical and practical
grounds. The practical side is examined separately in two different periods – (a) those
established before 1980 and (b) those established after 1980. Serious attempts have
Chapter II Literature Review
64
been made to elaborate India’s contributions in this area, along with those of South
Asians.
Detailed analysis of different models of Islamic Banking propounded by
M.N.Siddiqi, Mohamed Baqir Al Sadr, Muhammed Muslehuddin, A.L.M.Abdul
Gafoor etc. have been done.
Based on the adequate data the study has made a comparative analysis of
Islamic banking and conventional banking. It is reported that the rate of growth of
total equity for Islamic Banks during 1990-97 was substantially higher as compared to
the conventional Banks.
The problems faced by Islamic Banks are explained in a comprehensive
manner on ideological, theoretical and practical basis. The inbuilt problems of the
institutions related with advancing loans and accepting deposits are attempted
seriously. The problems related to attitude of Government are also highlighted.
The concluding chapter of the study explains the future prospects of Islamic
Banking in relation to that of conventional banking. It is observed that the financial
intermediation based on equity principles resulted in asset creation rather than debt
creation.
Based on the available literature reviewed above, the objectives and
methodology of the study have been formulated. The questionnaire preparation is at
par with theoretical propositions which have been gathered from the surveyed
materials.
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Chapter II Literature Review
65
3. Archer Simon and Rifaat Ahmed Abdel Karim, ‘Introduction to Islamic
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