Wednesday, December 31, 2008

AN ISLAMIC NEW YEAR By: Mohamed Elmasry

It has not been a tradition among Muslims to make New Year's resolutions, but the practice does not do any harm; indeed, it can do a lot of good.

Muslims are taught by the Prophet (may God’s peace and mercy be upon him) that in the eyes of God, every deed is valued according to the intention behind it (Hadith: anima-allamal-bel-niat).

In the same Hadith, he says that every journeying in life; be it physical, mental or spiritual is valued according to the truth or righteousness of the cause behind it. Thus the nobler the intention and cause behind a given action, the higher God Almighty values that action, resulting in greater divine rewards in this life and the hereafter.

Take, for example, everyday acts such as eating, working for a living, going to school, or nurturing our loved ones. If we consciously perform these through a desire to fulfill God’s covenant in caring for the universe, their value is higher than if they were carried out automatically, without any thought for their spiritual dimensions.

Similarly, if my aim in life is only to be rich, period, then Insha'llah (if God wills) I might become rich. But if I am motivated to acquire wealth in order to help other fellow human beings, besides myself and my family, then Insha'allah, a greater universal value has been added to my efforts.

I came to Canada from Egypt more than 30 years ago to pursue graduate studies toward a Ph.D. Back then, I had no particular intention of contributing to the well-being of this country. Even when I decided to stay here in Canada, and turned down lucrative job offers from the United States, it was more for personal reasons than anything else, for my wife is a Canadian.

But now, with my white hair and feeble bones, I've come to know better. After deep reflection and meditation, I have made a commitment to carry out every deed in my life with a higher intention. And this is my Islamic New Year's resolution.

The Islamic New Year dates from the time when the Prophet and his companions migrated from Mecca to Medina. The lunar calendar followed by Muslims the world over is called the Hijri, or Hegirian, from the Arabic word Hijra, meaning "migration." This historic migration was not done for economic reasons, but in order to be free to worship the One God, the Creator of all.

The beginning of the Islamic era proper was set as July 16, 622 A.D., based on the first day of the Hijra. Early Muslims chose that day, rather than the Prophet's birthday, to mark the beginning of their calendar. It distinguished for them those events that happened before and after the Hijra.

Muhammad was called to Prophethood with the beginning of the Divine revelations that resulted in the Qur'an, in June 610 A.D., in Mecca. But during the next 12 years or so, he and the community of early Muslims were heavily persecuted by the citizens of Mecca. Therefore, during the first year A.H. (After Hijra) the Prophet established an Islamic fellowship in Medina as a new social order. He also built the first mosque (or masjid) there as a place of worship, a university, a social centre, a governing house, and a court of law.

The Hijra also marks the creation of humanity's first multireligious world order. In fact, the Covenant of Medina was the first written constitution in human history. It was also at this time that a new concept of the Ummah was born -- a universalist commonwealth based on faith, moral justice, family values, equity, social responsibility, peace, freedom, and human dignity.

So I wish all Muslims a truly blessed new year; 'am-mo-barak, as it is said in Arabic.

As for my non-Muslim friends I invite them to read the history of my people. For this, I highly recommend “The Cultural Atlas of Islam” (Macmillan, 1986) by Ismail al Faruqi and Lois al Faruqi, p. 511. It is an outstanding reference book with beautiful photos and maps, and an excellent read.

[Dr. Mohamed Elmasry is a professor of electrical and computer engineering at the University of Waterloo, and national president of the Canadian Islamic Congress. He is author of Spiritual Fitness (TM) For Life, available at He can be reached at]

What is Islamic Calendar
S. Khalid Shaukat

The Islamic calendar is based on lunar months, which begin when a thin new crescent Moon is actually sighted in the western sky after sunset within a day or so after the New Moon. Hence, the month is either 29 days or 30 days. There are 12 months in an Islamic year, which is either 354 days long or 355 days long, compared to (Gregorian) civil calendar of 365 or 366 days. Since 12 lunar months are, on an average, 11 days shorter than the (Gregorian) civil year, the Islamic year shifts earlier in each civil year by about this amount. The 12 months of the Islamic calendar are: Muharram, Safar, Rabi' al-Awwal, Rabi' al-Thaani, Jumada al-Ooola, Jumada al-Ukhra, Rajab, Sha'ban, Ramadan, Shawwal, Dhu al-Qa'dah, Dhu al-Hijjah. The Islamic (Hijri) calendar year is usually abbreviated A.H. in Western languages from the latinized "Anno Hegirae" or more commonly known as "after hijrah." Although, the Islamic calendar was introduced in the Christian Era of 632 AD by the Messenger Muhammad (peace be upon him), the beginning of Islamic era for the count of years in this calendar was decided, much later in the year 639 AD, to be the year 622 AD.
It was during the Messenger Muhammad's (peace be upon him) last pilgrimage in the 10th year of Hijrah (that is 10th year of his migration from Makkah to Medinah), that the decision to introduce a purely lunar Islamic Calendar was made. The word Hijrah has often been misrepresented by many writers Muslims and non-Muslim alike. It means neither flight nor fleeing. The Arabic word Hajara means: to break off from the relations or abandon one's own tribe. The beginning of the Islamic era was considered and discussed during 639 AD, the time of the 4th year of the Caliphate of Umar who declared that the most important event in establishing the roots of Islam in Medinah is Hijrah (Messenger's migration from Makkah), therefore let it become the epoch of the era which happened in 622 AD. The actual starting date for the Islamic Calendar was chosen (on the basis of purely lunar years, counting backwards) to be the first day of the first month (1 Muharram) of the year of the Hijrah. However, the era between 1st year to 10th year of the Hijrah was not following this Islamic Calendar; instead the prevailing practices of various kinds of intercalation was followed in Arabia at that time. Different tribes were following different intercalation, so there was no uniform calendar. Accordingly, first day of Muharram 1 A.H. as practiced in Arabia corresponded either April 18 or May 18, 622 C.E. (Julian calendar). However, if one wants a theoretical starting date for Islamic calendar (on the basis of purely lunar months without intercalation, counting backwards) then the first day of the first month i.e. 1st Muharram 1 A.H. corresponds to July 16, 622 C.E.
The earliest date of Islamic calendar for which a Julian calendar date is exactly known is 9th Dhu al-Hijjah 10 AH, which corresponds to March 6, 632 C.E. (Friday), when the Messenger Muhammad (peace be upon him) performed his last and farewell pilgrimage to Makkah

The Islamic Calendar - Calculation

The Islamic calendar (or Hijri calendar) is a lunar calendar. It contains 12 months that are based on the motion of the moon, and because 12 lunar months is 12 x 29.53=354.36 days, the Islamic calendar is consistently shorter (11 Days) than a solar year, and therefore it shifts with respect to the Gregorian calendar.
The Islamic calendar is the official calendar in countries around the Gulf, especially Saudi Arabia. But other Muslim countries use the Gregorian calendar for civil purposes and turn to the Islamic calendar for religious purposes.

What does an Islamic year look like?
3.Rabi' al-awwal (Rabi' I)
4.Rabi' al-thani (Rabi' II)
5.Jumada al-awwal (Jumada I)
6.Jumada al-thani (Jumada II)

11.Dhu al-Qi'dah
12.Dhu al-Hijjah

What does the Quran say about measurement of time?
[Quran - 9.36] Surely the number of months with Allah is twelve months in Allah's ordinance since the day when He created the heavens and the earth..
[Quran - 31:29] Seest thou not that Allah merges Night into Day and he merges Day into Night; that He has subjected the sun, and the moon (to his Law), each running its course for a term appointed; and that Allah is well-acquainted with all that ye do?
[Quran - 103: 1..3] By (the Token of) Time (through the ages),- Verily Man is in loss, - Except such as have Faith, and do righteous deeds, and (join together) in the mutual teaching of Truth, and of Patience and Constancy.

How is an Islamic month determined:

Each month starts when the lunar crescent is first seen after a new moon.
Although new moons may be calculated quite precisely, the actual visibility of the crescent is difficult to predict. It depends on factors such as weather, the optical properties of the atmosphere, and the location of the observer. Therefore in some cases it may be difficult to give accurate information in advance about when a new month will start.
Furthermore, in some areas Muslims depend on a local sighting of the moon, whereas in other areas a universal sighting is accepted. (i.e. if a new crescent is seen anywhere in the world it is accepted for communities the world over). Both are valid Islamic practices, but they may lead to different starting days for the months.

Rules for the Islamic Calendar in Different Countries

The Islamic calendar is based on visibility of the crescent Moon. We know perfectly well where the Moon and the Sun are at any given time, but how light must the Moon be and how dark must the sky be before we can see the crescent? And what if the weather is bad?
In spite of these difficulties, some Muslim communities base their calendar on actual Moon sightings. This is done in India, Pakistan, and Bangladesh.
In some parts of the world there is a growing trend to determine the start of the new lunar month according to the minimum criteria required for sighting the new crescent. This is .. the age of the new moon must be at least 8.5 hours to 15.5 hours and the separation between the sun and the moon must be at least 11 degrees, to be able to be seen with the naked eye.
In Saudi Arabia and most of the Gulf countries they have simplified the calendar. They start the lunar month if the Moon sets after the Sun on the 29th day of the previous month, as seen from Mecca. Discussion on the web site of the Jordanian Astronomical Society.

How does one count years?
Years are counted since the Hijra, that is, Prophet Mohammed's (Peace be upon him) migration to Medina, which is assumed to have taken place 16 July C.E. 622 (Julian calendar). On that date AH 1 started (AH = Anno Hegirae = year of the Hijra).
March 16, 2002 CE will mark the beginning of 1423 AH.
Note that although only 2002 - 622 = 1380 years have passed in the Christian calendar, 1423 years have passed in the Islamic calendar, because its year is consistently shorter (by about 11 days) than the tropical year used by the Christian calendar.

When will the Islamic calendar overtake the Gregorian calendar?
As the year in the Islamic calendar is about 11 days shorter than the year in the Christian calendar, the Islamic years are slowly gaining in on the Christian years. But it will be many years before the two coincide. The 1st day of the 5th month of C.E. 20874 in the Gregorian calendar will also be (approximately) the 1st day of the 5th month of AH 20874 of the Islamic calendar

Further information: - provides moon visibility curves for the current year and next year.
Astronomical Applications department of the US Naval Observatory - lists New Moon birth times for the whole year. NB - the crescent Moon will not be visible until at least 15 hours after the birth of the New Moon.
Moon sighting versus Moon fighting - an article on various opinions of moon sighting

Tuesday, December 30, 2008 Drag and Drop


Sometime back I visited a website that had the drag and drop shopping cart feature. Users can simply drag and drop the items they wish to buy in the basket and the basket is updated with the new results. I was extremely impressed with this feature and decided to create a small application that does the same.

In this article I will implement a page which enables the users to drag and drop the items they wish to buy into the shopping basket. The shopping basket items and the price will be updated. The code presented in this article is browser compatible.

The Database Design:

I used SQL SERVER 2005 Express to create a simple database called "ToyShopDatabase". The database contains a single table "tblToys" which contains four columns.

  • ToyID: The identity column is used as a primary key.
  • Title: The title of the toy.
  • ImageUrl: The image url of the toy.
  • Price: The price of the toy.

I have populated the database with some dummy data. Let's see how we can display the data on the page.

Displaying Data on the Page:

I have used DataList control to display the data on the page. Check out the BindData method below which is used to retrieve the data from the database.

private void BindData()

string connectionString = ConfigurationManager.ConnectionStrings _
SqlConnection myConnection = new SqlConnection(connectionString);

SqlDataAdapter ad = new SqlDataAdapter("
SELECT * FROM tblToys",_

   DataSet ds = new DataSet();


dlToys.DataSource = ds;
You can see the items displayed on the page in the screen shot below:

You can also see the shopping cart displayed on the left side of the screen. The shopping cart displays $0.00 since there are no products added to the cart.

The interesting thing is the HTML code for the DataList. Let's check it out.

<asp:DataList Height="100%" Width="100%" ID="dlToys" runat="server"

RepeatColumns="3" CellPadding="20" CellSpacing="20">
<div ID="a" runat = "server" class="dragElement">
<asp:Label ID="lblTitle" runat=
server" Text='<%# Eval("Title") %>' />
<asp:Label ID="lblPrice" runat="server" Text =
<%# Eval("Price") %>' />
<asp:Image ID="imgPicture" runat="server" ImageUrl=
<%# Eval("ImageUrl") %>' />
As you can see in the code above I have added a
element inside the
ItemTemplate of the DataList control. This means that each product is contained
inside the
element which will serve as a draggable object. The

control will have a unique ID since I have added the runat="server" attribute.

The unique ID will be assign by ASP.NET at runtime as shown below:

Making Elements Dragable:

At this point we know that our DIV elements will serve as the dragable
objects. But there can be several DIV controls on the page which will not be a
part of this drag and drop feature. We will use regular expression to filter the
correct DIV elements.

Here is the code that initiates the drag and creates the clone.

function InitiateDrag(e)

mouseState = 'down';

var evt = e || window.event;

startX = parseInt(evt.clientX);
startY = parseInt(evt.clientY);

clone = obj.cloneNode(true); = 'absolute'; = parseInt(startY) + 'px'; = parseInt(startX) + 'px';


document.onmousemove = Drag;
document.onmouseup = Drop;

return false;


Dropping the Element in the Drop Zone:

I had some hard time creating a browser-compatible drop zone event. The Drop
is only successful when the product is dropped inside the drop zone. In my
article, "Drag and Drop Using JavaScript", I used the parent approach where I found
the element based on the mouse position. But unfortunately, that approach was
not browser compatible. The approach that is discussed here is browser
compatible and it based on the mouse position and the drop zone position on the

And here is the code for dropping the product in the drop zone:

function Drop(e)
var evt = e || window.event;
var evtTarget = || evt.srcElement;

var dZone = document.getElementById("dZone");

if( evt.clientX > dZone.offsetLeft &&
evt.clientX < (dZone.offsetLeft + dZone.offsetWidth) && evt.clientY > dZone.offsetTop &&
evt.clientY < (dZone.offsetTop + dZone.offsetHeight)) { AddPrice(); } document.onmouseup = null;
document.onmousemove = null;

mouseState = 'up';


f the product is not inside the drop zone then the product just disappears.
However, if the product is inside then it is added to the shopping cart.

Adding the Product to the Shopping Cart:

The AddPrice function is responsible for updating the total price and the
display of the shopping cart. Each product is embedded inside the DIV element
which is later added to the DropZone DIV container.

function AddPrice()


var title = GetProductTitle();
var price = GetProductPrice();

var dZone = document.getElementById("dZone");
var textNode = document.createTextNode(title);
var priceNode = document.createTextNode(price);

var spaceNode = document.createTextNode(': $');
var paragraphElement = document.createElement('p');

// create the delete button

var deleteButton = document.createElement('button');
deleteButton.value = 'Delete';
deleteButton.innerHTML = 'Delete';
deleteButton.onclick = DeleteItem;

var item = document.createElement('div'); = 'itemDiv' + uniqueNumber;



// increment the price


GetProductTitle and GetProductPrice are used to retrieve the title and
the price from the dragable product. uniqueNumber is a global variable
which is used to create a unique ID for the newly created DIV element. uniqueNumber is incremented each time a new product is added to the drop zone.
The IncrementTotal function is used to add the product's price to the total

Deleting the Item from the Shopping Cart:

Once the product is added to the shopping cart it is displayed with the
delete button. The delete button is used to remove the product from the shopping

cart and adjust the total balance.

function DeleteItem(e)

var evt = e || window.event;
var evtTarget = || evt.srcElement;

price = evtTarget.parentNode.childNodes[2].nodeValue;
price = evtTarget.parentElement.childNodes[2].nodeValue;


Tuesday, December 23, 2008

Mumbay Terror; who are the beneficiaries

Who are the beneficieries of Mumbai Terror?
Lashker or 'BJP'!

1-Unlike other terrorists, Terrorists in Mumbay has not demanded anything? They don't demand release of their co-prisoners nor demanded money... why?? what was their target then?

2-Unlike other islamic Jehadis with beard and turbans, why Mumbai terrorists came with strange look - they wore jeans and T-shirts; clean-shaved and no turbans nor any sign of muslims terrorists we normally watch on media?

3-And the Terrorists attackers did nothing specifically for western, even Israelis, it was sure if they were Jehadists!

4-Beer drinking terrorists; Jehadi are non-alcoholic, however Mumbai Terrorists goes to the cafe and drinks beer before they start firing??

5-Mumbai terrorists (as shown by media) had close similarities with RSS cadres: Mumbai terrorist wearing an yellow band on his right hand as RSS cadres wears normally (see pictures).

6-Mumbai terrorists immediately find their targets by killing ATS leaders [Hemant Karakare, CP Ashok Kamthe & Vijay Salskar) in first 15 minutes of the attacks of their terror? Karakare was wearing bullet proof jacket , he was fired right on his neck!!!he was in a crowded place , so it was not easy to find and identify they got so much information ????????? why they targeted him!!!!!!How and why they so specific the clearly chose ATS leaders? And the terrorist immediately ran away, why? & who was that terrorist? (ATS was investigating about BJP involvment in terrorism, General Prohait , Samjhoota Express Blasts)

7-Only one terrorist caught lively (?), all others killed as in every encounter in recent past?
8-Mumbai terrorist are very clear about their targets, they are well experienced their hide abouts in Taj and other places?
9-Prime Minister, Sonia & LK Advani visits Mumbai, but no clues or no claims about ISI or Pakistan.. However No1 terrorist, Gujarat CM Modi hurry-up to Mumbai and declares that Pakistan is behind the attack without any doubt!

Note: no other CMs goes to Mumbai.. And he offers rewards to every military men killed of 1 crore unlike PM and LK Advani? Even he offers aid to MahaRastra!
10-Media was widely reporting that there were IDs of terrorists recovered which shows Malaysian and Mauritious IDs however such references disappeared once Modi's arrival!
11-The timing of Mumbai terror is well planned, just before state elections! (so who will take beneficent ? lashkar-e-taiba or BJP?)
12-We are told that they came from Pakistan by sea? Indian military in boards sea were sleeping?? We are told they came by speed boats? is it possible to travel so long on such boat?
13-It took contineous 60 hours to stop the terrorism! and most of terrorists killed!!!!!
14)Karkare's wife declines 'Modi's compensation' offer
Mumbai The family of slain Maharashtra ATS chief Hemant Karkare has declined Gujarat Chief Minister Narendra Modi's offer of monetary help, sources said on Saturday.
Modi on Friday visited the residences of Karkare and encounter specialist Vijay Salaskar, who were killed while fighting militants on Wednesday night.
Modi also announced that his government would give Rs 1 crore to Maharashtra for the families of policemen killed in the attacks. Karkare's widow and other family members have declined Modi's offer, the sources said.


Pakistan extends along either side of the historic Indus River, following its course from the mountain valleys of the Himalayas down to the Arabian Sea. Bordering on India, China, Afghanistan and Iran, it is strategically located astride the ancient trade routes between Asia and Europe. Pakistan's 796,095 square kilometers of territory include a wide variety of landscapes, from arid deserts to lush, green valleys to stark mountain peaks.

Geographically, Pakistan can be divided into three regions: the lowlands along the Indus in the south and east, the arid plateau of Baluchistan in the southwest, and the mountains of the north. The provinces of Punjab and Sindh, in the east and south, are well irrigated by the Indus and its tributaries. The land is fertile and produces most of Pakistan's food. This area, which includes the cities of Karachi, Islamabad (the capital), Lahore and Rawalpindi, is the most densely-populated in the country.

The southwestern province of Baluchistan covers almost half Pakistan's territory. The land consists of a stony plateau, sparsely populated and very dry. Outside of the provincial capital of Quetta, travel in Baluchistan is extremely restricted.

Pakistan's mountainous north contains the second tallest peak on Earth, K2 (28,250 ft., 8611 m), and over 300 glaciers. Three great mountain ranges stretch across this part of the country: the Himalayas, the Karakorams and the Hindu Kush. The region's topography is constantly changing, as frequent earthquakes help the mountains grow at the remarkable rate of 7 mm (1/4 inch) a year.

Pakistan's climate varies according to elevation. April through September are the most pleasant months in the mountains, although they bring oppressive heat to the low-lying plains of the Indus Valley, where midday temperatures can exceed 40 degrees Celsius (100 degrees F). December through February are the coolest months, as lowland temperatures drop to between 10-25 degrees C (50-77 degrees F) and the air in the mountains falls below freezing. Monsoons reach the southern areas of the country in late summer, although precipitation is minimal in Baluchistan and in the north and limited in most of the interior.

History and People

While Pakistan as a country is relatively new, the Indus River region is known as a cradle of civilization. Archaeologists have found fossils of Homo sapiens in the area which date back 50,000 years. An urban society known as the Indus Civilization developed around 3,000 BC and flourished for a period of about fifteen hundred years. One of the reasons for the rise and the prosperity of the Indus Civilization was its situation right along a natural trade route between central Asia and the Indian subcontinent. While this position encouraged the rise of an urban trading society, it also encouraged wave after wave of invasion, making Pakistan's history a mind-boggling tapestry of successive conquests.

The first of these incursions was that of the Aryans, who arrived from Central Asia around 1,700 BC, displacing the Indus Civilization and bringing Hinduism to the region. Twelve hundred years later, the Aryans yielded in turn to the armies of Cyrus the Great, and the Indus region became a part of his Achaemenid Persian empire. The next conqueror to arrive was Alexander the Great, who passed through the Khyber Pass in 326 BC, built a fleet of ships, and sailed down the Indus to conquer what is now the Punjab state. It was in the Punjab that Alexander's soldiers refused to go any further east, prompting an enormously difficult march homeward through the harsh desert regions of Baluchistan, Afghanistan, and Iran.

Alexander's successors, the Seleucids, survived for about a century, until they capitulated to Ashoka, emperor of the great Mauryan empire of India. It was Ashoka who, in an act of remorse for the suffering caused by his many conquests, brought Buddhism to Pakistan (and to much of Asia). The Mauryans were then succeeded by the Bactrians, the Saka (Scythian nomads), the Parthians, and, in the 2nd century AD, by the Kushans. Kanishka, the greatest of the Kushan kings, ruled from Peshawar over an empire that stretched across much of India. As the Kushan empire declined, various Hindu kingdoms based in India asserted their power, dividing up the territory between them. Islam was introduced in the 8th century and quickly spread throughout the region. The Turkish rulers of Afghanistan invaded Pakistan as they began their conquest of India. Pakistan then passed under the control of the Muslim sultans of Delhi.

Early in the 16th century, Pakistan became part of the Mughal Empire. Under the emperors Akbar, Jahangir and Shah Jahan, art and architecture flourished. By the early 19th century, the Sikhs had consolidated their power and declared Lahore their capital. Within a few decades, however, the Sikhs were defeated in battle by the English, and Pakistan became part of the British Raj. When India prepared for independence from the British in the 1940s, Muslim Indians pushed for their own independent state, and the republic of Pakistan came into being on August 14, 1947 as a Muslim homeland. Unfortunately, the birth of both Pakistan and India was marked by massive bloodshed, when violence broke out between Muslims and Hindus migrating from one country to the other. About 500,000 people are believed to have died.

Pakistan's population of 128 million is one of the fastest-growing in Asia. The two largest ethnic groups are the Punjabis, an Indo-Aryan people who dominate political and business life, and the Pashtuns, who work mainly as herders and farmers. The northern areas are home to many distinct ethnic groups, whose eclectic heritage is the result of intermarriage between local peoples and invaders from elsewhere in Europe and Asia. The official language is Urdu, and English is used extensively in business.

Monday, December 15, 2008

Islamic Banking

Modern banking system was introduced into the Muslim countries at a time when they were politically and economically at a low ebb, in the late 19th century. The main banks in the home countries of the imperial powers established local branches in the capitals of the subject countries and they catered mainly to the import export requirements of the foreign businesses. The banks were generally confined to the capital cities and the local population remained largely untouched by the banking system. The local trading community avoided the “foreign” banks both for nationalistic as well as religious reasons. However, as time went on it became difficult to engage in trade and other activities without making use of commercial banks. Even then many confined their involvement to transaction activities such as current accounts and money transfers. Borrowing from the banks and depositing their savings with the bank were strictly avoided in order to keep away from dealing in interest which is prohibited by religion.1
With the passage of time, however, and other socio-economic forces demanding more involvement in national economic and financial activities, avoiding the interaction with the banks became impossible. Local banks were established on the same lines as the interest-based foreign banks for want of another system and they began to expand within the country bringing the banking system to more local people. As countries became independent the need to engage in banking activities became unavoidable and urgent. Governments, businesses and individuals began to transact business with the banks, with or without liking it. This state of affairs drew the attention and concern of Muslim intellectuals. The story of interest-free or Islamic banking begins here. In the following paragraphs we will trace this story to date and examine how far and how successfully their concerns have been addressed.
4.1 Historical development
It seems that the history of interest-free banking could be divided into two parts. First, when it still remained an idea; second, when it became a reality -- by private initiative in some countries and by law in others. We will discuss the two periods separately. The last decade has seen a marked decline in the establishment of new Islamic banks and the established banks seem to have failed to live up to the expectations. The literature of the period begins with evaluations and ends with attempts at finding ways and means of correcting and overcoming the problems encountered by the existing banks.
4.1.1 Interest-free banking as an idea
Interest-free banking seems to be of very recent origin. The earliest references to the reorganisation of banking on the basis of profit sharing rather than interest are found in Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud Ahmad (1952) in the late forties, followed by a more elaborate exposition by Mawdudi in 1950 (1961).2 Muhammad Hamidullah’s 1944, 1955, 1957 and 1962 writings too should be included in this category. They have all recognised the need for commercial banks and the evil of interest in that enterprise, and have proposed a banking system based on the concept of Mudarabha - profit and loss sharing.
In the next two decades interest-free banking attracted more attention, partly because of the political interest it created in Pakistan and partly because of the emergence of young Muslim economists. Works specifically devoted to this subject began to appear in this period. The first such work is that of Muhammad Uzair (1955). Another set of works emerged in the late sixties and early seventies. Abdullah al-Araby (1967), Nejatullah Siddiqi (1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974) were the main contributors.3
Early seventies saw the institutional involvement. Conference of the Finance Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study in 1972, First International Conference on Islamic Economics in Mecca in 1976, International Economic Conference in London in 1977 were the result of such involvement. The involvement of institutions and governments led to the application of theory to practice and resulted in the establishment of the first interest-free banks. The Islamic Development Bank, an inter-governmental bank established in 1975, was born of this process.
4.1.2 The coming into being of interest-free banks
The first private interest-free bank, the Dubai Islamic Bank, was also set up in 1975 by a group of Muslim businessmen from several countries. Two more private banks were founded in 1977 under the name of Faisal Islamic Bank in Egypt and the Sudan. In the same year the Kuwaiti government set up the Kuwait Finance House.
However, small scale limited scope interest-free banks have been tried before. One in Malaysia in the mid-forties4 and another in Pakistan in the late-fifties.5 Neither survived. In 1962 the Malaysian government set up the “Pilgrim’s Management Fund” to help prospective pilgrims to save and profit.6 The savings bank established in 1963 at Mit-Ghamr in Egypt was very popular and prospered initially and then closed down for various reasons.7 However this experiment led to the creation of the Nasser Social Bank in 1972. Though the bank is still active, its objectives are more social than commercial.8, 9
In the ten years since the establishment of the first private commercial bank in Dubai, more than 50 interest-free banks have come into being. Though nearly all of them are in Muslim countries, there are some in Western Europe as well: in Denmark, Luxembourg , Switzerland and the UK. Many banks were established in 1983 (11) and 1984 (13). The numbers have declined considerably in the following years.10
In most countries the establishment of interest-free banking had been by private initiative and were confined to that bank. In Iran and Pakistan, however, it was by government initiative and covered all banks in the country. The governments in both these countries took steps in 1981 to introduce interest-free banking. In Pakistan, effective 1 January 1981 all domestic commercial banks were permitted to accept deposits on the basis of profit-and-loss sharing (PLS). New steps were introduced on 1 January 1985 to formally transform the banking system over the next six months to one based on no interest. From 1 July 1985 no banks could accept any interest bearing deposits, and all existing deposits became subject to PLS rules. Yet some operations were still allowed to continue on the old basis. In Iran, certain administrative steps were taken in February 1981 to eliminate interest from banking operations. Interest on all assets was replaced by a 4 percent maximum service charge and by a 4 to 8 percent ‘profit’ rate depending on the type of economic activity. Interest on deposits was also converted into a ‘guaranteed minimum profit.’ In August 1983 the Usury-free Banking Law was introduced and a fourteen-month change over period began in January 1984. The whole system was converted to an interest-free one in March 1985.11
4.1.3 The last decade
The subject matter of writings and conferences in the eighties have changed from the concepts and possibilities of interest-free banking to the evaluation of their performance and their impact on the rest of the economy and the world. Their very titles bear testimony to this and the places indicate the world-wide interest in the subject. Conference on Islamic Banking: Its impact on world financial and commercial practices held in London in September 1984, Workshop on Industrial Financing Activities of Islamic Banks held in Vienna in June 1986, International Conference on Islamic Banking held in Tehran in June 1986, International Conference on Islamic Banking and Finance: Current issues and future prospects held in Washington, D.C. in September 1986, Islamic Banking Conference held in Geneva in October 1986, and Conference ‘Into the 1990’s with Islamic Banking’ held in London in 1988 belong to this category. The most recent one is the Workshop on the Elimination of Riba from the Economy held in Islamabad in April 1992.
Several articles, books and PhD theses have been written on Islamic Banking during this period. Special mention must be made of the work by M. Akram Khan in preparing annotated bibliographies of all published (and some unpublished) works on Islamic Economics (including Islamic Banking) from 1940 and before. It is very useful to students of Islamic Economics and Banking, especially since both English and Urdu works are included (1983, 1991, 1992). M.N. Siddiqi’s bibliographies include early works in Arabic, English and Urdu (1980, 1988). Turkish literature is found in Sabahuddin Zaim (1980).
4.2 Current practices
Generally speaking, all interest-free banks agree on the basic principles. However, individual banks differ in their application. These differences are due to several reasons including the laws of the country, objectives of the different banks, individual bank’s circumstances and experiences, the need to interact with other interest-based banks, etc. In the following paragraphs, we will describe the salient features common to all banks.
4.2.1 Deposit accounts
All the Islamic banks have three kinds of deposit accounts: current, savings and investment. Current accounts
Current or demand deposit accounts are virtually the same as in all conventional banks. Deposit is guaranteed. Savings accounts
Savings deposit accounts operate in different ways. In some banks, the depositors allow the banks to use their money but they obtain a guarantee of getting the full amount back from the bank. Banks adopt several methods of inducing their clients to deposit with them, but no profit is promised. In others, savings accounts are treated as investment accounts but with less stringent conditions as to withdrawals and minimum balance. Capital is not guaranteed but the banks take care to invest money from such accounts in relatively risk-free short-term projects. As such lower profit rates are expected and that too only on a portion of the average minimum balance on the ground that a high level of reserves needs to be kept at all times to meet withdrawal demands. Investment account
Investment deposits are accepted for a fixed or unlimited period of time and the investors agree in advance to share the profit (or loss) in a given proportion with the bank. Capital is not guaranteed.
4.2.2 Modes of financing
Banks adopt several modes of acquiring assets or financing projects. But they can be broadly categorised into three areas: investment, trade and lending. Investment financing
This is done in three main ways: a) Musharaka where a bank may join another entity to set up a joint venture, both parties participating in the various aspects of the project in varying degrees. Profit and loss are shared in a pre-arranged fashion. This is not very different from the joint venture concept. The venture is an independent legal entity and the bank may withdraw gradually after an initial period. b) Mudarabha where the bank contributes the finance and the client provides the expertise, management and labour. Profits are shared by both the partners in a pre-arranged proportion, but when a loss occurs the total loss is borne by the bank. c) Financing on the basis of an estimated rate of return. Under this scheme, the bank estimates the expected rate of return on the specific project it is asked to finance and provides financing on the understanding that at least that rate is payable to the bank. (Perhaps this rate is negotiable.) If the project ends up in a profit more than the estimated rate the excess goes to the client. If the profit is less than the estimate the bank will accept the lower rate. In case a loss is suffered the bank will take a share in it. Trade financing
This is also done in several ways. The main ones are: a) Mark-up where the bank buys an item for a client and the client agrees to repay the bank the price and an agreed profit later on. b) Leasing where the bank buys an item for a client and leases it to him for an agreed period and at the end of that period the lessee pays the balance on the price agreed at the beginning an becomes the owner of the item. c) Hire-purchase where the bank buys an item for the client and hires it to him for an agreed rent and period, and at the end of that period the client automatically becomes the owner of the item. d) Sell-and-buy-back where a client sells one of his properties to the bank for an agreed price payable now on condition that he will buy the property back after certain time for an agreed price. e) Letters of credit where the bank guarantees the import of an item using its own funds for a client, on the basis of sharing the profit from the sale of this item or on a mark-up basis. Lending
Main forms of Lending are: a) Loans with a service charge where the bank lends money without interest but they cover their expenses by levying a service charge. This charge may be subject to a maximum set by the authorities. b) No-cost loans where each bank is expected to set aside a part of their funds to grant no-cost loans to needy persons such as small farmers, entrepreneurs, producers, etc. and to needy consumers. c) Overdrafts also are to be provided, subject to a certain maximum, free of charge.
4.2.3 Services
Other banking services such as money transfers, bill collections, trade in foreign currencies at spot rate etc. where the bank’s own money is not involved are provided on a commission or charges basis.
4.2.4 Shortcomings in current practices
In the previous section we listed the current practices under three categories: deposits, modes of financing (or acquiring assets) and services. There seems to be no problems as far as banking services are concerned. Islamic banks are able to provide nearly all the services that are available in the conventional banks. The only exception seems to be in the case of letters of credit where there is a possibility for interest involvement. However some solutions have been found for this problem -- mainly by having excess liquidity with the foreign bank. On the deposit side, judging by the volume of deposits both in the countries where both systems are available and in countries where law prohibits any dealing in interest, the non-payment of interest on deposit accounts seems to be no serious problem. Customers still seem to deposit their money with interest-free banks.
The main problem, both for the banks and for the customers, seem to be in the area of financing. Bank lending is still practised but that is limited to either no-cost loans (mainly consumer loans) including overdrafts, or loans with service charges only. Both these types of loans bring no income to the banks and therefore naturally they are not that keen to engage in this activity much. That leaves us with investment financing and trade financing. Islamic banks are expected to engage in these activities only on a profit and loss sharing (PLS) basis. This is where the banks’ main income is to come from and this is also from where the investment account holders are expected to derive their profits from. And the latter is supposed to be the incentive for people to deposit their money with the Islamic banks. And it is precisely in this PLS scheme that the main problems of the Islamic banks lie. Therefore we will look at this system more carefully in the following section.
4.3 Problems in implementing the PLS scheme
Several writers have attempted to show, with varying degrees of success, that Islamic Banking based on the concept of profit and loss sharing (PLS) is theoretically superior to conventional banking from different angles. See, for example, Khan and Mirakhor (1987). However from the practical point of view things do not seem that rosy. Our concern here is this latter aspect. In the over half-a-decade of full-scale experience in implementing the PLS scheme the problems have begun to show up. If one goes by the experience of Pakistan as portrayed in the papers presented at the conference held in Islamabad in 1992,12 the situation is very serious and no satisfactory remedy seems to emerge.13 In the following paragraphs we will try to set down some of the major difficulties.
4.3.1 Financing
There are four main areas where the Islamic banks find it difficult to finance under the PLS scheme: a) participating in long-term low-yield projects, b) financing the small businessman, c) granting non-participating loans to running businesses, and d) financing government borrowing. Let us examine them in turn. Long-term projects
Table 1 shows the term structure of investment by 20 Islamic Banks in 1988. It is clear that less than 10 percent of the total assets goes into medium- and long-term investment. Admittedly, the banks are unable or unwilling to participate in long-term projects. This is a very unsatisfactory situation.
Table 1
Term Structure of Investment by 20 Islamic Banks, 1988
Type of Investment
% of Total
Social lending
Real-estate investment
Medium- and long-term investment
Source: Aggregate balance sheets prepared by the
International Association of Islamic Banks, Bahrain, 1988.
Quoted in: Ausaf Ahmed (1994). * Unit of currency not given.
The main reason of course is the need to participate in the enterprise on a PLS basis which involves time consuming complicated assessment procedures and negotiations, requiring expertise and experience. The banks do not seem to have developed the latter and they seem to be averse to the former. There are no commonly accepted criteria for project evaluation based on PLS partnerships. Each single case has to be treated separately with utmost care and each has to be assessed and negotiated on its own merits. Other obvious reasons are: a) such investments tie up capital for very long periods, unlike in conventional banking where the capital is recovered in regular instalments almost right from the beginning, and the uncertainty and risk are that much higher, b) the longer the maturity of the project the longer it takes to realise the returns and the banks therefore cannot pay a return to their depositors as quick as the conventional banks can. Thus it is no wonder that the banks are averse to such investments. Small businesses
Small scale businesses form a major part of a country’s productive sector. Besides, they form a greater number of the bank’s clientele. Yet it seems difficult to provide them with the necessary financing under the PLS scheme, even though there is excess liquidity in the banks. The observations of Iqbal and Mirakhor14 is revealing:
Given the comprehensive criteria to be followed in granting loans and monitoring their use by banks, small-scale enterprises have, in general encountered greater difficulties in obtaining financing than their large-scale counterparts in the Islamic Republic of Iran. This has been particularly relevant for the construction and service sectors, which have large share in the gross domestic product (GDP). The service sector is made up of many small producers for whom the banking sector has not been able to provide sufficient financing. Many of these small producers, who traditionally were able to obtain interest-based credit facilities on the basis of collateral, are now finding it difficult to raise funds for their operations. Running businesses
Running businesses frequently need short-term capital as well as working capital and ready cash for miscellaneous on-the-spot purchases and sundry expenses. This is the daily reality in the business world. Very little thought seems to have been given to this important aspect of the business world’s requirement. The PLS scheme is not geared to cater to this need. Even if there is complete trust and exchange of information between the bank and the business it is nearly impossible or prohibitively costly to estimate the contribution of such short-term financing on the return of a given business. Neither is the much used mark-up system suitable in this case. It looks unlikely to be able to arrive at general rules to cover all the different situations.
Added to this is the delays involved in authorising emergency loans. One staff member of the Bank of Industry and Mines of Iran has commented:15
Often the clients need to have quick access to fresh funds for the immediate needs to prevent possible delays in the project’s implementation schedule. According to the set regulations, it is not possible to bridge-finance such requirements and any grant of financial assistance must be made on the basis of the project’s appraisal to determine type and terms and conditions of the scheme of financing.
The enormity of the damage or hindrance caused by the inability to provide financing to this sector will become clear if we realise that running businesses and enterprises are the mainstay of the country’s very economic survival. Government borrowing
In all countries the Government accounts for a major component of the demand for credit -- both short-term and long-term. Unlike business loans these borrowings are not always for investment purposes, nor for investment in productive enterprises. Even when invested in productive enterprises they are generally of a longer-term type and of low yield. This latter only multiplies the difficulties in estimating a rate of return on these loans if they are granted under the PLS scheme. In Iran,16
...... it has been decreed that financial transactions between and among the elements of the public sector, including Bank Markazi [the central bank] and commercial banks that are wholly nationalised, can take place on the basis of a fixed rate of return; such a fixed rate is not viewed as interest. Therefore the Government can borrow from the nationalised banking system without violating the Law.
While the last claim may be subject to question, there is another serious consequence:17
Continued borrowing on a fixed rate basis by the Government would inevitably index bank charges to this rate than to the actual profits of borrowing entities.
4.3.2 Legislation
Existing banking laws do not permit banks to engage directly in business enterprises using depositors’ funds. But this is the basic asset acquiring method of Islamic banks. Therefore new legislation and/or government authorisation are necessary to establish such banks. In Iran a comprehensive legislation was passed to establish Islamic banks. In Pakistan the Central Bank was authorised to take the necessary steps. In other countries either the banks found ways of using existing regulations or were given special accommodation. In all cases government intervention or active support was necessary to establish Islamic banks working under the PLS scheme.
In spite of this, there is still need for further auxiliary legislation in order to fully realise the goals of Islamic banking. For example, in Pakistan,18
... the new law has been introduced without fundamental changes in the existing laws governing contracts, mortgages, and pledges. Similarly no law has been introduced to define modes of participatory financing, that is Musharakah19 and PTCs. It is presumed that whenever there is a conflict between the Islamic banking framework and the existing law, the latter will prevail. In essence, therefore, the relationship between the bank and the client, that of creditor and debtor is left unchanged as specified by the existing law. .... The existing banking law was developed to protect mainly the credit transactions; its application to other modes of financing results in the treatment of those modes as credit transactions also. Banks doubt whether some contracts, though consistent with the Islamic banking framework, would be acceptable in the courts. Hence, incentives exist for default and abuse.
In Iran, although the law establishing interest-free banking20
... is comprehensive, the lack of proper definitions of property rights may have constrained bank lending. Thus far there has been no precise legislative and legal expression of what is viewed as “lawful and conditional” private property rights. This may also have militated against investment lending in agricultural and industrial sectors and thus encouraged increased concentration of assets in short-term trade financing instruments.
Iran and Pakistan are countries committed to ridding their economies of riba and have made immense strides in towards achieving it. Yet there are many legal difficulties still to be solved as we have seen above. In other Muslim countries the authorities actively or passively participate in the establishment of Islamic banks on account of their religious persuasion. Such is not the case in non-Muslim countries. Here establishing Islamic banks involves conformation to the existing laws of the concerned country which generally are not conducive to PLS type of financing in the banking sector. We will see some of these problems below in section 4.4.
4.3.3 Involvement in specialised non-bank activities
Dr Hasanuz-Zaman, lists the traditional tasks of the bank and then questions its ability to take on the additional functions it is called upon to perform under the PLS scheme:21
It is due to historical reasons that banks have evolved purely as a financial institution. They are suited to attract money, keep it in safe custody, lend it under safety, invest it profitably and enjoy the capacity to create the means of payment. A bank has to maintain a balance between income, liquidity and flexibility. While allocating its funds it has to be meticulously sensitive about the factors like capital position and rate of profitability of various types of loans, stability of deposit, economic conditions, influence of monetary and fiscal policy, ability and experience of bank’s personnel and credit needs of the area. So far these banks thrive on a fixed rate of return a portion of which is passed on by them to the depositor. Thus the entire effort of a bank is directed towards money management and it is not geared to act as an entrepreneur, trader, industrialist, contractor or caterer.
The question arises: with all these limitations can a bank claim any competence in trading or entrepreneurship which is necessary for musharakah or mudarba22 contract, or can it act as an owner of a large variety of heavy machinery, transport vehicles or real estate to take the position of a lessor or, can it act as a stockist to buy and resell the entire stock of imports and exports that are needed by genuine traders?
Then he raises the even more serious question:
In case the bank is historically and practically not competent to do all these jobs its claim to share a portion of profits as a working partner, trader or lessor becomes questionable.
Traditional banks do perform a certain amount of project evaluation when granting large medium- and long-term loans. But doing such detailed evaluation as would be required to embark on a PLS scheme, such as determining the rates of return and their time schedule, is beyond the scope of conventional banks. So is the detailed accounting and monitoring necessary to determine the actual performance.
Under Islamic banking these exercises are not limited to relatively few large loans but need to be carried out on nearly all the advances made by the bank. Yet, widely acceptable and reliable techniques are yet to be devised. This is confounded by the fact that no consensus has yet been reached on the principles. Both the unprecedented nature of the task as well as the huge amount of work that need be done and the trained and experienced personnel needed to carry them out seems a daunting prospect.
4.3.4 Re-training of staff
As was seen in the previous section, the bank staff will have to acquire many new skills and learn new procedures to operate the Islamic banking system. This is a time consuming process which is aggravated by two other factors. One, the sheer number of persons that need to be re-trained and, two, the additional staff that need to be recruited and trained to carry out the increased work.
Principles are still to be laid down and techniques and procedures evolved to carry them out. It is only after the satisfactory achievement of these that proper training can begin. This delay and the resulting confusion appears to be among the main reasons for the banks to stick to modes of financing that are close to the familiar interest-based modes.
4.3.5 Other disincentives
Among the other disincentives from the borrower’s point of view are the need to disclose his accounts to the bank if he were to borrow on the PLS basis, and the fear that eventually the tax authorities will become wise to the extent of his business and the profits. Several writers have lashed out at the lack of business ethics among the business community, but that is a fact of life at least for the foreseeable future. There is a paucity of survey or case studies of clients to see their reaction to current modes of financing. As such we are not aware of further disincentives that might be there. Accounts
When a business is financed under the PLS scheme it is necessary that the actual profit/loss made using that money be calculated. Though no satisfactory methods have yet been devised, the first requirement for any such activity is to have the necessary accounts. On the borrowers’ side there are two difficulties: one, many small-time businessmen do not keep any accounts, leave alone proper accounts. The time and money costs will cut into his profits. Larger businesses do not like to disclose their real accounts to anybody. On the banks’ side the effort and expense involved in checking the accounts of many small accounts is prohibitive and will again cut into their own share of the profits. Thus both sides would prefer to avoid having to calculate the actually realised profit/loss. To quote Iqbal and Mirakhor:23
.... the commercial banks do face an element of moral hazard owing to the non-existence of systematic book-keeping in this sector. Additionally the reluctance of small producers to submit their operations to bank audits and the perceived enormous cost of auditing and monitoring relative to the small size of the potential credits makes banks unwilling to extend credit on the basis of new modes of financing to these small producers. These reduced lending to small producers may also explain the existence of excess liquidity in the banking system. Tax
The bank is a big business and it has to declare its profit and loss and is legally required to present an audited account of its operations. Once the bank’s accounts are known it doesn’t take much for the tax collectors to figure out the share of the businesses financed by the bank under the PLS scheme. Thus it’s no surprise that businesses are not too very happy about the situation. The fact that suggestions have been made to use the banks to collect taxes due has not helped the matter either.
4.3.6 Excess liquidity
Presence of excess liquidity is reported in nearly all Islamic banks. This is not due to reduced demand for credit but the due to the inability of the banks to find clients willing to be funded under the new modes of financing. Some of these difficulties are mentioned under section 4.3.1 Financing. Here we have a situation where there is money available on the one hand and there is need for it on the other but the new rules stand in the way of bringing them together! This is a very strange situation -- specially in the developing Muslim countries where money is at a premium even for ordinary economic activities, leave alone development efforts. Removal of riba was expected to ease such difficulties, not to aggravate the already existing ones!
4.3.7 Uneasy questions of morality
The practices in use by the Islamic banks have evoked questions of morality. Do the practices adopted to avoid interest really do their job or is it simply a change of name? It suffices to quote a few authors.24
The Economist writes:25
..... Muslim theoreticians and bankers have between them devised ingenious ways of coping with the interest problem. One is murabaha. The Koran says you cannot borrow $100m from the bank for a year, at 5% interest, to buy the new machinery your factory needs? Fine. You get the bank to buy the machinery for you -- cost, $100m -- and then you buy the stuff from the bank, paying it $105m a year from now. The difference is that the extra $5m is not interest on loan, which the Koran (perhaps) forbids, but your thanks to the bank for the risk it takes of losing money while it is the owner of the machinery: this is honest trading, okay with the Koran. Since with modern communications the bank’s ownership may last about half a second, its risk is not great, but the transaction is pure. It is not surprising that some Muslims uneasily sniff logic-chopping here.
Dr Ghulam Qadir says of practices in Pakistan:26
Two of the modes of financing prescribed by the State Bank, namely financing through the purchase of client’s property with a buy-back agreement and sale of goods to clients on a mark-up, involved the least risk and were closest to the old interest-based operations. Hence the banks confined their operations mostly to these modes, particularly the former, after changing the simple buy-back agreement (prescribed by the State Bank) to buy-back agreement with a mark-up, as otherwise there was no incentive for them to extend any finances. The banks also reduced their mark-up-based financing, whether through the purchase of client’s property or through the sale of goods to clients, to mere paper work, instead of actual buying of goods (property), taking their possession and then selling (back) to the client. As a result, there was no difference between the mark-up as practised by the banks and the conventional interest rate, and hence it was judged repugnant to Islam in the recent decision of the Federal Shari’ah court.
As banks are essentially financial institutions and not trading houses, requiring them to undertake trading in the form of buy-back arrangements and sale on mark-up amounts to imposing on them a function for which they are not well equipped. Therefore, banks in Pakistan made such modifications in the prescribed modes which defeated the very purpose of interest-free financing. Furthermore, as these two minimum-risk modes of financing were kept open to banks, they never tried to devise innovative and imaginative modes of financing within the framework of musharakah and mudarba.
Prof. Khurshid Ahmad says:27
Murabaha (cost-plus financing) and bai’ mu’ajjal (sale with deferred payment) are permitted in the Shari’ah under certain conditions. Technically, it is not a form of financial mediation but a kind of business participation. The Shari’ah assumes that the financier actually buys the goods and then sells them to the client. Unfortunately, the current practice of “buy-back on mark-up” is not in keeping with the conditions on which murabaha or bai’ mu’ajjal are permitted. What is being done is a fictitious deal which ensures a predetermined profit to the bank without actually dealing in goods or sharing any real risk. This is against the letter and spirit of Shari’ah injunctions.
While I would not venture a fatwa, as I do not qualify for that function, yet as a student of economics and Shari’ah I regard this practice of “buy-back on mark-up” very similar to riba and would suggest its discontinuation. I understand that the Council of Islamic Ideology has also expressed a similar opinion.
Dr Hasanuz Zaman is more scathing in his condemnation:28
It emerges that practically it is impossible for large banks or the banking system to practise the modes like mark-up, bai’ salam, buy-back, murabaha, etc. in a way that fulfils the Shari’ah conditions. But in order to make themselves eligible to a return on their operations, the banks are compelled to play tricks with the letters of the law. They actually do not buy, do not posses, do not actually sell and deliver the goods; but the transition is assumed to have taken place. By signing a number of documents of purchase, sale and transfer they might fulfil a legal requirement but it is by violating the spirit of prohibition.
It seems that in large number of cases the ghost of interest is haunting them to calculate a fixed rate percent per annum even in musharakah, mudarba, leasing, hire-purchase, rent sharing, murabaha, (bai’ mu’ajjal, mark-up), PTC, TFC, 30etc. The spirit behind all these contracts seems to make a sure earning comparable with the prevalent rate of interest and, as far as possible, avoid losses which otherwise could occur.
To sum up, in Dr Hasanuz Zaman’s words:31
... many techniques that the interest-free banks are practising are not either in full conformity with the spirit of Shari’ah or practicable in the case of large banks or the entire banking system. Moreover, they have failed to do away with undesirable aspects of interest. Thus, they have retained what an Islamic bank should eliminate.
4.4 Islamic banking in non-Muslim countries
The modern commercial banking system in nearly all countries of the world is mainly evolved from and modelled on the practices in Europe, especially that in the United Kingdom. The philosophical roots of this system revolves around the basic principles of capital certainty for depositors and certainty as to the rate of return on deposits. In order to enforce these principles for the sake of the depositors and to ensure the smooth functioning of the banking system Central Banks have been vested with powers of supervision and control. All banks have to submit to the Central Bank rules. Islamic banks which wish to operate in non-Muslim countries have some difficulties in complying with these rules. We will examine below the salient features.32
4.4.1 Certainty of capital and return
While the conventional banks guarantee the capital and rate of return, the Islamic banking system, working on the principle of profit and loss sharing, cannot, by definition, guarantee any fixed rate of return on deposits. Many Islamic banks do not guarantee the capital either, because if there is a loss it has to be deducted from the capital. Thus the basic difference lies in the very roots of the two systems. Consequently countries working under conventional laws are unable to grant permission to institutions which wish to operate under the PLS scheme to functions as commercial banks. Two official comments, one from the UK an the other from the USA suffice to illustrate this.
Sir Leigh Pemberton, the Governor of the Bank of England, told the Arab Bankers’ Association in London that:33
It is important not to risk misleading and confusing the general public by allowing two essentially different banking systems to operate in parallel;
A central feature of the banking system of the United Kingdom as enshrined in the legal framework is capital certainty for depositors. It is the most important feature which distinguished the banking sector from the other segments of the financial system;
Islamic banking is a perfectly acceptable mode of financing but it does not fall within the definition of what constitutes banking in the UK;
The Bank of England is not legally able to authorise under the Banking Act, an institution which does not take deposits as defined under that Act;
The Islamic facilities might be provided within other areas of the financial system without using a banking name.
In the United States, Mr Charles Schotte, the US Treasury Department specialist in regulatory issues has remarked:34
There has never been an application for an Islamic establishment to set up either as a bank or as anything else. So there is no precedent to guide us. Any institution that wishes to use the word ‘bank’ in its title has to guarantee at least a zero rate of interest -- and even that might contravene Islamic laws.
4.4.2 Supervision and control
Besides these, there are other concerns as well. One is the Central Bank supervision and control. This mainly relates to liquidity requirements and adequacy of capital. These in turn depend on an assessment of the value of assets of the Islamic banks. A financial advisor has this to say:35
The bank of England, under the 1979 Act, would have great difficulty in putting a value on the assets of an Islamic institution which wanted to operate as a bank in the UK. The traditional banking system has much of its assets in fixed interest instruments and it is comparatively easy to value that. For example, if they are British Government instruments they will have a quoted market value; and there are recognised methods for valuing traditional banking assets when they become non-productive. But it is very difficult indeed to value an Islamic asset such as a share in a joint venture; and the Bank of England would have to send a team of experienced accountants into every Islamic bank operating in the UK as a bank under the 1979 Act, to try to put a proper and cautious value on its assets.
Another financial analyst states:36
Even if a method could be found for assessing the risks to calculate the capital necessary, little comfort could be taken from the profitability which is usually relied upon to cover day-to-day losses arising from the bank’s business, because a substantial part of an Islamic bank’s portfolio is venture capital without any guaranteed return.
It is evident then that even if there is a desire to accommodate the Islamic system, the new procedures that need be developed and the modifications that need be made to existing procedures are so large that the chances of such accommodation in a cautious sector such as banking is very remote indeed. Any relaxation of strict supervision is precluded because should an Islamic bank fail it would undermine the confidence in the whole financial system, with which it is inevitably identified. As Suratgar puts it:37
There could be potential dangers for the international system, where the failure of such an institution could bring with it the failure of other associated institutions, or of all the Western banking institutions which come closely tied to with such an operation.
The question has engaged the attention of Central Banks in Muslim countries as well. But reliable satisfactory methods are still to developed.
4.4.3 Tax regulations
Another important consideration is the tax procedures in non-Muslim countries. While interest is a ‘passive’ income, profit is an earned income which is treated differently. In addition, in trade financing there are title transfers twice -- once from seller to bank and then from bank to buyer -- and therefore twice taxed on this account decreasing the profitability of the venture. The Director of the International Islamic Bank of Denmark says:38
Tax laws are against the Islamic philosophy and pose the greatest difficulty. In most OECD countries Mudarabha is constrained by fiscal acts which define profits as an after tax item for the profit creator and a fully taxable item for the profit receiver.
4.5 Discussion and suggestions
People have needs -- food, clothes, houses, machinery, services; the list is endless. Entrepreneurs perceive these needs and develop ways and means of catering to them. They advertise their products and services, peoples expectations are raised and people become customers of the entrepreneur. If the customers’ needs are fulfilled according to their expectations they continue to patronise the entrepreneur and his enterprise flourishes. Otherwise his enterprise fails and people take to other entrepreneurs.
Banks too are enterprises; they cater to peoples’ needs connected with money -- safe-keeping, acquiring capital, transferring funds etc. The fact that they existed for centuries and continue to exist and prosper is proof that their methods are good and they fulfil the customers’ needs and expectations. Conventional commercial banking system as it operates today is accepted in all countries except the Islamic world where it is received with some reservation. The reservation is on account of the fact that the banking operations involve dealing in interest which is prohibited in Islam. Conventional banks have ignored this concern on the part of their Muslim clientele. Muslims patronised the conventional banks out of necessity and, when another entrepreneur -- the Islamic banker -- offered to address their concern many Muslims turned to him. The question is: has the new entrepreneur successfully met their concerns, needs and expectations? If not he may have to put up his shutters!
Broadly speaking, banks have three types of different customers: depositors, borrowers and seekers of bank’s other services such as money transfer. Since services do not generally involve dealing in interest Muslims have no problem transacting such businesses with conventional banks; neither do Islamic banks experience any problems in providing these services. Among the depositors there are current account holders who too, similarly, have no problems. It is the savings account holders and the borrowers who have reservations in dealing with the conventional banks. In the following paragraphs we will see how well the Islamic banks have succeeded in addressing their customers’ special concern.
4.5.1 Savings accounts and capital guarantee
As pointed out earlier, our concern here is the savings account holders. As the name itself indicates the primary aim of the saving account depositor is the safe-keeping of his savings. It is correctly perceived by the conventional banker and he guarantees the return of the deposit in toto. The banker also assumes that the depositor will prefer to keep his money with him in preference to another who might also provide the same guarantee if the depositor is provided an incentive. This incentive is called interest, and this interest is made proportional to the amount and length of time it is left with the bank in order to encourage more money brought into the bank and left there for longer periods of time. In addition, the interest rate is fixed in advance so that the depositor and the banker are fully aware of their respective rights and obligations from the beginning. And laws have been enacted to guarantee their enforcement. In Economic theory the interest is often taken to be the “compensation” the depositors demand and receive for parting with their savings. The fact that the depositors accept the paid interest and that, given other things being equal, they prefer the bank or the scheme which offers the highest interest proves the banker’s assumption correct.
The scheme is simple, transparent and seems to have satisfied the requirements of all types of savers -- from teenagers to old-age pensioners, from individuals to large institutions, pension funds and endowments, from small amounts to millions, and from a few weeks or months to years -- that it has survived over centuries and operates across national, cultural and religious borders.
The situation is very different in the Islamic banks. Here too the depositor’s first aim is to keep his savings in safe custody. Islamic bankers divide the conventional savings account into two categories (alternatively, create a new kind of account): savings account and investment account. The investment accounts operate fully under the PLS scheme -- capital is not guaranteed, neither is there any pre-fixed return. Under the savings account the nominal value of the deposit is guaranteed, but they receive no further guaranteed returns.39 Banks may consider funds under the savings accounts too as part of their resources and use it to create assets. This is theory. In practice, however, the banks prefer, encourage and emphasise the investment accounts. This is because since their assets operate under the PLS scheme they might incur losses on these assets which losses they cannot pass onto the savings accounts depositors on account of the capital guarantee on these accounts. In the process the first aim of the depositor is pushed aside and the basic rule of commercial banking --capital guarantee-- is broken.40
It is suggested that all Islamic banks guarantee the capital under their savings accounts. This will satisfy the primary need and expectation of an important section of the depositors and, in Muslim countries where both Islamic and conventional banks co-exist, will induce more depositors to bank with the Islamic banks. At the same time, it will remove the major objection to establishing Islamic banks in non-Muslim countries.
But the question is how does the bank make an income from these deposits? We will examine this in the next section.
4.5.2 Loans with a service charge
We have already seen that all the problems of the Islamic banks arise from their need to acquire their assets under the PLS scheme. A simple solution does, in fact, already exist in the current theories of Islamic banking. It need only be pointed out and acted upon. We will examine the provisions in the Iranian, Pakistani and the Siddiqi models.41
All three models provide for loans with a service charge. Though the specific rules are not identical, the principle is the same. We suggest that the funds in the deposit accounts (current and savings) be used to grant loans (short- and long-term) with a service charge. By doing this the Islamic banks will be able to provide all the loan facilities that conventional banks provide while giving capital guarantee for depositors and earning an income for themselves. Furthermore, and it is important, they can avoid all the problems discussed in section 4.3. This would also remove the rest of the obstacles in opening and operating Islamic banks in non-Muslim countries.
The bonus for the borrowers is that the service charge levied by the Islamic banks will necessarily be less than the interest charged by conventional banks.
Let us now look at the existing relevant rules in the three models. The Iranian model provides for Gharz-al hasaneh whose definition, purpose and operation are given in Articles 15, 16 and 17 of Regulations relating to the granting of banking facilities:42
Article 15
Gharz-al-hasaneh is a contract in which one (the lender) of the two parties relinquishes a specific portion of his possessions to the other party (the borrower) which the borrower is obliged to return to the lender in kind or, where not possible, its cash value.
Article 16
... the banks ... shall set aside a part of their resources and provide Gharz-al-hasaneh for the following purposes:
(a) to provide equipment, tools and other necessary resources so as to enable the creation of employment, in the form of co-operative bodies, for those who lack the necessary means;
(b) to enable expansion in production, with particular emphasis on agricultural, livestock and industrial products;
(c) to meet essential needs.
Article 17
The expenses incurred in the provision of Gharz-al-hasaneh shall be, in each case, calculated on the basis of the directives issued by Bank Markazi Jomhouri Islami Iran43 and collected from the borrower.
In Pakistan, permissible modes of financing include:44
Financing by lending:
(i) Loans not carrying any interest on which the banks may recover a service charge not exceeding the proportionate cost of the operation, excluding the cost of funds and provisions for bad and doubtful debts. The maximum service charge permissible to each bank will be determined by the State Bank from time to time.
(ii) Qard-e-hasana loans given on compassionate grounds free of any interest or service charge and repayable if and when the borrower is able to pay.
Siddiqi has suggested that 50 percent of the funds in the ‘loan’ (i.e. current and savings) accounts be used to grant short-term loans.45 A fee is to be charged for providing these loans:46
An appropriate way of levying such a fee would be to require prospective borrowers to pay a fixed amount on each application, regardless of the amount required, the term of the loan or whether the application is granted or rejected. Then the applicants to whom a loan is granted may be required to pay an additional prescribed fee for all the entries made in the banks registers. The criterion for fixing the fees must be the actual expenditure which the banks have incurred in scrutinising the applications and making decisions, and in maintaining accounts until loans are repaid. These fees should not be made a source of income for the banks, but regarded solely as a means of maintaining and managing the interest-free loans.
It is clear from the above that all three models agree on the need for having cash loans as one mode of financing, and that this service should be paid for by the borrower. Though the details may vary, all seem to suggest that the charge should be the absolute cost only. We suggest that a percentage of this absolute cost be added to the charge as a payment to the bank for providing this service. This should enable an Islamic bank to exist and function independently of its performance in its PLS operations.
4.5.3 Investment under PLS scheme
The idea of participatory financing introduced by the Islamic banking movement is a unique and positive contribution to modern banking. However, as we saw earlier, by making the PLS mode of financing the main (often almost the only) mode of financing the Islamic banks have run into several difficulties. If, as suggested in the previous section, the Islamic banks would provide all the conventional financing through lending from their deposit accounts (current and savings), it will leave their hands free to engage in this responsible form of financing innovatively, using the funds in their investment accounts. They could then engage in genuine Mudaraba financing. Being partners in an enterprise they will have access to its accounts, and the problems associated with the non-availability of accounts will not arise.
Commenting on Mudaraba financing, The Economist says:47
.... some people in the West have begun to find the idea attractive. It gives the provider of money a strong incentive to be sure he is doing something sensible with it. What a pity the West’s banks did not have that incentive in so many of their lending decisions in the 1970s and 1980s. It also emphasises the sharing of responsibility, by all the users of money. That helps to make the free-market system more open; you might say more democratic.
4.6 Conclusions
Islamic banking is a very young concept. Yet it has already been implemented as the only system in two Muslim countries; there are Islamic banks in many Muslim countries, and a few in non-Muslim countries as well. Despite the successful acceptance there are problems. These problems are mainly in the area of financing.
With only minor changes in their practices, Islamic banks can get rid of all their cumbersome, burdensome and sometimes doubtful forms of financing and offer a clean and efficient interest-free banking. All the necessary ingredients are already there. The modified system will make use of only two forms of financing -- loans with a service charge and Mudaraba participatory financing -- both of which are fully accepted by all Muslim writers on the subject.
Such a system will offer an effective banking system where Islamic banking is obligatory and a powerful alternative to conventional banking where both co-exist. Additionally, such a system will have no problem in obtaining authorisation to operate in non-Muslim countries.
Participatory financing is a unique feature of Islamic banking, and can offer responsible financing to socially and economically relevant development projects. This is an additional service Islamic banks offer over and above the traditional services provided by conventional commercial banks.