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Study Report on Islamic Banking

August 25, 2012

US-Pacific Banks

Analysis Report on Islamic Banking

Write-up by Mohammed Ariff

Research Report on Islamic Banking

by Mohamed Ariff, University of Malaya,
taken from Asian-Pacific Financial Literature, Vol. 2, No. two (September 1988), pp. 46-62

Islamic banking is a new phenomenon that has taken several observers by surprise. The entire banking system has been islamized in the two Iran and Pakistan. In addition, there are some thirty Islamic banking institutions in operation in other parts of the globe, such as the Jeddah-based Islamic Development Financial institution (IDB) but excluding several non-financial institution Islamic economic institutions (see Appendix). What is far more, the speed with which Islamic financial institutions have sprung up and the charge at which they have progressed make it really worth-while to research them systematically. An try is manufactured in this paper (a) to survey the growing literature on Islamic banking, in distinct (b) to trace the development and improvement of Islamic banking, and (c) to highlight its salient characteristics.

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Evolution
The first modern experiment with Islamic banking was undertaken in Egypt below cover, without having projecting an Islamic image, for fear of getting witnessed as a manifestation of Islamic fundamentalism which was anathema to the political regime. The pioneering work, led by Ahmad El Najjar, took the kind of a savings financial institution based mostly on profit-sharing in the Egyptian town of Mit Ghamr in l963. This experiment lasted right up until l967 (Prepared l98l), by which time there were 9 such banking institutions in the nation. These banking institutions, which neither charged nor paid interest, invested mainly by engaging in trade and industry, straight or in partnership with others, and shared the revenue with their depositors (Siddiqi l988). Thus, they functioned primarily as saving- investment institutions rather than as industrial financial institutions. The Nasir Social Financial institution, established in Egypt in l97l, was declared an interest-totally free industrial bank, although its charter made no reference to Islam or Shariah (Islamic law).

The IDB was established in l974 by the Organization of Islamic Nations (OIC), but it was mainly an inter-governmental financial institution aimed at offering funds for development tasks in member countries. The IDB offers fee- based mostly financial providers and profit-sharing monetary support to member nations. The IDB operations are free of interest and are explicitly based mostly on

Shariah Rules
In the seventies, modifications took spot in the political climate of several Muslim countries so that there was no longer any strong require to set up Islamic economic institutions beneath cover. A quantity of Islamic banking institutions, each in letter and spirit, came into existence in the Middle East, e.g., the Dubai Islamic Financial institution (l975), the Faisal Islamic Bank of Sudan (l977), the Faisal Islamic Bank of Egypt (l977), and the Bahrain Islamic Financial institution (l979), to mention a few. The Asia-Pacific region was not oblivious to the winds of alter. The Philippine Amanah Bank (PAB) was established in l973 by Presidential Decree as a specialized banking institution with out reference to its Islamic character in the bank’s charter. The establishment of the PAB was a response by the Philippines Government to the Muslim rebellion in the south, made to serve the unique banking demands of the Muslim local community. Even so, the key activity of the PAB was to assist rehabilitation and reconstruction in Mindanao, Sulu and Palawan in the south (Mastura l988). The PAB has eight branches located in the major cities of the southern Muslim provinces, including 1 in Makati (Metro Manila), in addition to the head office situated at Zamboanga City in Mindanao. The PAB, nonetheless, is not strictly an Islamic bank, since interest-primarily based operations keep on to coexist with the Islamic modes of financing. It is indeed fascinating to observe that the PAB operates two ‘windows’ for deposit transactions, i.e., traditional and Islamic. Nonetheless, efforts are underway to convert the PAB into a full-fledged Islamic financial institution (Mastura l988).

Islamic banking made its debut in Malaysia in l983, but not without having antecedents. The first Islamic economic institution in Malaysia was the Muslim Pilgrims Cost savings Corporation set up in l963 to help folks save for carrying out hajj (pilgrimage to Mecca and Medina). In l969, this body evolved into the Pilgrims Management and Fund Board or the Tabung Haji as it is now popularly known. The Tabung Haji has been acting as a finance firm that invests the financial savings of would-be pilgrims in accordance with Shariah, but its part is rather restricted, as it is a non-bank fiscal institution. The results of the Tabung Haji, nevertheless, presented the primary impetus for establishing Bank Islam Malaysia Berhad (BIMB) which represents a total- fledged Islamic business financial institution in Malaysia. The Tabung Haji also contributed l2.five per cent of BIMB’s preliminary capital of M$ 80 million. BIMB has a complement of fourteen branches in numerous components of the country. Ideas are afoot to open 6 new branches a year so that by l990 the branch network of BIMB will complete thirty-three (Guy l988).

Reference should also be made to some Islamic economic institutions established in nations where Muslims are a minority. There was a proliferation of interest-free of charge cost savings and loan societies in India during the seventies (Siddiqi l988). The Islamic Banking Technique (now called Islamic Finance Home), established in Luxembourg in l978, represents the first try at Islamic banking in the Western planet. There is also an Islamic Financial institution International of Denmark, in Copenhagen, and the Islamic Investment Company has been set up in Melbourne, Australia.

contd at..

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