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PERBANDINGAN KINERJA BANK ISLAM TERHADAP BANK PERSERO, BANK ASING DAN BANK UMUM DI INDONESIA PADA 2000 – 2004 August 22, 2010 isa7695 Leave a comment 1 Vote M.Suyanto The study evaluates interbank performance of Islamic Banks in Indonesia on profitability, liquidity, risk and solvency; and community involvement for the period 2000 – 2004. Financial ratios are applied in measuring these performances. F-test are used in determining their significance. The study found that Islamic Banks are relatively more commitment to community development, but less liquid compared to the Government Banks, Foreign Banks, and Commercial Banks. Islamic Banks do not show (statistically) any difference in performance and managerial performance with the Government Banks and Commercial Banks, but Islamic Banks are less performance and managerial performance with the Foreign Banks. Islamic Banks are relatively more cost efficient compared to the Government Banks and Commercial Banks; more profit (NIM) compared to the Commercial Banks; and relatively less risky compared to the Foreign Banks. Keyword : Kinerja, Bank Islam, Bank Umum 1. Pendahuluan Bank dan Keuangan Islam pada sepuluh tahun terakhir tumbuh 15 % setiap tahun yang melebih pertumbuhan Bank maupun institusi keuangan yang ada di pasar modal global, berada di lebih dari 75 negara dengan asset sekitar 200 milyar dolar Amerika (Yawer, 2002). Beberapa institusi keuangan Islam bahkan beroperasi di tiga belas lokasi lain, diantaranya Australia, Bahama, Kanada, Cayman Islands, Denmark, Guernsey, Jersey, Irlandia, Luxemburgh, Switzerland, Inggris, Amerika Serikat dan Virgin Islands. Ekspansi bank Islam ke seluruh dunia, baik dalam jumlah maupun dana yang diluasai, disertai operasioperasi yang dikaji di mesir, Malaysia, Bangladesh, Jordania, Australia, Sudan, Iran dan Pakistan menunjukkan bahwa perbankan Islam sangat layak dan bank Islam benar-benar dapat beroperasi di negara manapun, memenuhi banyak sekali fungsi dan menggunakan instrumen-instrumen yang berbeda. Meskipun banyak bank telah mendapat dukungan modal yang banyak sekali dan mendapat perlindungan dari pemerintahan-pemerintahan dan keluarga-keluarga muslim terkemuka, tetapi bank Islam telah mempercayakan diri jauh lebih banyak pada lingkungan pasar kompetitif pada sistem perbankan campuran-konvensional (Algaoud dan Lewis, 2001). Selanjutnya Algoud dan Lewis menambahkan bahwa perbankan Islam merupakan sebuah pasar yang berkembang dan ada perbedaan dalam penerapan prinsip-prinsip dasarnya di lokasi-lokasi yang berbeda. Misalnya pada sisi deposito, rekening lancar (current account) dijalankan terutama berdasarkan prinsip alwadiah. Deposito tabungan juga diterima berdasarkan prinsip al-wadiah, tetapi “hadiah” kepada para deposan diberikan menurut kebijakan Bank Islam atas saldo minimum, sehingga para deposan juga sama-sama mendapat bagian laba. Di Malaysia, keuntungan dari rekening tabungan islami secara langsung bersaing dengan rekening tabungan Bank konvensional. Deposito investasi didasarkan pada prinsip mudharabah, tetapi terdapat banyak variasi. Dengan demikian, Islamic Bank of Bangladesh, mislanya menawarkan rekening deposito profit-loss sharing (PLS), rekening pemberitahuan khusus PLS dan rekening deposito berjangka PLS, sedangkan Bank Islam Malaysia mengoperasikan dua jenis deposito investasi, satu untuk masyarakat umum dan satu lagi untuk nasabah kelembagaan. Juga terdapat variasi-variasi yang menarik dalam pola penggunaan sumberdaya oleh Bank Islam. Misalnya, musyarakah telah menjadi cara investasi yang penting di Mesir dan sudan, sedangkan di Malaysia cara ini nyaris tidak menonjol. Musyarakah yang berkurang (diminishing musyarakah) telah dipakai untuk permodalan kemitraan pembangunan perumahan di Australia. Jordan Islamic Bank telah melakukan investasi langsung dalam perumahan dan skema-skema investasi lainnya. Pada saat-saat sekarang, Bank Islam dalam berbagai bentuk bermunculan di banyak negara muslim mapupun non-muslim. Deposito, dana-dana yang disalurkan, serta modal para pemegang saham di Bank tersebut meningkat tajam (Saeed, 1996). Maka Bank Islam menarik untuk diteliti. Bank Islam merupakan gabungan antara bank komersial dan bank investasi, dan akan menawarkan serangkaian produk pelayanan bagi para pelanggan yang mempunyai hubungan jangka panjang. Sebagian dari dana pembiayaannya akan digunakan untuk proyek-proyek tertentu atau ventura, sedangkan mayoritspembiayaan yang bersifat jangka pendek akan tersedia dalam kerangka persetujuan ini. Investasi yang berorientasi kepada penyertaan modalnya, tidak mengijinkannya untuk meminjam jangka pendek dan memberikan pinjaman jangka panjang. Hal ini menyebakan kecenderungan tidak mudah terkena krisis dibandingkan dengan bank konvensional (Chapra, 2000). Bank Islam yang mengedepankan model equity finance menjadi lebih menarik setelah model debt financing oleh bank konvesional di Amerika Serikat mengalami krisis baik 1930-an atau 1980-an. Jepang menggunakan kombinasi struktur debt financing dan equity finance sehingga pertumbuhan ekonominya setelah perang tinggi (Akacem dan Gillian, 2002). Sebaliknya bank konvensional mudah terkena krisis. Krisis perbankan terbesar terjadi di Amerika Serikat pada 1930-an, yaitu 9.106 ditutup / dibantu (Federal Deposit Insurance Corp.,2004). Keunggulan konsep perbankan Islam atas perbankan konvensional terletak dalam kenyataan bahwa Islam telah melenyapkan kezaliman bunga. Islam melarang bunga, karena tidak berpengaruh pada volume tabungan, dan bunga dapat menyebabkan depresi kronis juga memperlambat proses pemulihan, karena ia memperburuk masalah pengangguran dan akhirnya mendorong pembagian kekayaan yang tidak merata (Mannan, 1970). Bank Islam dengan menggunakan sistem non bunga akan meringankan beban negara dari hutang. Setiap tahun Amerika Serikat membayar jutaan dolar bunga atas hutang nasionalnya. Demikian juga, negara-negara yang dianggap kaya harus membayar bunga besar sekali atas hutang nasionalnya. Keberadaan hutang ini seharusnya tidak terjadi. Karena itu pembayaran bunga atasnya tidaklah seharusnya dilakukan (Diwany, 2003). Dengan demikian Bank tanpa bunga (Bank Islam) menjadi lebih menarik lagi untuk diteliti. Meskipun demikian, masih ada masalah yang harus diselesaikan untuk kemajuan bank Islam. Masalah-masalah tersebut berkait dengan masalah hukum, daya tarik deposito yang terus bertahan dan pola operasi pendanaan yang dilaksanakan. Undang-undang perbankan di sebagian besar negara tidak mengijinkan bank untuk terlibat langsung dalam bisnis yang menggunakan dana para deposan, atau paling tidak secara tegas membatasi investasiinvestasi semacam itu hanya pada dana yang dipasok oleh para pemegang saham. Di negaranegara nonmuslim, mendirikan bank Islam harus sesuai dengan undang-undang yang ada di negara yang bersangkutan yang pada umumnya tidak kondusif untuk jenis pendanaan PLS dalam sektor pebankan. Pasar sudah tidak lagi dalam masa pertumbuhannya, dan bank Islam tidak dapat menerima nasabah apa adanya. Terdapat banyak institusi, termasuk Bank Barat, yang bersaing dengan Bank Islam murni melalui jendela-jendela islami, dan pelajaran umum yang dapat dipetik dari pasar-pasar modal, sebagaimana dalam pasar-pasar lainnya adalah bahwa penyebaran laba dan margin laba mengalami penurunan begitu institusi-institusi keuangan baru masuk pasar. Tidak adanya instrumen jangka pendek juga menyulitkan bank Islam (Algoud dan Lewis, 2001). Dengan demikian studi tentang bank Islam lebih mendalam perlu dilakukan. Perkembangan Bank Umum Syariah (Islam), Unit Usha Syariah dan Bank perkreditan Rakyat Syariah dari 2000 sampai dengan 2004 dapat dilihat pada tabel 1.1. TABEL 1.1 JARINGAN KANTOR PERBANKAN SYARIAH Kelompok Bank 2000 2001 2002 2003 2004 KPO/KC/ KCP KK KPO/KC/ KCP KK KPO/KC/ KCP KK KPO/KC/ KCP KK KPO/KC/KCP KK Bank Umum Syariah 29 26 41 43 54 59 94 113 132 131 PT. Bank Muamalat Indonesia 16 26 18 37 20 46 41 80 49 78 PT. Bank Syariah Mandiri 13 0 23 6 34 13 53 33 81 53 PT. Bank Syariah Mega Indonesia 0 0 0 0 0 0 0 0 2 0 Unit Usaha Syariah 7 0 12 0 25 0 48 0 48 0 PT. Bank IFI 1 0 1 0 1 0 1 0 1 0 PT. Bank Negara Indonesia 5 0 10 0 12 0 17 0 22 0 PT. Bank Jabar 1 0 1 0 3 0 4 0 4 0 PT. Bank Rakyat Indonesia 0 0 0 0 2 0 11 0 18 0 PT. Bank Danamon 0 0 0 0 5 0 10 0 10 0 PT. Bank Bukopin 0 0 0 0 2 0 2 0 3 0 PT. Bank Internasional Indonesia 0 0 0 0 0 0 2 0 3 0 HSBC, Ltd. 0 0 0 0 0 0 1 0 1 0 PT Bank DKI 0 0 0 0 0 0 0 0 1 0 BPD Riau 0 0 0 0 0 0 0 0 1 0 BPD Kalsel 0 0 0 0 0 0 0 0 1 0 PT Bank Niaga 0 0 0 0 0 0 0 0 5 0 BPD Sumut 0 0 0 0 0 0 0 0 1 0 BPD Aceh 0 0 0 0 0 0 0 0 1 0 Bank Permata 0 0 0 0 0 0 0 0 1 0 Bank Perkreditan Rakyat Syariah 0 0 0 0 0 0 0 0 0 0 TOTAL 115 26 134 43 162 59 142 113 206 131 KPO = Kantor Pusat Operasional KC = Kantor Cabang KCP = Kantor Cabang Pembantu KK = Kantor Kas Sumber : Statistik Perbankan Syariah, Bank Indonesia, Maret 2004 Dari Tabel 1.2., Bank Umum Syariah dari 2000 sampai dengan 2004 mengalami peningkatan, dari 2 bank menjadi 3 bank, dan Kantor Pusat Operasional/Kantor Cabang/Kantor Cabang Pembantu mengalami peningkatan dari 29 buah pada 2000 menjadi 41 buah pada 2001, menjadi 54 buah pada 2002, menjadi 94 buah pada 2003 dan menjadi 132 buah pada 2004. Kantor Kasnya juga ningkat dari 26 buah pada 2000, menjadi 43 buah pada 2001, menjadi 59 buah pada 2002, menjadi 113 buah pada 2003 dan menjadi 131 pada 2004. Unit Usaha Syariah dari 2000 sampai dengan 2004 mengalami peningkatan, dari 3 buah menjadi 15 buah, dan Kantor Pusat Operasional/Kantor Cabang/Kantor Cabang Pembantu juga mengalami peningkatan dari 7 buah pada 2000, menjadi 12 buah pada 2001, menjadi 25 buah pada 2002, menjadi 48 buah pada 2003 dan menjadi 66 buah pada 2004, tetapi Kantor Kasnya tidak mengalami peningkatan, tidak mempunyai Kantor Kas pada 2000 sampai dengan 2004. 2. Metodologi dan data Kinerja merupakan sebuah konsep yang sulit, baik dalam bentuk definisi maupun dalam pengukuran. Kinerja didefinisikan sebagai hasil akhir dari aktivitas, dan ukuran tepat yang terpilih untuk menilai kinerja perusahaan yang dipertimbangkan bergantung pada jenis organisasi yang dievaluasi dan sasaran yang dicapai melalui evaluasi itu (Hunger dan Wheelen, 1997). Dengan demikian kinerja bank Islam dapat didefinisikan sebagai hasil akhir dari aktivitas bank Islam. Untuk mengukur kinerja bank Islam, Haron (1996) menggunakan tiga indikator kinerja bank Islam, yaitu Total income yang diterima oleh bank (TITA), the bank’s portion of income after payment to depositors (BITA), dan net profit before tax (BTTA). Sarker (1999), menggunakan Banking Efficiency Model untuk mengevaluasi kinerja bank Islam di Bangladesh. Banking Efficiency model menggunakan lima kriteria tes untuk mengukur efisiensi sistem perbankan Islam. Kelima kriteria tes tersebut antara lain Investment Opportunity Utilisation Test, Profit Maximisation Test, Project Efficacy Test, Loan Recovery test dan Test of Elasticity in Loan Financing. Samad dan Hassan (1999) melakukan pengukuran kinerja perbankan Islam Malaysia antara 1984 – 1997. Indikator yang dipakai untuk melakukan pengukuran kinerja bank Islam adalah profitability, liquidity, risk and solvency dan commitment to community. Studi ini membuat perbandingan kinerja Bank Islam (Bank Syariah) dengan Bank Konvensional (Bank Umum atau Bank Komersial) di Indonesia. Pertama, Bank Islam dibandingkan dengan Bank Persero (Bank Pemerintah). Kedua, kinerja Bank Islam dibandingkan dengan Bank Asing. Ketiga, kinerja dibandingkan dengan Bank Konvensional yang terdiri dari 145 bank (Industri Bank). Analisis mengenai kinerja antarbank ini, pertamakali dilakukan Sabi (1996). Dalam pasar keuangan yang sangat kompetitif, kinerja suatu bank dapat lebih baik difahami dengan menggunakan analisis antar bank (Samad dan Hassan, 2000). Studi ini menggunakan 9 rasio keuangan untuk kinerja bank. Rasio-rasio ini dikelompokkan dalam empat kategori, yaitu: a. profitability ; b. liquidity; c. risk and solvency; d. commitment to community. a. Profitability Ratios : Profitability dapat diukur menggunakan empat kriteria : 1. Return on asset (ROA) = Laba sebelum pajak dalam 12 bulan terakhir / Rata-rata Aktiva dalam periode yang sama (sesuai Surat Edaran Bank Indonesia No. 30/2/UPPB tanggal 30 April 1997) 2. Return of equity (ROE) = Laba sebelum pajak dalam 12 bulan terakhir / Rata-rata Modal dalam periode yang sama (sesuai Surat Edaran Bank Indonesia No. 30/2/UPPB tanggal 30 April 1997). ROA dan ROE merupakan indicator pengukuran efisiensi of manajerial (Ross (1994), Sabi (1996), Hassan (1999) and Samad (1998). ROA merupakan pendapatan bersih per unit suatu aset, yang menunjukkan bagaimana sebuah bank dapat melakukan konversi aset menjadi pendapatan bersih. Semakin tinggi rasio ROA semakin baik kinerja bank tersebut. Demikian halnya, ROE merupakan net earnings per unit equity capital. Semakin tinggi rasion ROE semakin baik kinerja manajerial bank tersebut. 3. Income expense ratio (IER) = Pendapatan Operasional dalam 12 bulan terakhir / Biaya operasional dalam periode yang sama (sesuai Surat Edaran Bank Indonesia No. 30/2/UPPB tanggal 30 April 1997). IER merupakan indikator efisiensi biaya dalam menghasilkan pendapatan. Semakin tinggi IER semakin tinggi efisiensi biaya untuk mendapat pendapatan, yang berarti pula semakin tinggi kinerja bank tersebut (Samad dan Hassan, 2000). 4. Net Interest Margin (NIM) = Pendapatan Bunga Bersih / Rata-rata Aktiva Produktif (untuk Bank Konvensional, sesuai Surat Edaran Bank Indonesia No. 30/2/UPPB tanggal 30 April 1997) Non Net Interest Margin (NIM) = Pendapatan Non Bunga Bersih / Rata-rata Aktiva Produktif (untuk Bank Islam) Semakin tinggi NIM suatu Bank, semakin tinggi margin pendapatan bank tersebut. b. Liquidity Ratios. Bank dan lembaga keuangan berbagi resiko likuiditas, karena transaksi deposito dan tabungan dapat dilakukan setiap saat. Dengan demikian, pendeknya waktu dapat menyebabkan masalah pada likuiditas (Samad dan Hassan, 2000). Likuiditas dapat diukur menggunakan criteria sebagai berikut : 1. Loan deposit ratio (LDR) = Kredit / Dana yang diterima. (Untuk bank konvensional, (sesuai Surat Edaran Bank Indonesia No. 30/2/UPPB tanggal 19 Maret 1997). Financing deposit ratio (FDR) = Financing / Dana yang diterima (Untuk bank Islam). Semakin tinggi LDR/FDR mengindikasikan bahwa sebuah bank membuat lebih menekankan keuangannya pada pembuatan hutang/pembiayaan yang telalu banyak. Semakin kecil LDR/FDR semakin baik likuiditas bank tersebut. CAR yang tinggi mengindikasikan bahwa bank mempunyai asset yang likuid jangka panjang. Bank Indonesia memberikan ketentuan minimal CAR 8 %. c. Risk and Solvency Ratios Sebuah bank dikatakan mampu membayar hutangnya (solvent) jika total nilai asetnya lebih besar dari liabilitasnya. Bank menjadi beresiko jika tidak solvent. Berikut ini yang umum digunakan untuk risk and insolvency. 1. Capital adequacy ratio (CAR) = (Modal Inti + Modal Pelengkap) / Aktiva tertimbang Menurut Resiko (ATMR). Modal Inti terdiri dari Modal disetor dan Cadangan tambahan modal, sedangkan modal pelengkap terdiri dari revaluasi aktiva tetap, cadangan umum PPAP maksimal 1,25 % dari ATMR, modal pinjaman, pinjaman sub ordinasi maksimal 50 % dari modal inti dan peningkatan nilai penyertaan pada portofolio yang tersedia untuk dijual setinggi-tingginya sebesar 45 %. 2. Debt to total asset ratio (DTAR) = Hutang (Dana Pihak Ketiga) / total asset. DTAR mengindikasikan kemampuan keuangan sebuah bank untuk membayar kepada pemberi hutang. Semakin tinggi DTAR semakin tinggi suatu bank melibatkan diri dalam resiko bisnis. 3. Non Performing Financing (Loan) (NPF) = Collectibility / Total Credit (financing). Collectibility meliputi kualitas kredit (pembiayaan) kurang lancar, diragukan dan macet. Semakin tinggi nilai NPF mengindikasikan sebuah bank mepunyai resiko lebih tinggi. d. Commitment to Community 1. Credit (Financing) to Total Asset Ratio (CTA) = (FTA) = Kredit (pembiayaan) yang diberikan / Total Asset. Semakin besar prosentase FTA semakin besar pula komitmen bank terhadap pengembangan masyarakat. (commitment to community development). Hal ini sesuai dengan yang dikemukakan Samad dan Hassan (2000). Kinerja Bank Islam (Syariah) di Indonesia diukur dalam dua tahap. Tahap pertama membandingkan kinerja Bank Islam dengan Bank Persero dan membandingkan kinerja Bank Islam dengan Bank Asing yang beroperasi di Indonesia. Tahap kedua, membandingkan kinerja Bank Islam dengan seluruh Bank Umum atau Bank Konvensional yang ada di Indonesia (145 bank). SPSS 11.5 for Windows digunakan dalam analisis. Dalam membadingkan antar kelompok Bank tersebut, digunakan Analisis Varian Satu jalan (One Way ANOVA) untuk menguji hipotesis nul (H0), yaitu kinerja bank Islam dengan Bank yang lain itu sama (tidak ada perbedaan yang berarti). MSB / MSW digunakan untuk mengestimasi nilai F. Jika nilai F ini (F hitung) lebih besar dari nilai F kritis (F tabel), maka dikatakan Ho ditolak atau Ha yang diterima, artinya kinerja antara dua kelompok bank tersebut secara statististik tidak sama atau berbeda. Sebaliknya jika nilai F ini (F hitung) lebih kecil dari nilai F kritis (F tabel), maka dikatakan Ho diterima Ha ditolak, artinya kinerja antara dua kelompok bank tersebut secara statististik sama atau tidak berbeda. 3. Analisis data dan Hasil Empiris Pada kategori profitabilitas, ANOVA menyarankan untuk menerima Ho untuk ROA dan ROE antara Bank Islam dengan Bank Persero, artinya ROA dan ROE Bank Islam tidak ada beda secara statistik dengan Bank Persero (Tabel 1). Dengan demikian kinerja dan kinerja manajerial Bank Islam dengan Bank Persero tidak berbeda secara signifikan. Sedangkan perbandingan Bank Islam dengan Bank Asing, yaitu rata-rata ROA and ROE untuk Bank Islam masing-masing 1,884 % and 16,428 % sedangkan ROA and ROE untuk Bank Asing pada periode yang sama masing-masing 3,882 % dan 124,230 % (Tabel 2). ANOVA menyarankan untuk menolak Ho, atau menerima Ha dengan signifikansi secara statistik masing-masing pada tingkat 5 % dan 1 %, artinya kinerja dan kinerja manajerial Bank Islam berbeda secara statistik dengan Bank Asing. Maka kinerja dan kinerja manajerial Bank Islam kurang baik dibandingkan dengan Bank Asing. Perbandingan antara Bank Islam dengan Bank Umum untuk ROA dan ROE, ANOVA menyarankan untuk menerima Ho untuk ROA dan ROE antara Bank Islam dengan Bank Umum, artinya ROA dan ROE Bank Islam tidak ada beda secara statistik dengan Bank Umum (Tabel 3).. Dengan demikian kinerja dan kinerja manajerial Bank Islam dengan Bank Umum tidak berbeda secara signifikan. Hasil ini sesuai dengan studi yang dilakukan Samad dan Hassan (2000) yang membandingkan kinerja antara Bank Islam dan Bank Konvensional di Malaysia. Perbandingan Income Expense Ratio (IER) antara Bank Islam dengan Bank Persero dan Bank Umum, ANOVA menyarankan untuk menolak Ho, atau menerima Ha, artinya IER Bank Islam berbeda secara statistik dengan Bank Persero dan Bank Umum. Rata-rata IER untuk Bank Islam 1,220 sedangkan IER untuk Bank Persero dan Bank Umum pada periode yang sama masing-masing 1,002 dan 1,098. Perbedaan ini signifikan secara statistik masingmasing pada tingkat 1 % dan 5 % (Tabel 1 dan Tabel 3).. Maka Bank Islam lebih efisien biaya untuk memperoleh pendapatan dibandingkan dengan Bank Persero dan Bank Umum. Meskipun demikian IER Bank Islam dibandingkan dengan Bank Asing, hasil dari ANOVA, menerima Ho, artinya tidak berbeda secara signifikan (Tabel 3) atau Bank Islam tidak lebih efisien biaya untuk memperoleh pendapatan dibandingkan dengan Bank Asing. Perbandingan Net Non Interest Margin (NIM) Bank Islam dengan Net Interest Margin (NIM) Bank Persero dan Bank Asing, ANOVA menyarankan untuk menerima Ho, maka Net Non Interest Margin (NIM) Bank Islam dengan Net Interest Margin (NIM) Bank Persero dan Bank Asing tidak berbeda secara signifikan (Tabel 1 dan Tabel 2).. Bank Islam lebih baik daripada Net Interest Margin (NIM) Bank Umum. Maka margin pendapatan Bank Islam dibandingkan dengan Bank Persero dan Bank Asing tidak berbeda secara signifikan. Namun demikian, NIM Bank Islam dibandingkan dengan NIM Bank Umum, ANOVA menyarankan untuk menolak Ho, menerima Ha yang berarti NIM Bank Islam dan NIM Bank Umum berbeda secara signifikan. Rata-rata NIM untuk Bank Islam 5,774 % sedangkan NIM untuk Bank Umum pada periode yang sama masing-masing 3,772%. Perbedaan ini signifikan secara statistik pada tingkat 5 % (Tabel 3). Maka margin pendapatan Bank Islam lebih baik dibandingkan dengan Bank Umum. Pada kategori likuiditas, Loan / Financing Deposit Ratio (LDR/FDR) Bank Islam dibandingkan dengan Bank Persero, Bank Asing dan Bank Umum berbeda secara signifikan (menolak Ho). Rata-rata FDR untuk Bank Islam 98.126 % sedangkan LDR untuk Bank Persero, Bank Asing dan Bank Umum pada periode yang sama masing-masing 34.738 %, 53.248 % dan 41.288 %. Perbedaan ini signifikan secara statistik masing-masing pada tingkat 1 % ((Tabel 1, Tabel 2 dan Tabel 3). Dengan demikian Bank Islam kurang likuid dibandingkan dengan Bank Persero, Bank Asing dan Bank Umum. Hal ini justru berbeda dengan studi yang dilakukan Samad dan Hassan (2000) yang membandingkan kinerja likuiditas antara Bank Islam dan Bank Konvensional di Malaysia, bahwa likuditas Bank Islam lebih baik dibandingkan dengan Bank Konvensional, karena Bank Islam memelihara likuditas lebih baik dibandingkan dengan Bank Konvensional. Sebaliknya di Indonesia, Bank Islam memelihara likuiditas kurang baik dibandingkan dengan Bank Konvensional (Bank Umum) atau berarti pula Bank Islam mempunyai kemampuan menyalurkan dana lebih baik dibandingkan dengan Bank Konvensional. Sedangkan Capital Adequacy ratio (CAR) Bank Islam Islam berbeda dari Bank Asing (menolak Ho). Rata-rata CAR untuk Bank Islam 26.314 % sedangkan CAR untuk Bank Bank Asing 17.490 %, berbeda secara signifikat pada tingkat 10 %, artinya Bank Islam Islam mempunyai kecukupan modal lebih baik daripada Bank Asing (Tabel 2), tetapi CAR Bank Islam tidak berbeda secara signifikan dengan CAR Bank Persero dan Bank Umum (Tabel 2 dan Tabel 3). atau Bank Islam mempunyai kecukupan modal yang tidak berbeda atau mempunyai likuiditas jangka panjang tidak berbeda dengan Bank Persero dan Bank Umum. Pada kategori Risk and Solvency, Debt to total asset ratio (DTAR) Bank Islam tidak berbeda dengan DTAR Bank Persero, Bank Asing dan Bank Umum (menerima Ho), dapat dilihat pada Tabel (Tabel 1, Tabel 2 dan Tabel 3). Dengan demikian kemampuan keuangan Bank Islam untuk membayar kepada pemberi hutang atau melibatkan diri dalam resiko bisnis dibandingkan Bank Persero, Bank Asing dan Bank Umum tidak berbeda. NPL Bank Islam juga tidak berbeda secara signifikan dibandingkan dengan NPL Bank Persero dan Bank Umum (menerima Ho) atau berarti pula resiko Bank Islam tidak berbeda secara signifikan dibandingkan dengan Bank Persero dan Bank Umum (Tabel 1 dan Tabel 3)., tetapi berbeda (menolak Ho) dengan Bank Asing pada tingkat sinifikansi 1%. Rata-rata NPL untuk Bank Islam 5.110 % sedangkan NPL untuk Bank Asing 11.193 % (Tabel 2). Maka Bank Asing mempunyai resiko lebih tinggi dibandingkan dengan Bank Islam. Pada kategori commitment to community, Financing Total Asset Ratio (FTA) Bank Islam lebih baik dibandingkan Bank Persero, Bank Asing dan Bank Umum. Rata-rata FTA untuk Bank Islam 75.762 % sedangkan FTA untuk Bank Persero, Bank Asing dan Bank Umum pada periode yang sama masing-masing 29.460 %, 45.508 % dan 37.964 %, berbeda secara signifikan masing-masing pada tingkat 1 % (Tabel 1, Tabel 2, dan Tabel 3).. Hal ini berbeda dengan yang ditemukan Samad dan Hassan (2000) pada studi perbandingan kinerja Bank Islam dengan Bank Umum di Malaysia, yang menyatakan bahwa komitmen antara Bank Islam dan Bank Konvensional adalah sama. Hal ini berarti Bank Islam di Indonesia lebih berkomitment terhadap pengembangan masyarakat dibandingkan Bank Persero, Bank Asing dan Bank Umum. 4. Kesimpulan dan Saran Berdasarkan hasil analisis dapat disimpulkan bahwa kinerja dan kinerja manajerial Bank Islam dengan Bank Persero dan Bank Umum tidak berbeda secara signifikan. Sedangkan perbandingan kinerja dan kinerja manajerial Bank Islam kurang baik dibandingkan dengan Bank Asing. Bank Islam lebih efisien biaya untuk memperoleh pendapatan dibandingkan dengan Bank Persero dan Bank Umum. Meskipun demikian Bank Islam tidak lebih efisien biaya untuk memperoleh pendapatan dibandingkan dengan Bank Asing. Margin pendapatan Bank Islam dibandingkan dengan Bank Persero dan Bank Asing tidak berbeda secara signifikan. Namun demikian, margin pendapatan Bank Islam lebih baik dibandingkan dengan Bank Umum. Pada kategori likuiditas, Bank Islam kurang likuid dibandingkan dengan Bank Persero, Bank Asing dan Bank Umum Bank Islam Islam mempunyai kecukupan modal lebih baik daripada Bank Asing, tetapi CAR Bank Islam tidak berbeda secara signifikan dengan CAR Bank Persero dan Bank Umum atau Bank Islam mempunyai kecukupan modal yang tidak berbeda dengan Bank Persero dan Bank Umum. Pada kategori Risk and Solvency, kemampuan keuangan Bank Islam untuk membayar kepada pemberi hutang atau melibatkan diri dalam resiko bisnis dibandingkan Bank Persero, Bank Asing dan Bank Umum tidak berbeda. Bank Islam tidak berbeda secara signifikan dalam resiko kemacetan hutang dibandingkan dengan Bank Persero dan Bank Umum., tetapi Bank Islam mempunyai resiko kemacetan lebih kecil dibandingkan dengan Bank Asing. Pada kategori commitment to community, Bank Islam lebih berkomitment terhadap pengembangan masyarakat dibandingkan Bank Persero, Bank Asing dan Bank Umum. Dengan terbuktinya Bank Islam lebih berkomitment terhadap pengembangan masyarakat dibandingkan Bank Persero, Bank Asing dan Bank Umum, maka Pemerintah untuk terus mendukung perkembangan Bank Islam di Indonesia dengan membuat kebijakan yang memberikan peluang lebih besar untuk Bank Islam. Studi lebih lanjut dari ini pelu dilakukan, misalkan studi tentang pengaruh kinerja Bank Islam terhadap kesejahteraan masyarakat. Studi teantang pengaruh Kebijakan Pemerintah terhadap kinerja Bank Islam. Table 1 Performance Measure Bank Islam Bank Persero F-value I. Profitability 1. ROA 1,824 % 1,872 % 0,008 2. ROE 16,428 % 21,336 % 0,572 3. IER 1,220 1,002 22,567*** 4. NIM 5,774 % 4,042 % 0,162 II. Liquidity 6. LDR 98,126 % 34,738 % 52,964*** III.Risk and Solvency 7. CAR 26,314 % 17,372 % 2,846 8. DTAR 66,304 % 67,690 % 0,077 9. NPL 5,110 % 8,990 % 2,501 IV. Commitment to Community 10.FTA 75,762 % 29,460 % 95,681*** * Difference in means : Significant at 10 % ** Difference in means : Significant at 5 % ***Difference in means : Significant at 1 % Table 2 Performance Measure Bank Islam Bank Asing F-value I. Profitability 1. ROA 1,824 % 3,882 % 9,738** 2. ROE 16,428 % 124,230 % 21,153*** 3. IER 1,220 1,174 0,656 4. NIM 5,774 % 4,144 % 0,127 II. Liquidity 5. LDR 98,126 % 53,248 % 27,816*** III.Risk and Solvency 6. CAR 26,314 % 17,490 % 4,311* 7. DTAR 66,304 % 73,830 % 2,631 8. NPL 5,110 % 11,193 % 11,193*** IV. Commitment to Community 9. FTA 75,762 % 45,508 % 47,866*** * Difference in means : Significant at 10 % ** Difference in means : Significant at 5 % ***Difference in means : Significant at 1 % Table 3 Performance Measure Bank Islam Bank Umum F-value I. Profitability 1. ROA 1,824 % 1,834 % 0,000 2. ROE 16,428 % 27,966 % 2,505 3. IER 1,220 1,098 6,460** 4. NIM 5,774 % 3,722 % 3,837* II. Liquidity 5. LDR 98,126 % 41,288 % 38,597*** III.Risk and Solvency 6. CAR 26,314 % 19,328 % 2,321 7. DTAR 66,304 % 73,822 % 2,514 8. NPL 5,110 % 10,880 % 5,396** IV. Commitment to Community 9. FTA 75,762 % 37,964 % 85,797*** * Difference in means : Significant at 10 % ** Difference in means : Significant at 5 % ***Difference in means : Significant at 1 % REFERENSI Akkas, Ali, (1996), “Relative Efficiency of the Conventional and Islamic Banking System in Financing Invenstment,” Unpublished PH,d, Dissertation, Dhaka University, Algaoud, Latifa M and Lewis, Mervyn K, (2001), “Islamic Banking”, Edward Elgar, Massachusetts, Arif, Mohammad, (1989), “Islamic Banking in Malaysia:Framework, performance and lesson”, Journal of Islamic Economics, vol,2, No,2 Dewany, Tarek El, (2003), “The Problem With Interest”, London, Dirrar, E,Elbeid, (1996), “Economics and Financial Evaluation of Islamic Bankking Operations:A case of Bank Islam Malaysia 1983-1995”,Unpublished paper,UIA, Haron, Sudin (1996), “The Effects of Management Policy on The Performance of Islamic Banks”, Asia Pacific Journal of Management, Vol 13, No, 2: 63-76 Hassan, M,Kabir (1999),”Islamic Banking in Theory and Practice: The Experience of Bangladesh,”Managerial Finance, Vol,25,Vol,5:60-113, Hassan, M, Kabir and Samad, Abdus (2000) “The Performance of Malaysian Islamic Bank During 1984-1997: An Exploratory Study ” International Journal of Islamic Financial Services Vol,1,No,3, Saeed, A,(1996), “Islamic Banking and Interest”, Leiden, EJ, Brill, Sum, Wong Choo,(1995),”Bank Islam Malaysia:Performance Evaluation”,Al-Harran Saad Abdul Satter(ed, :eading Issues in Bnaking and Finance,PJ,Pendaduk Publication, Tan,M,Koh,Cand Low C,(1997),”Stability in Financial ratios:A study of listed companies in Singapore”,Asia Review of Accounting,vol,5,No,1, Sabi,Manijeh,(1996),”Comparative Analaysis of Foreign and Domestic Bank Operation in Hungary”, Journal of Comparative Economics,vol,22,pages (179-188) Samad,Abdus,(1999,”Comparative Efficiency of the Islamic Bank Malaysia vis-à-vis conventional banks”,Journal of Economics and Management,vol,7,No,1, Meinster,David amd Elyasian, Elyas (1994) “An Empirical test of Test of Association between Production and Financial Performance: The case of Commercial banking industry”, Apllied Financial Economics, vol,4,pages 55-59, Putnam, B,H, (1983),”Concept of Financial Monetary”, Federal Reserve Bank of Atlanta Economics Review, pages 6-13, Spindler, Andrew et,Al (1991),”The Performance of Ibternationally Active Banks and Securities Firms based on conventional measure of competitiveness, In Federal Reserve Bank,NY, Yawer, Nick (2002), “Islamic Banking & Finance Conference”, Washinton DC, The Islamic Free Market Intitution,

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ISLAMIC BANKING AND FINANCE IN THE CONTEMPORARY WORLD August 22, 2010 isa7695 Leave a comment 1 Vote DISSERTATION Shakeel Ahmad ([email protected]) Facilitator: Dr. H. K. Pradhan ([email protected]) Executive Post Graduate Program (Ex-PGP) in Management XLRI (http://www.xlri.ac.in), Dubai (http://www.xlri-dubai.net/) Approved for submission: February 2004 Acknowledgements I am grateful to Dr. H.K. Pradhan, my guide, for his continuous encouragement that enabled this study of a subject that had remained within my heart, since early ages. His teachings of International Financial Management provided insights beyond theoretical concepts, and his friendly style inspired the quest for excellence. I am thankful to XLRI, an institution that provided me with the opportunity to pursue this post graduate study in management, for which this dissertation project was undertaken. I take this opportunity to express my sincerest gratitude to all the members of Islamic Banking and Finance Community (IBFnet) in the Yahoogroups mailing list. Islamic finance community has worked hard in providing a wealth of resources on the internet. They deserve appreciation and rewards from no less an entity than Allah SWT Himself. Special thanks go to Dr. Obaidullah, the IBFnet’s founder. This dissertation work would not have been possible without the special help and encouragement from Dr. Shahid Ebrahim – it is difficult to express my special thanks for him, in a few words. Finally, the time that I devoted on the Ex-PGP, and this project, was taken away from my family whose support acted not only as facilitator but also was a source of continuous inspiration. Exploratory Channel: Sequence Title Page 1 Introduction 3 2 Why Islamic Banking? 4 3 Islamic Banking and Finance (IFB) Sector, now 6 4 Why is Islamic Banking and Finance (IBF) creating ripples? 6 6 Literature Review 7 7 Islamic Banks 10 8 Brief History 11 9 Concepts behind Islamic Banking and Finance 13 10 Distinguishing Features 13 11 Role of Islamic Banks 14 12 Prohibition of Interest 14 13 Table-2: Comparison between Riba and Profit 15 14 Table-3: Differences between Islamic & Conventional Banking 16 15 Key Islamic Financial techniques/ Products 17 16 Box-1: Islamic Financial Instruments 19 17 Islamic Derivative Products 21 18 Advantages of Islamic Finance 21 19 Box-2: Landmark Islamic finance deal inked 23 20 Perceived Disadvantages of IBFs 24 21 Impediments to the growth of IBFs 24 22 Recommendations to counter Impediments to growth of IBFs 36 23 Latest Developments 38 24 Box-3: How Islamic is Bank Negara’s IIMM? 40 25 Islamic Bonds (Sukuk) Funds 41 26 Box-4: Conventional Investors find Islamic Bonds attractive 41 27 Box-5: US$250 Government Islamic Leasing Securities 42 28 Box- 6: Islamic Development Bank launches bond issue worth $400m 43 29 Box-7: Latest Trends & Challenges 45 30 Box-8: Bahrain: LMC to issue $1.2b bonds 46 31 Rating Agencies 48 32 Basel II Implications 49 33 Important Institutions 49 34 Conclusion 51 35 References 54 36 Appendix-A0: Estimation of TAI for UAE 59 37 APPENDIX-A: Competitiveness of Banking Sector In Case of Opening Local Markets to GCC Banks 59 38 APPENDIX-B: Islamic Financial Institutions in the World 61 39 APPENDIX-C: Islamic Equity Funds in the World 68 40 APPENDIX-D: The Dow Jones Islamic Market Indexes 72 41 APENDIX-E1: Assets, Deposits and Loans of 53 Conventional local Banks in GCC 73 42 APENDIX-E2: Assets, Deposits and Loans of 8 Islamic local Banks in GCC 74 Introduction: To start with graphics may not be a novel idea, but if you are associated in any way with promoting deposits or instruments of a conventional bank anywhere in the world, these graphics must already have left some alarm bells ringing in your mind. 32.83% CAGR in Deposits and 24.69% CAGR in total assets over a four-year period in a country which was written off the books of financial wizards and stock-market punters after the Asian Currency Crisis. In figure–1, the rapid rise can be seen not in one aspect but in all major aspects of banking and finance reinforcing the belief that the growth rate witnessed was an all encompassing one. The question that arises at this moment is whether this growth rate is sustainable. An answer to that would be premature without looking at the reasons behind this phenomenon, and whether the same success story is repeated anywhere else in the world. We will try to answer some of the above questions, and also try to see if the growth in Islamic banking and finance sector could have been better. If yes, we will try to peep into the reasons behind less than expected growth. Much has been written by historians about the feudal lords who by virtue of charging high interest rates controlled those in desperate need to finance their survival. Financial clout led to political clout and ended up in enslaving the masses. Before the historians touched upon this exploitation of the masses, religious scriptures had already warned of usurious acts existing in the society. In the Old Testament (King James Version), Exodus, Chapter 22, verse 25: If you lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury. Leciticus, Chapter 25, verses 34-36: And if thy brother be waxen poor, and fallen in decay by thee; then thou shalt relieve him: yea though he be a stranger, or a sojourner, that he may live with thee. Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee. Why Islamic Banking? The New Testament also contains edicts on the same line. Thus the very mention of usury and the suggestion to avoid indulging in this act in Judaism and Christianity implies its existence in ancient times and the ills that it carried along for the society. Despite the warning against this practice, the system prospered. Modern financial system learnt a lesson from these religious warnings and tried to adopt a system that limited the extent of usurious exploitation to a great extent. By creating a market for debt, based upon ‘perfect competition’, it propounded an end to exploitative nature of usury and thus evolved the system of interest rates which was supposed to be determined by the market forces freely competing with each other. What we see today is an expansion of the ancient feudal system into a global arena with nations facing the same plight as did individuals earlier. From the traditional Jewish lending system of the Shylocks to the Indian feudal system, there is no need to strain our memories much. What is definitely cause for stress is the false claim of the contemporary world order to have relieved the masses of this burden of debt. Figures 2a and 2b show how countries, instead of individuals, are getting trapped into slavery. There is no doubt that Debt to GDP ratio is a robust indicator of the Debt burden of countries. If we compare the ratios that triggered the 1980s Debt crisis with the levels being experienced, now, we can see that the situation is no better, and could be enough cause for the unipolar world of the day. Despite the claim that modern interest-based system is not exploitative or usurious, because the interest rates or debt-service payments are within limits, Figures 2c and 2d provide a different picture altogether. The transition of the world from a multipolar world order to a unipolar one has not been without pain and suffering. It is not easy to emphatically pronounce that the cause for this has been the interest-based system, but nobody should doubt that the cause has been the financial system as a whole. Interest-based system is one component of the economic system where the concept of money itself, as a worthless piece of paper carrying immense power, may be ill-conceived. Fig-3a and 3b: Interest rates and export prices in Latin America (1972-1986) Source: Andres Bianchi et al., “Adjustment in Latin America, 1981-86,” in V. Corbo, M. Goldstein, and M. Khan, ed., Growth Oriented Adjustment Programs, Washington, D.C.: International Monetary Fund and The World Bank, 1987. Similarly, the argument that low interest rates cannot cause countries to lose their sovereignty also does not hold much ground. The diagnosis of the Debt Crisis of early 80s suggests that even low interest rates (Figure-3a), acting as a trap (particularly when they are floating rate, as majority of debt was) could cause countries to come down to their knees. Flushed with funds, due to the sharp oil price increase in 1973-74 leading to booming deposits by Oil-rich countries, international commercial banks were eager to lend at lower interest rates enticing the third world to borrow more and more. The debt burden measured by Debt-to-GDP ratio (Fig-2b) is an indication of the inevitable crisis that was waiting to happen. The urge to have a system that claims to provide a solution to such financial crises grows after every financial (monetary, exchange rate, stock market or Debt) crisis. It is not hard to understand that if the value of money carried its real worth, currency crises could be avoided. If the paper being traded in stock exchanges were actually trading at their genuine value, with no speculation, bubbles that occasionally burst would not exist. If the interest-free banking system could see the light of the day, no debt-crises would occur, as all the financing would be PLS (Profit-and-Loss Sharing arrangement of Islamic financial system). Islamic banking and finance based on the Islamic economic system must be taken seriously, therefore. This paper looks into the realities associated with this system which is growing at a much faster pace than its counterpart, and is making its conventional competitors stand up and have a look. The success of the Islamic system can be gauged by the rush among the conventional banks to open their own ‘Islamic windows’ not just in countries dominated by Muslims but also in rest of the world. Some of the Western banks already having dedicated Islamic subsidiaries are: Citibank, HSBC, American Express, ABN Amro, BNP Paribas, Bank of America, Stantad Chartered, Commerzbank, Barclays, Deutche Bank, ANZ Grindlays, Golman Schs, Royal Bank of Canada, Pictet & Cie, UBS, Flemings, Merrill Lynch and Kleinwort Benson. And the list is growing. With countries like Pakistan, Sudan and Iran adopting 100% Islamic Banking, the prospects of more countries to follow suit rising, the conventional counterparts cannot sit back and see their market share being eaten away. Islamic Banking and Finance (IFB) Sector, now: It is difficult to obtain exact figures on the size of the Islamic financial sector. Without doubt, it is small in comparison to the conventional financial sector but it is experiencing strong growth. Iqbal and Mirakhor (1999) report that Islamic banks grew from an asset base of $5 billion in 1985 to a level of over $100 billion in the late nineties. The chairman of Dubai Islamic Bank and Emirati Minister for Financial Affairs, Mohammad Khalfan bin Kharbash, recently noted that the number of Islamic banks has grown from 34 institutions in 1983 to 250 today, operating and managing assets of $200 billion (Phillips, 2001). The annual growth rate for Islamic financial institutions varies from 15 to 40 percent annually (Hamwi and Aylward, 1999). Yet, a comparison of the assets of all Islamic banks to HSBC, just one of the world’s largest banks with assets of $569 billion in 1999 (Azzam, 2000), demonstrates how small the Islamic sector remains on the world banking stage. Nevertheless, Islamic banking is spreading and gaining acceptance in both Muslim and nonMuslim countries. In 1999, the Middle East alone had 12 top-tiered Islamic banks with total capital of about $1.8 billion and assets of approximately $18 billion. Bosnia Bank International became operational in March 2001, positioned as a regional Islamic bank for the Balkan area, with wholesale and retail services in Bosnia (Carvalho, 2001). Many of the Islamic banks are gaining strength and achieving profits. For example, Al Rajhi Banking and Investment Corporation posted a net profit in 1997 of $347 million and return on capital of 25% (Hamwi and Aylward, 1999). Bank Al-Jazira, by far the smallest bank in the Saudi Islamic banking sector, grew profits by forty-one percent in 2000 (MEED, 2001). Why is Islamic Banking and Finance (IBF) creating ripples? Looking at the growth rates of IBF in comparison to the conventional banking, the reason may be obvious (Figure-4). Malaysia being a pioneer in expansion of IFB products, our calculations for the CAGR for its leading bank BIMB (Bank Islamic Malaysia Berhard) between 1998 and 2002 yield the following results: Deposits grew at 32.4%, Investments at 39.3% and Total assets at 28.3%. It will be an impossible task for any conventional bank to match these figures during the period. For the sake of diversity in outlook, we compared the figures for two banks in UAE under the same ownership – National Bank of Abu Dhabi, a Conventional Bank and Abu Dhabi Islamic Bank, an Islamic bank. The results are even more astounding, as depicted in Figure-5. None of the Islamic banks yielded any negative growth rates during the period under study while thirteen conventional banks in terms of Loans, seven in terms of Assets and eight in terms of Deposits reported negative CAGR. The data for all these banks are provided in Appendices-E1 and E2. Table-1: Comparison of CAGR for 53 conventional and 8 Islamic banks in GCC Average CAGR (1999-2001) Financing (Loans) Deposits Assets Local Conventional Banks 7.3% 7.6% 9.5% Local Islamic Banks 19.2% 21.4% 18.6% Western banks and financial institutions, like Chase Manhattan, J.P. Morgan, Goldman Sachs, Commerzbank AG, Deutsche Bank AG, HSBC, Citicorp and Bankers Trust, have joined the race for providing Islamic products, but they currently exist in trade and other forms of short-term finance, mostly. Independent financial institutions based on Shari’ah are also becoming common for the Western banks and financial institutions. Citicorp’s Islamic banking unit in Bahrain established in 1996 is an example. Standard Chartered Bank Malaysia Bhd. is planning to extend its Islamic banking services to become a total money management and financial provider within two to three years (The Star, May 17, 2001). From less than 10 Islamic mutual funds a decade ago to over 90, now, according to a report by Wall (2001), is no mean achievement. High-tech fever has not caused Islamic financial Web sites to crop up and grow along with Islamic Finance. Literature Review: The information on Islamic Banking & Finance is available in many forms, e.g., PhD dissertations (El-Bdour, 1984; Khan, 1983), books written by leading academics and practitioners (e.g. Homoud, 1985; Shirazi, 1990), published research in the form of reports (Ahmad, 1987; Iqbal and Mirakor, 1987) and journal articles (e.g. Erol and El-Bdour, 1989; Erol et al., 1990; Shook and Hassan, 1988; and Sudin et al., 1994). Because of Riba, Islamic banks have had to develop financial products which are not in conflict with the Sharia’h. The task has been achieved by creating a number of special financial products (Ali and Ali, 1994). The main thrust of Islamic financial contracts is on profit and loss sharing, which can be deemed as equity (Musharakah) and hybrid (modified Mudharabah and Ijara) facilities (Ahmad, 1994). However, the risks of these vehicles are inherently higher than conventional ones as espoused by Ebrahim (1999). One definition of an Islamic Bank is a bank that, by its own choice, opts to comply with two sets of law: the law of the Land (Jurisdiction); and the Islamic Law (Shari’ah). This is why Islamic bankers have two types of legal counsel: traditional “lawyers” and “Shari’ah Councils” (Al-Bahar, 1996). “Islam is deeply concerned with the problem of economic development, but treats this as an important part of a wider problem, that of total human development. The primary function of Islam is to guide human development on correct lines and in the right direction. It deals with all aspects of economic development but always in the framework of total human development and never in a form divorced from this perspective” (Al-Harran, 1993). The Shari’ah specifies, inter alia, rules that relate to the allocation of resources, property rights, production and consumption, and the distribution of income and wealth (Iqbal and Mirakhor, 1987). Islamic banking advances the following set of beliefs: interest as a reward for saving does not have any basis as a moral foundation; abstinence from spending of present income does not deserve a financial reward; and to benefit from money is to transform the money into investments, conditioned to accept risks and bringing the knowledge of other factors of production together (Presley, 1988). Rayner (1991) lays down four elements of a contract on a property (mal): they are lawfulness, existence, deliverability and precise determination. Ebrahim (1999) explains that profits on Murabahah facilities are generally higher than conventional loans because Islamic instruments are structured to share the risk of the asset or venture. Hence, the “profits” and “interest-charge” implied are similar in outcome, although not by design (Iqbal and Mirakhor, 1999; Rosly, 1999). Thomas (1995) is of the view that Riba, Gharar and Maysir manifested in the conventional system can wreak havoc in an economy as advanced as the USA, as depicted by the massive failures of US savings and loans institutions of the 1980s. Islamic banking aims to promote economic growth through risk-sharing instruments whose payoffs fluctuate with economic output and do not structurally impair the economy in the manner of excessive fixed-interest debt does in a poor economic environment such as a recession (Asquith et al., 1994; Andrade and Kaplan, 1998). The potential of Islamic fixed income securities backed by an Ijara facility is discussed by Kahf (1997). Islamic Derivatives: These comprise both Islamic Futures and Embedded Options in a contract. However, the development of it is largely unrealized (Khan, 1995). Ebrahim (2001) recommends to design, develop and implement Islamic hedging and risk minimizing facilities such as Islamic futures (Bai Al-Salam/Istisna), Islamic swaps, etc. (Iqbal, 1999). (Ebrahim, 2000) further recommends to design, develop and implement Islamic facilities that enhance the competitive ability of Islamic banks and reduce their risk exposure. The excessive use of credit facilities by Islamic banks globally has drawn the ire of scholars such as Ahmad (1989) and El-Naggar (1994). Conventional futures are very controversial with the Ulema – religious scholars (Kamali, 1999). It should be noted that certain Ulema such as Justice Taqi Usamani have given their verdict allowing contracts with embedded options (Kahn, 1999). Part of the study of Erol and El-Bdour (1989), conducted in Jordan, aimed at establishing the attitude of local people towards Islamic banking. The results suggest that religious motivation did not appear to play a primary role in bank selection; the opening of new branches was not an important factor in increasing the utilization of financial services provided by Islamic banks; while 39.4 per cent of respondents would withdraw their deposits if an Islamic bank did not generate sufficient profit to make a distribution in any one year, 30.4 per cent would retain their deposits because the Islamic bank could distribute a higher dividend the following year. Gerrard & Cunningham’s (1997) study establishes that, in Singapore, which has a minority of Muslims in its population, both Muslims and non-Muslims are generally unaware of the culture of Islamic banking. Also the two separate groups have different attitudes towards the Islamic banking movement, with the degree of difference depending on the nature of the respective matter put to them. For example, when asked what they would do if an Islamic bank did not make sufficient profits to make a distribution in any one year, 62.1 per cent of Muslims said they would keep their deposits within the Islamic banking movement, while 66.5 per cent of non-Muslims said they would withdraw their deposits. Much has been written since the early 1960s on the theme of the bank selection process (see, for example, the published articles of Anderson et al. (1976); Holstius and Kaynak (1995); Kaynak (1986); Kaynak et al. (1991); Laroche et al. (1986), and the working paper of Chan (1989)). Erol & El-Bdour (1989) and Erol et al. (1990) compared the bank selection process in relation to “conventional” and Islamic banks. Sudin et al. (1994) compared responses about the bank selection criteria of both Muslims and non-Muslims. In addition to establishing attitudes towards Islamic banking, Erol and his co-researchers (1989 and 1990) sought to establish, then compare, the bank selection criteria of customers of conventional and Islamic banks in Jordan. Sudin et al. (1994), among other things, sought to establish the relative importance of certain bank selection criteria using a sample of Muslims and non-Muslims, none of whom had to be patronizing an Islamic bank at the time of the study. The three most important criteria in the bank selection process for Muslims were: first, “the provision of a fast and efficient service”; second, “the speed of transaction”; and third, “friendliness of bank personnel”. As regards the non-Muslims, the three most important bank selection criteria were: first, “friendliness of bank personnel”; second, “the provision of a fast and efficient service”; and third, “the reputation and image of the bank”. ISLAMIC BANKS: An Islamic bank is an intermediary and trustee of other people’s money like any conventional bank with the possible difference that the payoff to all its depositors is a share in profit and loss in one form or the other. This difference introduces an element of mutuality in Islamic banking, making its depositors as customers with some ownership rights inherent within it. However, in practice, Islamic banks hardly look different from its conventional counterpart in terms of organisational set-up (Dar and Presley, 2000). Islamic banking has been defined in a number of ways. General Secretariat of the OIC’s definition goes like this: “An Islamic bank is a financial institution whose status, rules and procedures expressly state its commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations” (Ali & Sarkar-1995) Unlike conventional banks, however, Islamic banks offer PLS accounts, among others, which do not guarantee a fixed certain return on investment deposits. This leads to a reluctance of deposit holders, who have no representation in the organisation, to use PLS accounts. The bank faces a similar problem on the assets side when it comes to investing on PLS. The essential feature of Islamic banking is that it is interest-free. Although it is often claimed that there is more to Islamic banking, such as contributions towards a more equitable distribution of income and wealth, and increased equity participation in the economy (Chapra l982), it nevertheless derives its specific rationale from the fact that there is no place for the institution of interest in the Islamic order. It is simply an accepted fact that there are sufficient Muslim investors and borrowers in both Islamic and non-Islamic countries to warrant the attention of traditional banks who seek to serve such clients and capture a potentially profitable slice of a still relatively untapped market. Just as interesting and useful for non-Islamic bankers are the lessons learned from the innovation and creativity applied in meeting Islamic criteria. Some products are more Islamic and than others. The basic principle is that interest – usury or Riba used interchangeably – is prohibited on the principle of no pain no gain. What a “pure” Islamic banking seems to be structurally very similar to venture capital finance, nonrecourse project finance or ordinary equity investment. The investor takes a share in the profits, if any, of the venture and is liable to lose his capital. It involves investing but not lending and therefore on a systemic basis is similar to the German, Japanese and Spanish banking systems rather than the British or American systems. Just as in the process of converting interest into capital gains for tax purposes, early Islamic investors were content to enter into zero-coupon bonds or discounted Treasury bills and receive the interest foregone in the form of capital gains. Beyond the question of interest or Riba lies an ethical issue. Islamic investments exclude tobacco, alcohol, gaming and other “undesirable” sectors. Islamic investors, by and large, are motivated in their choice of investments by much the same criteria as their Western ethical counterparts. The search for acceptable investments is balanced by natural risk-aversion. Islamic borrowers, on the other hand, also demonstrate a reluctance to give away a share in the profits of their enterprise. It is not therefore surprising that most of Islamic banking takes the form of one type of mark-up or other rather than profit-sharing. An analysis of the products suggests that Islamic banking has six key features: • free of interest, • trade-related and there is a perceived “genuine” need for the funds, • In its purest form, it is equity related, • meant to avoid exploitation – no usury, • invests ethically, • there are retail and wholesale applications. Under the current interpretation of the rules governing Islamic banking, Usury and Riba are regarded as synonymous. The prohibition is on interest and not just on usurious interest. In practice, there appears to be more emphasis on the prohibition and restructuring of interest than on the potentially exploitative aspect of financing. Brief History: It is worth noting that there is nothing new or particularly Islamic or Christian about Usury or interest controls. In 24th century B. C. Manu established a rate ceiling of 24% in India. Later, Hammurabi, King of Babylon, authored laws around 19th B. C. established a cap on lending rates. On loans of grain, which were repayable in kind, the maximum rate of interest was limited to 33 1/3% per annum. On loans of silver, the maximum legal rate was 20% although it appears that in some cases rates of 25 per cent per annum were charged. The law remained for most of the next 12 centuries but as with any law “regulatory arbitrage” took place and was subsequently eliminated. Unfair practices also existed. For example, creditors were forbidden from calling a loan made to a farmer prior to harvest. If the crop failed due to weather conditions, all interest on the loan would be cancelled for that year. In the case of houses, due to the scarcity of wood, a door could be used as collateral and was considered to be separate from a house. The 6th century Greeks, through the laws of Solon, lifted all maximum limitations on the legal rate of interest a moneylender might charge. The temple at Delphi was the “City” or “Wall Street” of the Greek Empire lending money for interest regularly. Credit regulation was once again part of the legal code at the start of the Roman Empire. The legal limitation on interest was established at 8 1/3% per in the 5th century B.C. Julius Caesar’s attempts to control interest rates could well have been the real reason for his assassination since many the Roman senators were the main moneylenders. (This section is drawn from Edwardes-2000. The reader is also referred to Armstrong-1987, for more details). Back to the present day, quite a few Western countries have Usury laws that prohibit excessive interest rates. The UK’s usury laws which prevented “excessive” interest were abolished in 1854. South Africa and the US still have usury laws. Usury results when a lender charges more than the legal amount of interest permitted in that geographical area. Usury percentage limits vary by state, in USA, and at least one state, Virginia, has no usury limit. Today most of the states have had their ability to limit interest rates curtailed by overriding US Federal law. Higher than permissible rates have been regarded by US Federal banking authorities as penalty fees and insurance premiums. And the federal rate limits are high. (Refer to Edwardes-2000). In some states there is no restriction on the rates used for lending to incorporated entities. The controls are often on lending to persons. The usury rate usually is variable depending on market rates. In September 1998 in North Dakota it was 10.556%. California has recently imposed strict consumer lending limits. But these only apply to state banks and not to national banks. The California Constitution allows parties to contract for interest on a loan primarily for personal, family or household purposes at a rate not exceeding 10% per annum (compound annual percentage rate). The allowable rate in California is 5% over the amount charged by the Federal Reserve Bank of San Francisco on advances to member banks on the 25th day of the month before the loan. The usury laws do not apply to any real estate broker if the loan is secured by real estate. This applies whether or not he or she is acting as a real estate broker. The limitations also do not apply to most lending institutions such as banks, credit unions, finance companies, pawn brokers, etc. State laws place limitations on some of these loans, but at a higher percentage rate than the usury laws listed above. (Refer to Edwardes-2000). In the Old Testament (King James Version), Exodus, Chapter 22, verse 25: If you lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury. Leciticus, Chapter 25, verses 34-36: And if thy brother be waxen poor, and fallen in decay by thee; then thou shalt relieve him: yea though he be a stranger, or a sojourner, that he may live with thee. Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee. THE New Testament also contains edicts on the same line. Thus we can see that Judaism and Christianity are no different in terms of prohibition of usury. Chronology of recent historical events in the industry: 1963: Egypt interest free savings banks, not overtly Islamic – invested in trade and industry on the basis of share in profits. 1971: Egypt Nasr Social bank, still no overt reference to Islam. 1973: Conference of Islamic finance ministers. 1975: Islamic Development Bank, Jeddah, fee based and PLS, revolving capital. 1975: Dubai Islamic Bank, UAE, first Islamic Commercial Bank in the world. 1970’s: Faisal Islamic Bank of Sudan / Egypt; Bahrain Islamic Bank; Malaysia, Philippines, Nigeria, Indonesia; Islamic Finance House, Luxembourg; DMI Geneva; Al Rajhi London, Denmark, Australia, South Africa; HSBC Amanah Fund; ANZ First ANZ International Murabah Ltd., IBU of United Bank of Kuwait. Time payment contracts such as retail installment contracts are not generally treated as loans and the usury laws normally do not apply to them. There are no limits on finance charges for the purchase of personal, family and household goods or services at this time. The maximum interest rate for car loans is almost 22%. Banks also treat interest charges for third party credit cards such as Visa, MasterCard and American Express as not being subject to Usury law limitations. (Refer to Edwardes-2000). In transactions for the purchase of goods or services which are not for personal, family or household purposes, there are normally no limits to finance charges except those set by the parties. Limited liability companies and limited liability partnerships can no longer assert usury as a defence in civil recovery actions. The usury interest limit that applies to limited liability companies and limited partnerships has been raised from 30% per annum to 50% per annum to equate to the level that applies to corporations. (Refer to Edwardes-2000). But there is a problem with usury laws as can be seen in South Africa. If there is a particularly risky investment and an interest rate limit, then banks will simply not lend. The poorest will find themselves deprived of financing, and under a free market there will be a shift to quality or to those that do not really need financing. Unless there is government imposed mandatory or tax driven lending to certain sectors or public opinion pressure, certain sectors or individuals deemed risky by the banks will simply not get the funding required. (Refer to Edwardes-2000). The Concepts behind Islamic Banking and Finance: Distinguishing Features: The economic doctrine of Islam is based on encouraging free markets, discouraging price controls and forbidding financial contracts based on riba, gharar and maysir. Riba (Charging of Interest): Taking or paying of interest (riba) is prohibited by Shariah (Islamic law). The concept of riba extends beyond interest and usury, and volumes have been written by scholars to explain the concept. In simple terms, riba can be considered as exploitation of one party who owns a product (that includes money and capital) and which another party wishes to acquire. Although interest comes very close to this concept, it is still better to consider riba as “unfair exploitation”. Ebrahim (1998) explains that “Riba is expounded by Ibn Qayyim & Al-Jawziyya (n.d.), another prominent Islamic scholar, to imply (i) any form of unfair trade, market manipulation or engaging a market participant to trade under duress (riba-al-fadl) and (ii) risk-free debt contracts (riba-al-nasi’ah). From a financial economist’s perspective, riba-al-nasi’ah can be defined as a risk-free return from an investment vehicle or strategy.” (see also Chapra-1986, Rahman-1969, Saeed-1995, Thomas-1995). Gharar (Uncertainty): The existence of uncertainty in a contract is prohibited because it requires the occurrence of an event which may not ultimately occur. “Full disclosure” by both parties is the norm in contractual relationships. Any type of transaction where the (i) subject matter, (ii) the price, or both are not determined and fixed in advance amounts to “uncertainty”. Thus hedging and dealing in derivatives is not allowed. Maisir or Speculation: Speculation is equivalent to gambling, and therefore is prohibited. Derivative transactions like Options, Futures, Swaps and forward contracts (that insure profit) are considered un-Islamic. They are also considered un-Islamic because for most of them, rates are determined by interest differentials. Zaka’h: A taxation system inherent in the Islamic system based on the principles of social justice and equity. Implying social justice and general welfare: The basic principle is that everybody should be able to fulfill at least the basic needs. Conforming to Shariah: The Quran and Hadith clearly specify the guidelines for individual, social, organizational, governmental behaviour, and thus become the basic pillar for any Islamic system, with the banking and financial system being no exception. Qard-e-hasna (benevolent loan), or Qard Hassan: Qard-e-Hasna means an interest free loan and is the only type of loan permitted by the Shariah. The loans are made from the pooled donations of the members and are generally granted to those who are facing emergency personal crisis. This form of finance is very important part of Islamic financial system and all members are encouraged to become regular donors so that the fund may be strengthened for the benefit of all Muslim The guiding principle again is the social justice and general welfare. Some Islamic banks provide the privilege of interest free loans only to the holders of investment account with them. Some extend to all bank clients. Some restrict it to needy students and other economically weaker sections of the society. Yet some other Islamic banks provide interest free loans to small producers, farmers and entrepreneurs who are not qualified to get finance from other sources. The purpose of these loans is to help start them their independent economic life and thus to raise their incomes and standard of living. Banks usually charge a small fee (say, 1.5%) annually to cover their administrative costs, etc. Profit and loss sharing (PLS): It is an alternative to interest-based transactions. Risk sharing: No risk, no gain is the basis. Prohibited Investments and Permissibility of Activities: Investments should only support Halal (permitted) activities. So, investments involving products like pork, alcohol, pornography, arms & ammunitions, Cinema, Tobacco, Conventional Financial Services and activities like gambling are prohibited. Hoarding: Hoarding money is considered improper in Islam; money is merely a means of exchange and should not be treated as a commodity. Islam encourages Trade and Enterprise, which can generate wealth for the benefits of the community as a whole with PLS as its core. Role of Islamic Banks: The role of Islamic banks becomes difficult compared to their conventional counterparts because of the basic principle that money is not supposed to earn interest. This eliminates a major role of the financial institution. So, what do they do? They invest in viable projects, with reliable borrowers. If the project succeeds, the banker shares in the profit, if it fails, he suffers the losses. Prohibition of Interest: Prohibiting the receipt and payment of interest is the nucleus of the system, supported by other principles of Islamic doctrine advocating risk sharing, individuals’ rights and duties, property rights, and the sanctity of contracts. Similarly, the Islamic financial system is not limited to banking, but covers capital formation, capital markets, and all types of financial intermediation. Since prohibition on transactions based on interest payments is the most important factor and is at the heart of the Islamic financial system, it will be unjust not to provide some light on it. The basic philosophy underlying transaction of money is that the one who is offering his money to another person has to decide whether: (a) He is lending money to him as a sympathetic act or, (b) He is lending money to the borrower, so that his principal may be saved or, (c) He is advancing his money to share the profits of the borrower. Table-2: Comparison between Riba and Profit Riba Profit 1. When money is “charged”, its imposed positive and definite result is Riba 1. When money is used in productive activity (e.g., in trading), its uncertain result is profit. 2. By definition, Riba is the premium paid by the borrower to the lender along with principal amount as a condition for the loan. 2. By definition, profit is the difference between the revenue from production and the cost of production. 3. Riba is prefixed, and hence there is no uncertainty on the part of either the givers or the takers of loans. 3. Even if a sharing ratio is agreed in advance, profit is still uncertain, as its amount is not known until the activity is completed. 4. Riba con not be negative, it can at best be very low or zero. 4. Profit can be positive, zero or even negative. 5. From Islamic Shariah point of view, it is Haram (prohibited). 5. From Islamic Shariah point of view, it is Halal (allowed). Making Money from Money is not permissible – the basic points of difference between money and commodity are highlighted to justify this. Money (of the same denomination) is not held to be the subject matter of trade, like other commodities. Its use is restricted to its basic purpose i.e. to act as a medium of exchange and a measure of value. If money is to be exchanged for money or it is borrowed, the payment on both sides must be equal, so that it is not used for trade in money itself. In short, money is treated as “potential” capital. It becomes actual capital only when it joins hands with other resources to undertake a productive activity. Islam recognizes the time value of money, but only when it acts as capital, not when it is “potential” capital. Muslim scholars term interest as Riba. Under Shariah, Riba technically refers to the premium that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity (Chapra 1985, p.64). In other words, Riba is the predetermined return on the use of money. In the past there has been dispute about whether Riba refers to interest or usury, but there is now consensus among Muslim scholars that the term covers all forms of interest and not only “excessive” interest (Khan 1985, p.52). The most important characteristic of Riba is that it is the positive and definite result of money when changed. In other words, when money begets money, without being exchanged for goods or services, or without indulging in any productive activity, it is called Riba. The basic characteristics of Riba are: • It must be related to loan; • A prefixed amount of money to be paid when due; • A time is fixed for the repayment; and • All these elements for repayment are taken as conditions for loan. Since Interest or Riba has emerged as the basic alternative for Profit, a comparison is justified between the two (Table-2). Table-3: Differences between Islamic & Conventional Banking: Characteristics Islamic Banking System Conventional Banking System Guiding principle Guided by Quranic edicts, Hadeeth, Islamic ethics and Islamic laws. Guided by profit motive alone, with no religious or ethical considerations. Ethics of financing Financing being asset-backed, and meant for productive use helps reduce the overall debt burden. Debt burden arising out of excessive use of credit leads to bankruptcies, and waste of financial resources. Liquidation Assets An Investment Account Holder will have similar rights as shareholders. Depositors are paid before the shareholders. Involvement of risk & Equity financing Equity financing is available to a project or venture that involves profit-and-loss sharing. Risk-sharing and profit sharing go together. Commercial banks do not usually indulge in equity financing, only venture capital companies and investment banks do. Conventional banks carry much less risk, major part of the risks being transferred to the borrowers. Return on Capital Depends on productivity, idle money cannot earn any return. Money is not capital per se, only potential capital . Even idle money in bank deposits earns returns. Prohibition of Gharar (uncertainty) The existence of uncertainty in a contract is prohibited because it requires the occurrence of an event which may not ultimately occur. “Full disclosure” by both parties is the norm in contracts. Derivatives trading e.g. options are considered as having elements of Gharar. Trading and dealing in derivatives are widely considered as the main source of liquidity in the conventional financial, commodity and capital markets. Profit and Loss Sharing Most transactions are based on this variable returns, dependent on lenders’ performance. Greater share of risks forces them to manage risks more professionally, to ensure better returns than conventional accounts. Depositors & investors have opportunity to earn higher returns than in conventional systems. There is no relationship between bank performance and returns to the depositors or investors, who mostly enjoy a risk-free return. Conventional institutions mostly act as intermediaries between lenders & borrowers enjoying almost a risk-free spread. Zakat It has become one of the functions of the Islamic banks to collect and distribute Zakat. Government Taxes perhaps serve the same purpose – mode and rate of charging are different, though. Compounding or Interest on interest The Islamic banks have no provision to charge any extra money from the defaulters. It can charge additional money (compound rate of interest) in case of defaulters. Money-Market Borrowing For the Islamic banks, it is comparatively difficult to borrow money from the money market. For commercial banks, borrowing from the money market is the main source of liquidity. Developing expertise Since it shares profit and loss, the Islamic banks pay greater attention to developing project appraisal and evaluation systems. Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations. Viability v/s credit-worthiness The Islamic banks, on the other hand, give greater emphasis on the viability of the projects. The conventional banks give greater emphasis on creditworthiness of the clients. Relationship with Clients The status of Islamic bank in relation to its clients is that of partners, investors and trader. The status of a conventional bank, in relation to its clients, is that of creditor and debtors. Capital Guarantee No guarantee. Built into the system. Deposit insurance None An integral component Key Islamic Financial techniques: Islamic banking and financial institutions have developed a wide rage of techniques which allow them to uphold the religious and legal principles while enabling them, at the same time, to offer viable financial products. The search is actually still going on to find newer techniques, and for variations based upon the existing ones to offer more attractive and useful instruments for the investors. The following list covers many of them, but must not be considered as exhaustive: Mudaraba (Participation or trust financing): It involves two parties, the managing trustee (Mudarib) and the beneficial owner (Rub-ul-Maal). Usually the investment account holders are the provider of funds, and the Islamic Banks are the managing partner (mudarib). The Islamic Financial Institution may either put up all the funds itself and undertake responsibility for investing in them, or alternately it can provide funds to a customer who then acts as Mudarib. The borrower retains a fixed percentage of profits, the Islamic Financial Institution’s reward is a fixed percentage in the balance of the revenue generated by the investments and the remainder goes to the investors. Underlying principle is ‘no-pain-nogain’, i.e., no one is entitled to any addition to the principal sum if he does not share in the risks involved. Although profits are shared on a pre-agreed basis, losses are wholly suffered by the Rub-ul-Maal. Musharaka (Equity Financing): It is quite similar to the Mudarabah contract. It involves financing through equity. Here the partners or shareholders for a Project use their capital through a Joint Venture, Limited Partnership to generate a profit. Profits or losses will be split between the shareholders according to some agreed pre-formula depending on the investment ratio. Difference between Mudaraba and Musharaka Contracts: In a Mudaraba contract, the managing agent (beneficiary or the borrower, called the Mudarib) does not have any financial participation. In a Musharaka contract, the agent is a financial partner along with the provider of fund (Rubb-ul-Maal of Mudaraba contract) sharing the gain or loss at the predesignated ratio which is likely to be higher than what he is likely to get in a Mudaraba contract. Thus, in Mudaraba, the agent acts as a working partner who does not bear any losses and simply manages the fund (the project in which the fund is invested), whereas in Musharaka, all the parties are shareholders in the venture. Murabaha (Cost-plus financing): This technique is extensively used to facilitate trade financing activities of Islamic Financial Institutions. The Mudaraba and Musharaka transactions are often seen on the retail liability side of Islamic banks. The asset side whether retail or wholesale is quite risky. The most common such financial instrument is the ‘markup’ structure called Murabaha. It sounds quite similar to a “repo” agreement commonly used in the West. In a Murabaha transaction, the bank finances the purchase of an asset by buying it on behalf of its client. The bank then adds a “mark-up” in its sale price to its client who pays for it on a deferred basis. The ‘cost-plus’ nature of Murabaha sounds very much like the interest into capital gains manipulations of tax-avoiders. Islamic banks are supposed to take a genuine commercial risk between the purchase of the asset from the seller and the sale of the asset to the person requiring the goods. The bank stands in between the buyer and the supplier and is liable if anything goes wrong. There is thus some form of guarantee with respect to the quality of the goods provided by the bank to the end user in the strict form of Murabaha. Title to the goods financed may pass to the bank’s client at the outset or on deferred payment. From the perspective of modern finance, a Murabaha facility is equivalent to an asset-backed risky loan. If the capital markets are perfect and all agents in the economy have equal access to information, then competition between Islamic banks and conventional banks would result in Murabahah having the same expected return as that of conventional loans. Baimuajjal (Deferred Payment Sales): The payments for this sale could be either in installments or a one-off deferred payment as per agreement between the parties at the time of the sale, and cannot include any charges for deferment. This is like as a Murabaha mode of investment with an exception that the sale under this cost-plus sale mode of investment is made on a credit basis rather than cash. It is deemed acceptable to charge higher prices for deferred payments. Such transactions are regarded as trades and not loans. Ijara (Operating Lease): It involves leasing of machinery, equipment, buildings and other capital assets. The financier purchases the asset and leases it to the end-user for an agreed rental which may be fixed in advance or subject to occasional review by a mutually acceptable third party, e.g. an international firm of accountants. Insuring of the asset remains a contentious issue. Ijara wa iqtina (Financial Lease): This is a leasing structure coupled with a right available to the lessee to purchase the asset at the end of the lease period (Bay’ al Wafa). The lessee agrees to make payments into an Islamic investment account (with right to all profits) to be used in or towards financing the ultimate purchase of the asset. The instrument has been used increasingly in a range of asset classes including ships, aircrafts, telecom equipment and power station turbines, etc. Baisalam or Bai’ Salaf (Purchase with deferred delivery): It is a short-term commodity finance contract in which the buyer (usually of agricultural or manufactured products) pays the seller full negotiated price of a product that is promised for delivery at a later date. It has similarities with the forward contracts of conventional financial systems except that in Islamic instruments the rate of return is tied to each transaction rather than to a time dimension. Another difference lies in the fact that in Salam, the buyer pays the entire amount in cash, at the time of contract. Both the quality and quantity of the sold products are definitely specified in the contract. The counter-party risk in Al Salam is one-sided as it lies with the buyer alone (the IBF) unlike the forward contracts in which it affects both parties. Hence, it is expected that this risk will be priced one way unless a security is provided by the seller. This involves the bank paying for the producer’s goods at a discount before they have been delivered or even made. Difference of opinion exists on whether the subject of Bai Salam transaction should be available in the market at the time of the contract or whether it is enough that the asset will be available at the date set in the contract for delivery. Difference of opinion also can be seen on the minimum time period between the date of contract and delivery of assets. The party on the purchase side of the contract may sell the asset back to the party on the sale side of the contract or to a third party for a profit. The purchaser/ financier may also sell the assets by way of a parallel Bai Salam contract (a salam contract with a third party) to hedge the asset-risk or for profit. The stipulation of full cash prepayment in Al Salam contracts is meant to facilitate working capital finance wherein the party on the buyer side is the IBF institution. Since full prepayment is involved, the price paid is lower than the future spot price of the goods in question unlike the futures or forward price which is always higher than the spot price. An important feature of Al salam contract is the underlying asset which must be standardizable, of determinate quality and easy to be quantified. Istisna and Parallel Istisna: It involves a deferred delivery sale contract similar to salam. It is also similar to conventional work-in-progress financing of capital projects like construction. It is also used for trade finance such as pre-shipment export finance. In this contract, the seller ( Al Sani’), based upon an order from purchaser (Al Mustasni’), undertakes to manufacture or have manufactured/ acquired the subject item (Al Masnoo’) as per purchaser’s specifications. The price, payment structure and the date of delivery are fixed in advance. In parallel Istisna, the Al-Sani’ may enter into a second Istisna’ contract (subcontract) with a third party to manufacture the subject item unless Al Mustasni’ (ultimate purchaser) has stipulated in the contarct specifically for Al Sani’ to manufacture himself. Similarity with Bai Salam contract: Sale of a product not available at the time of the deal. Difference with Bai Salam contract: In Bai Salam, full price for the asset must be paid at the outset, whereas in Istisna, payment in full or in installments may be made at any agreed upon time (even beyond delivery date). Similarity with Ijarah: In Istisna, al-sani’ may either provide the raw material or labour. The labour part is the similarity with Ijarah. Arbun or Urboun (Pre-purchase of right to acquire asset): The purchaser makes a deposit (a down-payment, which may be a fraction of the price) for the purchase of an asset at a later date on the understanding that, should the sale of the assets not proceed (say, if the purchaser chooses not to proceed), the seller will be permitted to retain the deposit. Because of its similarity to an option, it has met with varying levels of approval from the schools of Islamic jurisprudence. A lot of work will be required to mould the instrument so as to remove any possibility of speculation ensuring total acceptability. Khiyar al-shart: This is a sale contract concluded at the time of signing the agreement, but where one of the two parties to the contract has a right to cancel the sale within a stipulated time. Cancellation is not contingent upon any uncertain future event. For example, party A enters into a contract with party B to sell a given quantity of equity stock on an agreed price, today. Party A has the right to either confirm or rescind the contract by a certain time in the future (let’s term it as “maturity”). If Pmaturity > Pcontract, A may choose to rescind the contract and instead sell the stock in the market. The similarity of the exercise features of this contract with the conventional Put Option invites some controversy. Al Bay Bithaman Ajil: BBA, popular in Malaysia, is a mark-up sale in which payments are delayed and made in equal installments. Theoretically, in the contract of BBA the bank sells the product (a house, equipment or machinery, etc.) to the customer at a mark-up price, whose content consists of the cost price plus a profit margin. The client may be allowed to settle payment by installments within a pre-agreed period, or as a lump sum. It is similar to a Murabaha contract, but with payment on a deferred basis. The BBA facility can also be utilised for refinancing of assets owned by the Customer, and the proceeds to be utilised for the Customer’s working capital. Syndication: Islamic Financial Institutions are increasingly prepared to participate in large project financing, and are getting ready to compete with their conventional counterparts. The syndication works on the techniques discussed above, most popular being the Mudarabah contract modified to suit the technicalities. Jo’alah: A party undertakes to pay another party a specified amount of money as a fee for rendering a specified service in accordance with the terms of the contract stipulated between the two parties. This mode usually applies to transactions such as consultations and professional services, fund placements, and trust services. Certificates of sale: It has been suggested that consumers buying consumables on credit would issue ‘certificates of sale’ similar to letters of credit. These could be encashed by the seller at the bank at a discount. This seems very similar in structure to Baisalam. Prizes and bonuses: Iran and Pakistan have both attempted to fully Islamise the entire banking. Iran converted to Islamic banking in August l983 with a three-year transition period. In Iran banks accept current and savings deposits without paying any return. The banks are permitted to offer bonuses and prizes on these deposits very similar to the UK’s premium bonds. This is apparently not regarded as gambling by the Iranian Islamic banking units. No fee accounts: There is a substantial Muslim population in South Africa and they are serviced by two small Islamic banks. The main product being offered is the “no fee” current account which is also provided by the conventional banks by arrangement. Transaction charges are waived and interest is not paid on current accounts. Gifts: Gifts to depositors are given entirely at the discretion of the Islamic banks on the basis of the minimum balance. These gifts may be monetary or non-monetary are based on the banks’ returns. Non PLS Modes: Non-Profit-and-Loss Sharing Modes. They are used in cases where PLS modes cannot be implemented, e.g., in cases of small-scale borrowers or for consumption loans. Qard Al Hasnah (Beneficence Loans): Zero return loans that Islam edicts for Muslims to make to the needy. Banks can only charge the borrowers a one-off service fee to cover the administrative expenses, but this fee cannot be related, by any means, to the loan amount or its maturity. Islamic Derivative Products: Salam (Bai Al Salam), Urboun (Arbun) and Khiyar al-shart are the existing derivative products approved by some schools of Islamic jurisprudence. Dr. Kenneth Baldwin has suggested some Profit Rate Swaps that replicate the risk management capability of conventional interest rate swaps, using Sharia-compatible building blocks (existing and extensively used instruments). It is generally assumed that the term “Islamic Derivatives” is a contradiction. The requirements of derivatives and rules of Shariah at first sight are diametrically opposed and all derivatives are therefore Haram. But it is important to recall the generalised definition we use of a financial derivative. It is simply a financial instrument that is derived from another financial instrument or a combination of such instruments. It is argued that as derivatives “unquestionably” involve interest or interest-based products they are contaminated and should be prohibited. Well, derivatives only involve interest if one or both parties using the derivative seek to hedge the derivative. It could be argued that Murabaha could involve interest if the parties seek to match the interest free but guaranteed return product with an interest-bearing equivalent. Islamic banking derivatives should be perfectly acceptable so long as they do not involve interest. The literature contains hardly any serious criticism of the interest-free character of the operation, since this is taken for granted, although concerns have been expressed about the lack of adequate interest-free instruments. There is a near-consensus that Islamic banks can function well without interest. An International Monetary Fund (IMF) study by Iqbal and Mirakhor (l987) found Islamic banking to be a viable proposition that can result in efficient resource allocation. Advantages of Islamic Finance: Efficient allocation of funds: Since allocation of funds by banks will be dependent upon the soundness of projects under the PLS arrangements, the allocation is more efficient. Productive use of capital: Banks are likely to know their fund users better in order to ensure that the funds are used for productive purposes. In this way, both the fund providers and the financial intermediary contribute to promoting productive economic activities and greater financial responsibility. Thus, IBFs would promote economic growth [Chapra (1998), Siddiqui (1983)] Similarly, since banks have no pressure of fixed regular payments on deposits, the efficiency of allocating resources to profitable and more productive use is further boosted. Equitable distribution of wealth: The efficiency in allocation leads to this, and creates additional wealth as well. Interest distribution is considered unjust and inequitable because it is not based on any productive use of capital, and it exploits the misfortune of the borrower (who has run out of money). Generation of employment: Productive use of capital implies investments and creation of jobs. The investment is not dependent upon the cost of capital (and positive NPVs) or time value of money, hence number of investible projects is likely to be much higher resulting in larger capital formation. Saving in information costs: Being a partner of the entrepreneur (or a firm), the financial institution has easier and cheaper access to information on matters relating to the firm. This may make credit rating agencies redundant, and lending more efficient. Saving in deposit insurance costs: Risk-sharing concept built into the IBF system, there will be no need for deposits to be insured. Reduction of debt burden: The IBF system of equity financing encourages debt to be swapped with equity which can help many developing countries get rid of the immense debtburden. Instead of rescheduling of existing loans or selling Brady bonds at heavy discounts, which does not help relieve the pressure much, converting debt to equity promises a much more fruitful alternative. Promoting Ethical behaviour: Because of its strong emphasis on the ethical and moral dimensions of doing the business and selecting the activities/ commodities to be financed, the Islamic financing institutions could play an important role in promoting socially desirable investment and corporate behavior. In this context, it is worth mentioning that Islamic financing institutions are subject to Shariah (Islamic Law) regulations in addition to conforming to the conventional regulatory standards. This is further expected to ensure greater prudence and responsibility. Higher profits: Account holders under Islamic finance could expect higher profit from their investment as Islamic banks are required to share the entire net profit according to the agreed formula rather than just a portion of the profit, as is the conventional practice. Reduction in run-on-deposits: Banks using profit and loss sharing (PLS) to mobilize resources are less likely to face a sudden run on their deposits. More stable economic environment: The perspective of investments is long-term in comparison to short-term expectations of returns in conventional financial system – this may result in a more stable economic environment less dependent on business cycles. Less likelihood of flight of capital: Under Islamic finance, debt instruments that may be created through selling goods and services on credit are not readily tradable. This greatly eliminates the possibility of sudden mass movement of funds from one country to another. Reduction in speculative transactions: Examination of daily records of trading in financial markets vividly shows that institutional participants carry out huge speculative transactions. More often than not, such transactions are sources of instabilities. In contrast, Islamic banks and financial institutions are inherently prevented from carrying out such activities. As a result destabilizing speculations would be significantly curtailed in financial markets, although liquidity will remain with secondary market trading allowed in stocks or investment certificates. Reduction of inflationary pressures: Under Islamic economics the inflationary pressures would be reduced to a great extent, as over or under-supply of money with respect of supply of goods is not allowed (money directly linked to supply of goods in the economy). Reduction in unproductive use of borrowings: By eliminating unnecessary and excessive borrowing (borrowing beyond productive use), risk to lenders is reduced under PLS, as lending is directly related to project appraisals and feasibility. Automatic Shock-absorption: For banks involved in the equity-based system, Khan (1986) argues that the shocks to asset positions are immediately absorbed by changes in the values of shares held by depositors in the bank. This makes the real values of assets and liabilities of banks equal at all times, preventing banking crises. Nienhaus (1986) agrees with the argument. Guaranteed market of practicing Muslims. Islam being the fastest growing religion in the world further enhances the potential marketability of IBF instruments. Perceived Disadvantages of IBFs: With PLS, the role of the bank undergoes a change from being an intermediary trader of money, earning profits from the margin between lending and borrowing, to being an investing partner. The role of an investment bank brings in added costs: o Search cost resulting from the need to decide on the most profitable ventures. With an Islamic bank required to finance so many different kinds of businesses, acquiring skills in all of them may be immensely costly. o Monitoring costs resulting from the need to prevent mishandling of the venture and fraudulent means (including creative accounting) adopted by borrowers/ partners are in addition to those involved in conventional financial system. o Managing costs incurred because of its obligation as a partner in the PLS deals. Determination of mechanism for profit sharing in the short-term is difficult in a PLS system based on returns only from productive deployment of funds. In the absence of a standard mechanism for profit/ loss sharing (both for short-term as well as long-term), the possibility of exploitative contracts cannot be eliminated. Eliminating interest may reduce the propensity to save (with banks) or invest (considering the risk associated with returns), thus curtailing economic growth affecting employment (Pryor-1985), generation of wealth and its distribution. Of course, IBF proponents do not agree, as an opportunity for equitable sharing of wealth earned from productive activities could be enough stimulant for investors. Dispute settlement mechanism adds to the cost further, as the account put forward by the borrower (entrepreneur) may not be convincing enough for the banks or other investor partners. Fixed return of the conventional system has no such costs. A risk sharing proposition of IFBs and resulting absence of deposit insurance system leaves small investors in the risky avenues, particularly when the Islamic financial institution carries fraudulent intentions. Curtailing speculative activities in the secondary market would be extremely difficult resulting in the same risks and costs that the conventional financial systems carry. The mark-up system of most of the non-PLS schemes resembles the interest-based system to the extent of becoming indistinguishable, sometimes, and provides unscrupulous financiers opportunity to replicate the conventional system. Additional cost of supervision by the Sharia Board: Product development, its offering, agreements between counterparties, functioning of the IBF system, accounting, etc need to be Sharia compliant which needs certification by the Sharia Boards resulting in additional cost burden over the IBF Operators. Account holders under Islamic finance could expect higher profit from their investment as Islamic banks are required to share the entire net profit according to the agreed formula rather than just a portion of the profit, as is the conventional practice. Impediments to the growth of IBF: The impediments are being discussed in this paper after grouping them in seven broad categories: (1) Social Impediments, (2) Economic Impediments, (3) Financial Impediments, (4) Structural Impediments, (5) Institutional Impediments, (6) Political Impediments, Technological Impediments, and (7) Religious Impediments. 1. Social Impediments: Humans are undoubtedly the most important resource endowment for any country. Their development is the key to the competitiveness of any nation in any sphere. Even in the field of IBF, it is the level of human development in the promoter nations that will ultimately steer the IBF into a competitive arena. The Human Developed Index (HDI) available with the Human Development Report brought out by United Nations Development Programme (UNDP) is a composite index that measures achievements of a country in three basic parameters of human development (HDR 2003). These are: (i) longevity measured by life expectancy at birth, (ii) knowledge, measured by a combination of the adult literacy rate and the combined primary, secondary, and tertiary gross enrolment ratio, and (iii) standard of living, measured by GDP per capita. It is worthwhile, then, having a look (Figure-7) at the HDI of member nations of Organization of Islamic Countries (OIC), having some kind of IBF (as they are the promoters of IBF), in comparison with some of the world leaders (promoters of Conventional banking & financial system). Accumulation of human capital is an indicator of endogenous growth and is often used in empirical growth models. In most regressions, this variable turns out with a positive coefficient (Barro, 1991). The highest ranked country among the Islamic countries, in terms of HDI, is Brunei with a rank of 31, the second highest being Bahrain at 37, both of them with so small a population that their impact on the development of as important a system as IBF is not expected to be large. However, in terms of developing a financial market (and related systems, also in terms of IBF) the maximum effort has been made by Bahrain after Malaysia (Countries with 100% Islamic Financial system in place, i.e., Iran was placed at 106, Sudan at 138 and Pakistan had a rank of 144 in HDR of 2003). The development in the area is not likely to bear much fruit unless the promoter countries of IBF take giant steps towards developing their most important infrastructure element, i.e. the Human Resources. The initial successes may remain at superficial levels, and sustainability of growth and the challenges posed to the conventional financial system may remain feeble otherwise. At the moment, it poses a significant impediment to the growth of IBF. (a) Societal Impediments: The basic societal fabric builds the psyche of the masses. Coming out of this box, then, is not easy. After initial leadership over a long period, when the Islamic society ultimately lost its primacy to the Western world because of their consistent multidimensional development activities, it seems the members of the Islamic society also lost the motivation to win back. This has had a lasting impact on the society in all spheres that are cited next. Islamic Financial Institutions as part of this society have a strong barrier to scale, and along with its parent society has a backlog of many generations to clear. Social alienation, particularly in the wake of 11th September, may detract non-Muslims even further away from anything Islamic, and act as a major source of impediment. (b) Educational Impediments: Education is the backbone of any development, and is one of the most important reasons behind the lost glory of the Islamic society. The absence of Islamic Banking and Finance from the horizon, for centuries, is pointer enough towards lack of education and research. However, figure-8 provides the status of education in the Islamic World represented here by countries of the Organization of Islamic Countries (OIC) Countries that have IBFs in comparison with some of the world leaders. In terms of Adult literacy and Education Index (a measure that provides a composite indicator of the level of education), all the countries in the OIC sample lag behind the world leaders. In terms of Public Expenditure on education reported as percentage of respective GDPs, Saudi Arabia’s figure is encouraging as it leads the sample in this respect (except Yemen, whose ratio could be misleading as the GDP figure is too small) but also increased from 6.5% in 1990 to 9.5% during 1998-2000 (data refers to the year during this period for which it was available) which shows its recent commitment towards educating its citizen. But the scenario in all other countries even in this respect is no different from what is projected by the Adult literacy or the Education Index. The enrolment into educational institutions provides indication towards the future of education in a country. From the data available in the Human Development Report 2003 (HDR 2003) for 175 countries, we find that, among the OIC countries, only Guyana with 91% enrolment (although its overall HDI rank is a poor 92) was part of the top quartile of Combined primary, secondary and tertiary gross enrolment ratio, during the year 2000-01 compared with thirty (30) non-OIC members. The second quartile of ranks had twenty (20) OIC members while the third quartile had seventeen (17) and the last one had sixteen (16) of them. More than sixty-one percent (61%) OIC members fell in the lower half, compared with thirty-three percent (33%) of non-OIC members. The full list of 174 countries had 31% OIC members (54 numbers), whereas the lower half of the ranks, based on combined enrollment, had 45% of them. This presents a gloomy picture not only for the present but has repercussions for the foreseeable future. Only exponential growth in enrollments, now, can provide some hope of catching up with rest of the world. (c) Psychological Impediments: Psychological mindset needs to change for those who have been using the conventional banks and FIs as well as those for those who have been abstaining from them due to their anti-usurious beliefs. This tantamounts to a paradigm shift that is not easy to happen in a short period and it requires a lot of concerted effort on all fronts. On the other hand, psychological pressure on the Islamic institutions, in general, from fundamentalist organizations is keeping a check on declaring innovations that they could launch otherwise. 2. Economic Impediments: Size of the economy is an important indicator of the kind of flow passing through the banking and financial channels that the IBF have to chase. Considering that home banking and financial institutions have a clear advantage over foreign institutions, GDP should be a good indicator for development of these institutions. Looking at the GDP of the IBF promoter countries (our sample of OIC having some type of IBF) vis-à-vis rest of the world provides some clue as to why it may be difficult to promote the IBF in the era of opening economy where they have to compete with the world players too. The GDP of all the sample Islamic countries put together was less than 17% of the GDP of USA. When we add Japanese GDP to the GDP of USA, the sample Islamic countries do not reach even 12%. What influence an economy like USA or Japan can have on the prosperity of a financial system can be seen from this fact. The chart (Figure-9) therefore excludes USA, Japan, Germany, UK, France, China and Italy the top seven nations (constituting of 68.75% of World GDP, the world being represented, here, by 170 nations included in the HDR 2003) so that the remaining figures could be comparable. 3. Financial Impediments: a. Lack of active capital market: Equity is an excellent source of capital and organizations are likely to exhaust this source before exploring other means when planning to acquire, upgrade or produce technology to sell as a product. An absence of active capital market hinders technology intensive, high capital endeavors as well as any expansion of such projects. Since acquisition of technology is capital-intensive, the payback period for which is usually long, whereas bank borrowings seldom indulge in 100% financing or long-term financing, it is almost an impossible source for the start-ups, capital markets have proven to be the most successful and feasible means of financing. b. Lack of active debt market: The absence of secondary debt market in UAE is also a serious handicap for the investing community. As a result, debt issues become illiquid and costly. There is no scope of long term debt financing and with bank financing catering to short term or medium term finance, it acts as a deterrence to technology intensive ventures. At the same time, bank finance is mostly suitable for Working Capital financing rather than Capital Expenditure funding that is required for Technology-intensive ventures. c. Lack of Money Market: It is another major impediment leaving the market not just illiquid and costlier, but also leaves the government devoid of financing its expenses through a cheaper and liquid medium. d. Supportive Institutions for Venture Capital Financing: The strongest form of Islamic financing being the PLS forms of Mudarabah and Musharakah, Venture Capital financing (VCF) should have been the strongest in the countries that promote the IBFs, but the reality is surprisingly different. VCF needs institutional support in terms of an active network of financiers, entrepreneurs, technology promoting institutions like Private and Government R&D laboratories, Universities, Stock Exchanges and regulatory framework, etc. A Silicon Valley type network of alliances is required which is largely absent in the OIC. Some efforts in the direction of establishing technology parks and business incubators have started in some countries, but they have a long way to go. For individual small economies it may take a lot of time to achieve the critical mass, a strong need therefore is for the association of countries like the GCC or ASEAN to pool their resources. e. Lack of an active secondary market: Secondary markets are in the process of evolving and it will take time before they could really provide this market with the required liquidity. Secondary markets do not just become meeting points between the investors and the corporates, they become a benchmark for the health of the whole financial system. f. Lack of Business incubators: Incubators connect talent, technology, capital and know-how to leverage entrepreneurial talent, accelerate the development of new knowledge-based businesses and thus speed up the commercialization of new knowledge and technology. Although the system has started in some countries like UAE, it will take time in shaping up to a stage where it could be of real use. There is a strong relationship between the financial institutions and the business incubators. Business incubators cannot grow without financial support and growth in the sector means a growth in demand for the financial sector. Hence a lack of this system, in the Islamic countries, is an impediment to the growth of IBF system. 4. Structural Impediments: • Financial Engineering: The structuring of any new system that can pose real competition to an existing well-established system requires not just a robust structure to start with but a structure that supports innovation and continual improvement. Financial Engineering is an integral part of the financial service provider so that innovative products can be offered regularly to keep the depositors/ investors interest in the system alive. For a relative newcomer, with variants far less in number and the scope limited by restrictions by Sharia, Financial Engineering acquires all the more importance, more so because of the need to differentiate itself from the conventional products. • Lack of Islamic credentials of the product: The products based on Sharia Committee of banks do not necessarily satisfy the psyche of the masses unless backed by religious edicts and logical reasoning. Currently, all products except those based on Mudaraba and Musharaka principles leave doubts in the minds of people who want Sharia-compliant products. The penetration would have been much faster had these doubts been cleared. • The mark-up system of most of the non-PLS schemes resembles the interest-based system. As discussed above, if the stronger Islamic instruments based on PLS principles were dominant, the IBF system could attract more investors to its fold. The current scenario can be judged from the proportion of funds based on the two types of systems, namely PLS (stronger Islamic system) and the mark-up type systems (weaker Islamic system). It is obvious from Fig-10a that the depositors’ preference is for PLS type deposits (ready to take larger risk, and choose stronger Islamic products) whereas the banks are more risk averse and prefer to indulge in Mark-up type financing, as can be seen from Fig-10b. The Bahrain market’s position is even more tilted towards the non-PLS schemes for deposits. • Maturity mismatch: It can be seen from the maturity structure for the Bank Islam Malaysia Berhard (BIMB) that the maturities on the deposit side (Figure-11a) are totally different from the maturities of the financing side (Figure-11b). The situation of other IBFs in the world is not much different in terms of maturity-mismatch. This creates problems in the cash-flow matching, too. Deposits with maturity of more than one year being less than 1% is a clear sign of lack of investors’ confidence in the system. This may be as a result of other impediments under discussion. • Unclear product proposition or processes: Competing with the conventional counterpart in marketing abilities is not easy for a relatively new entrant like IBF. Lack of skills that help in the matter is currently an impediment that can be removed only through learning which is path-dependent and will take time to set in. • Additional risks: The PLS mode has its inherent risks similar to those of Venture Capital Financing or those faced by Equity financiers rather than the Debt financiers. In fact, PLS modes have in-built risk component wherein the financier has to share the risk of failure (loss) along with the entrepreneur (the borrower). Even the operational mode is more complex than the Conventional Debt financing, e.g., calculation of the share in profit and loss, feasibility and profitability studies of ventures being financed and their continuous monitoring and audit. Further, PLS modes of financing are not ted to collaterals, as do the conventional loans. Even no-PLS modes have unique risks, e.g., the Salam or Bai Salaf contracts expose them to commodity risk in addition to the credit risk. Similarly, the Ijara contracts differ from conventional lease contracts in that the leased assets have to be carried on the Balance Sheet of the Bank which limits the transferability of substantial risks and rewards to the lessee. The Finance by IBFs are mostly backed by tangible assets whose market value may not be constant over time. This volatility is in addition to the normal depreciation of assets. Basel Committee’s recommendation for Capital Adequacy does not incorporate this volatility. Another example is that of the Displaced Commercial Risk which endangers the competitiveness of IBFs in the long run. It is the pressure on the IBFs to pay higher returns than that it is obliged to (as per agreed terms) in order to make its returns more lucrative than the market returns, this involves paying the investors from its own share of profits which actually belonged to the IBFs’ sharehlders. Conventional financiers as well as the investors can use derivative instruments to hedge various types of risks to a great extent which is largely absent in IBF System, and this poses a major impediment to the growth of this system unless alternative comparable or better mechanisms are evolved. Lack of liquidity itself poses a major risk, both for the borrower as well as for the lender. For detailed insight into unique risks involved in Islamic Banking, the reader may refer Chapra & Khan (2000) and Hassan (2000). • Financially weak institution offering the product: In a market with very high prospects for growth there is always a rush for every Tom, Dick and Harry to adopt a me-too strategy and entering without having a look at their own credentials. Islamic Financial Institutions are weaker, in general, compared to the Conventional ones, and the rush to launch a new institution to grab the fast buck exposes the weakness further. For weaker institutions, it becomes much more difficult to convince customers on the viability of their products and services. The need for Sharia Compliance makes the task even more difficult. • Size of the IBFs: Most of the IBFs are extremely small in size compared with the multinational banks operating in their markets. All the IBF fund put together does not match the funds with Multinational banks like HSBC or Citibank. Size carries the power in the market, and smaller size of IBFs, at present, does prove to be a source of impediment in that respect. 5. Institutional Impediments: (a) Absence of a uniform regulatory framework: It is still evolving in some areas whereas in some other areas it is entirely absent. For example, the oldest of such institutions, AAOIFI had come out with only 16 financial accounting standards in the ten years since its inception in 1991 [October issue of the quarterly “Islamic Banking Hub” of Bahrain reports ‘43 standards and statements’ having been issued]. Formation of such organizations is taking time mainly because of difficulty in developing consensus among Islamic nations, and also because of difficulty in making the regulations compatible with the conventional regulations. (b) Lack of acceptance of existing Regulatory bodies: For example, even after twelve years of existence, the AAOIFI’s standards are mandatory only in Sudan, Bahrain and Jordan. Saudi Monetary Agency just ‘requests’ Saudi banks to seek guidance from the AAOIFI standards. Zaher and Hassan (2001) provide a comparative study on the salient features of Islamic Banking Supervisory Systems in 15 countries. (c) Absence of an Islamic Financial Network free from ribawee dealings: Networks play a major role in encouraging a system to grow and sustain the growth over longer terms, in the absence of which the growth may be lumpy in nature. Mutual cooperation in the networks helps pooling of resources and optimizing their exploitation to gain competitive advantage. What is seen today in the IBF world is some pockets of excellence in countries like Malaysia and Bahrain with a few institutions like Islamic Development Bank (IDB) playing some inspiring roles, but to bridge the huge gap with respect to the competitors in the conventional sector, a lot more is required a lot more quickly. (d) Absence of Islamic Central banks except in three countries (Pakistan, Sudan and Iran) that have converted their banking system to 100% Islamic. In other countries, even after twenty eight years of the modern Islamic Banking and Finance experience, dependence on the conventional systems of the Central banks is a good explanation why the growth in this sector with immense potential is not happening at the desired pace. (e) Clash with the mainstream regulations, particularly in the non-Islamic nations. Some examples: (i) the treatment of Ijara as Lease instead of mortgage, (ii) imposition of taxes despite the zakat, as an integral part of Islamic system, having the same functionality – amounting to double taxation effectively, (iii) regulatory fees – double payment due to the requirement to meet dual regulations. (f) Limited availability of risk management and analysis tools to hedge against volatility poses an additional burden for IBFs and results in maintaining higher levels of liquidity. (g) Lack of trained personnel: With the number of educational institutions and training centres catering to the need of this rapidly growing segment being limited, non-availability of qualified personnel who can analyse and manage portfolios is a major impediment. 6. Political Impediments: • Political pressure, in general, on Islamic institutions from the Western World, particularly in the wake of 11th September not only affects the system physically but it has an impact on the psyche. For, example, almost every financial transaction (particularly relating to an Islamic Institution) is being monitored. From UAE, no amount in excess of AED 2,500 can be repatriated without leaving a copy of identity which then goes into the system under scrutiny. • Lack of economic, military and political prowess of countries sponsoring the Islamic Financial system, only adds to the other weaknesses of the system. Freezing of accounts by the super-powers at short notices, and arbitrarily, is only a symbolic threat to this institution. A country’s environment conducive to investments boosts the growth of financial systems. An environment fraught with risks, on the contrary, impedes it. Many organizations try to capture countries’ environment to reflect this aspect. Freedom indices like “Index of Economic Freedom” developed by Heritage Foundation of USA, “Freedom in the World” by Freedom House (emphasis on Political and civil rights) of USA and “Economic Freedom of the World” by Frazer Institute of Canada capture the economic environment of countries. All of them point towards an overall lack of freedom in most of the OIC countries. Erb et. al. (1996) report country risk analysis being carried out by organizations like (a) Bank of America World Information Services, (b) Business Environment Risk Intelligence (BERI) S.A., (c) Control Risks Information Services (CRIS), (d) Economist Intelligence Unit (EIU), (e) Euromoney, (f) Institutional Investor, (g) Standard and Poor’s Rating Group, (h) Political Risk Services: International Country Risk Guide (ICRG), (i) Political Risk Services: CoplinO’Leary Rating System, (j) Moody’s Investor Services. They provide ratings that try to capture ratings based on qualitative and quantitative information into a single index. In the ICRG composite risk ratings for March 2003, the least risky OIC country (Brunei) was ranked six (6). The top twenty (20) least risky countries included only three OIC countries (Brunei, UAE and Kuwait) out of the forty-four (44) OIC countries for which ICRG provides country risk ratings. Top half had just fourteen (14) countries (32%) whereas the bottom half had thirty (30) countries (68%) of them. Table-5: ICRG composite risk ratings for 44 OIC member countries (March 2003) Top quartile 2nd quartile 3rd quartile Bottom quartile Total OIC countries Numbers 6 8 15 15 44 Percentage 14% 18% 34% 34% 100% The trend indicates that OIC member countries are considered as riskier than non-OIC countries for financial investments. This is also reflected in the incoming Foreign Direct Investment (FDI) in these countries, and suggests that the Governments and Institutions in these countries need to do a lot. 7. Technological Impediments: The Islamic world has not kept pace with the developments in rest of the world. Technology being the backbone of banking and financial system and the main driver of market power today, lagging behind in technology means backwardness in every sector of the economy. Various measures of Technological strength like Technological Achievement Index developed by UNDP is a composite index providing enough indication of the level of Technology in a country. The promoters of IBFs, Islamic countries, fall far behind the promoters of conventional financial system. Other indicators have developed by many other agencies and independent researchers point towards the same backwardness of the group. Indicator of new technology diffusion has been considered as ICT (Information and Communications Technology) by many agencies including UNDP, as this is what has revolutionized the integration of the world into a global village speeding up innovations by pooling talents together. Figure-13 represents a comparison between the Islamic world with a few of the world leaders. The picture is not much different from what is seen with other indicators. Except for United Arab Emirates (UAE), we hardly see any potential competitors to the countries promoting conventional systems of banking and finance. The best performer in Telephone Mainlines per thousand people from the Islamic world is placed at 31st position with a value of 259. Similarly, in terms of Internet Users per thousand people, the highest place for an Islamic Country goes to UAE at the 19th position (315 users), next best is Malaysia at the 26th place (273 users); in terms of Cellular penetration per thousand people, the highest ranked Islamic country is UAE at the 24th place with 616 users, but the next best falls at 32nd position with 460 users. From the chart in Figure-13, we can see that almost half of the Islamic countries have no significant place. This, then, poses a significant impediment to the developments in the area of IBF in the modern world driven by ICT. Technology Achievement Index (TAI), developed by United Nations Development Programme (UNDP), focuses on achievements of a country as a whole in the technological arena. The Index has been found to be relevant for the least developed countries to the same extent as for the most highly developed countries. The index is based upon the four elements: Technology creation: number of patents per capita and royalty/ license receipts per capita, Diffusion of recent innovation: internet users as percentage of population, Diffusion of old innovation: electricity and telephone consumption per capita (logged), Human skills: Mean years of schooling and gross enrolment in tertiary science and mathematics education (Desai-2001). Figure-14 compares OIC member countries for which the Index value is available (and UAE as per authors’ own calculations presented in the Appendix A0) with others. Archibugi and Coco (2004) have developed a New Indicator of Technological Capabilities for Developed and Developing Countries (ArCo). This index is an improvement upon the TAI and UNIDO’s Industrial Performance Scoreboard. This index takes into account more variables associated with technological change. Similar to TAI, three main components considered are: (a) the creation of technology, (b) the technological infrastructures and (c) the development of human skills. Eight sub-categories have also been included. ArCo also allows for comparisons between countries over time. Figure-14 provides a comparison in this respect. 8. Religious Impediments: For a detailed treatise on the effect of religion on economic or development activities, the reader is referred to Noland (2003) • Lack of consensus on issues: Developing a consensus on any religious matter has always been a difficult task. It becomes even more difficult when a matter as complex as the financial system comes up for discussion. Despite Quran being the most lucid religious book, creative minds tend to interpret the verses to their own benefit. Thus, just on the matter of interest there are many schools of thought, e.g., although the vast majority accepts that all forms of interest are un-Islamic and therefore prohibited, one group believes that only exploitative interest rates fall under the category of Riba, and prohibited (and what is the dividing line between the exploitative and the non-exploitative?), yet another group believes that despite the interest declared as un-Islamic, there is no need for a regulatory system to control dealings in interest and people should be free to follow whichever system suited them best, postponing God’s judgment for the Last Day (Khan-2000). • Absence of a central religious body with universal appeal or control only exacerbates the matter. Some even argue that religion must not be mixed with the daily lives of people. But Islam does not distinguish between the two. Although religious faith cannot be forced upon people, clear guidelines and regulatory mechanisms would help those who wish to become a part of Islamic way of life. • Divided House: Despite being the most promising religion capable of maintaining its structure through guaranteeing a non-modifiable holy book in the form of the Quran, the world of Islam is divided among sects some of which would like to oppose a proposal just for the sake of it. The flexibility in religious practices and the heterogeneity in the thoughtpatterns of groups could actually act as facilitator of innovation as can be witnessed in developments in Malaysia, Bahrain and UAE, but the same to diffuse to the rest of the Islamic world needs a change in paradigm that will need institutional support in limiting other impediments. • Rise of fundamentalism: Despite the tenets of Islam being strongly based upon “tolerance”, and “peace”, the shift from a tolerant society to an intolerant one (whatever be the reasons) is diverting the attention of Muslim youth away from acquiring knowledge and making best use of it to prosper in all aspects of human life. Recommendations to counter the impediments to the growth of IBFs: The recommendations obviously emerge from the above discussion on impediments. For the Islamic Financial System to exploit its competitive advantages for maximum benefits, it has to remove the impediments in its way. It must control the impact of those factors that are not directly under its control. Educational: The foremost and urgent requirement is the advancement in the educational arena supported ably by research work in all areas that can enrich the level of education. It is important to understand that the people of the OIC region have different socio-cultural and religious orientations from those in the Western world. Therefore, simply adopting the Western system may not be so useful. In fact, there is a real threat of an increase in the level of confusion in the minds of the students if the available systems are not adjusted to suit their special needs. The Western educational system has advanced so well that it cannot be dumped without jeopardizing the educational development of the young generation. Further, it is no use reinventing the wheel all over again. Therefore, a framework that can properly adapt the Western system of education to the local needs of the region in every respect (language, socio-cultural and religious requirements, educational level of parents, pace of learning, etc.) is preferable. Development of a workable and sustainable infrastructure requires a lot of time, effort, investment and will power. Coordination between countries with similar cultural background, in this respect, and pooling of their resources will help speed up the process of building the required infrastructure related to research & development of educational media as well as related to actual imparting of education to the needy. These efforts have to consider education at all levels. The system has to be attractive enough for the students to reduce their dropout ratio at all levels. Since dropout ratio is also tied up with the state of economy, efforts towards making the region’s economy stronger are required. Thus, we can visualize the strong inter-relationship between various aspects that need attention, all at the same time, in order to provide a recipe for success. Figure-15 tries to capture this interrelationship. Societal and Psychological: The social fabric needs to undergo deep introspection to trace the reasons behind the declining value systems followed by concerted efforts to build them back to their original levels where they were so attractive to the outside world that societies as a whole adopted them voluntarily. This requires a deep-rooted support from institutions and government agencies. At the psychological level, the confusion in the minds of the modern youth craving for modern ways of life and at the same time seeking solace in the roots have to be cleared. Islam is the only religion that clears the air of confusion through an authentic institution in the form of Quran by clearly recommending Muslims to pursue the worldly pleasures without compromising with the religious value system. Guidelines cannot be any clear, which means that there is something wrong with the educational, political, and socio-cultural systems prevalent today. Thus, there is a need for thorough overhaul. Economy: Economy is the backbone without which no system can stand on its own, and if it does seem to do so for a while, it cannot sustain for long. Therefore, there is a need for accelerating the growth in all spheres of economic activity, at a much faster pace than others, in order to overtake them soon. This needs efforts to come out of isolation, develop common markets among member countries, and make a combined effort towards capturing the global markets backed by competitive products manufactured indigenously. The countries will have to graduate from their trading paradigm to an all-encompassing capability-building paradigm. This needs cooperation at all levels for pooling of resources, but demands a lot of sacrifice from individual nations. Alternative options hardly exist. Financial: There is an urgent need for an active capital market, an active debt market, an Islamic money market, Supportive Institutions for Venture Capital Financing and business incubators, an active secondary market for Islamic debt instruments and Sharia-compliant equities, etc. to bring dynamism into the Islamic Financial Sector. Dynamic Financial Engineering is the need of the hour for a nascent financial sector with great potentials. It needs a lot of effort towards the development of a research base supported by an innovative educational and training system. Islamic credentials of financial products must be established in order to gain acceptability and remove any confusion from the minds of those craving for ethical or Islamic products. Clarity in product propositioning and processes is vital in this respect. Survival of a banking or financial system is contingent upon controlling the maturity mismatch in Islamic debt portfolio. Mechanisms need to be devised to contain additional risks inherent in the Islamic Financial systems. This needs additional efforts from Financial Engineers to develop Sharia-compliant hedging instruments. It also requires much better coordination between Sharia Boards and Financial Engineers across borders. Institutional: A uniform regulatory framework is an ideal proposition, but if complete uniformity is difficult to achieve in the short run, the existing regulatory frameworks must attempt to limit the mismatch to the minimum, and continue with their goal of having one such framework in the long run. This requires the coming together of not only the regulatory authorities but also the religious scholars on a common platform to sort out any differences that are natural to exist. These differences can be positively utilized to boost creativity and innovativeness. Lot of examples exist to take inspirations from. To start with, acceptance of existing Regulatory bodies is vital, and must be encouraged at all costs. A head-on clash with the mainstream regulations must be avoided, at least in the beginning, so that the Islamic financial instruments can be marketed in countries where there is little possibility of establishing an Islamic regulatory system in the near future. The wings of institutions must spread to reach every nook and corner of the world which requires an Islamic Financial Network to be established. Pooling of resources together, and establishment of an Islamic Central bank with its branches in every country will enhance the pace of development in the Islamic financial arena, provide strength to match (and later, supersede) the conventional counterparts, and encourage others to join the bandwagon. Religious: The whole basis of this sector of financial system is based on religious edicts. Therefore, it is essential that consensus on issues related to Sharia is established. Since it is not an easy task for intellectuals to reach an absolute consensus on all issues, a working mechanism needs to be established to limit misunderstandings to the minimum and exploit the differences to generate creativity and innovativeness. A central religious body may sound like a distant dream today, but a Central Sharia Board to deliberate on matters related only to Islamic Finance should not be so difficult after all, particularly when the ultimate goal is the same, and the means to reach those goals (Quran and Hadeeth) are the same. Finally, fundamentalism is the biggest enemy of anything Islamic. Although there is nothing wrong with the Islamic fundamentals, which are stronger than any other fundamentals, a lot of misunderstanding exists in the minds of not just the non-Muslims but also in the minds of Muslims. Lack of education is to blame. Islamic educational system is way behind other educational systems, and thus is unable to control the damage done to it by unscrupulous agents from within the community and beyond. It is not difficult for a religion whose fundamentals are built upon ‘peace’ and ‘patience’ to remove the tag of fundamentalism. Political: All the recommendations are dependent upon governmental and institutional support, which makes it extremely important to have a political system that is conducive to development of Islamic Financial system. Technological: There is no doubt in any mind that technology is an essential tool to gain competitive advantage in the modern world. It is an excellent medium to build capabilities and core competencies. Hence efforts are required not just towards use of latest technologies but also towards developing, on its own, compatible technologies and continuously upgrading them to keep ahead of the conventional counterparts. This needs emphasis on research & development activities and establishment of an infrastructure (soft as well as hard) base. Technology parks and establishment of a NASDAQ type stock exchange may not seem to be direct enablers for this purpose, but they would act as catalysts, and provide ingredients for long-term competitiveness. Latest Developments: Bahrain Monetary Authority (BMA)’s efforts in establishing Bahrain as a hub of Islamic Banking, the future support from the planned Bahrain Financial Harbour and the launch of Dubai International Financial Centre – launched to coincide with Dubai 2003 (IMF/ World Bank Board of Governors Meet – September 2003), the improved regulatory controls promised by IIFM, IIRA and IFSB are certainly important developments in the recent past. Challenges of developing and sustaining the market for Islamic finance is no easy task, and concerted efforts from many sides are required. The success of Dubai 2003 and the concurrent International Islamic Finance Forum, have been an exceptionally large morale booster for the Islamic Financial Community. The Forum marked coming together of the Institute for International Research (IIR), Dow Jones Indexes, the Saudi Economic & Development Company (SEDCO), iHilal Financial Services, Dubai Islamic Bank, Shariah Funds Inc. – a division of US-based Meyer Capital Partners, Oasis Global Management Company of Guernsey and South Africa and International Brunei Exchange, etc. Networks and alliances will decide the future of IBFs in a world where the conventional financial system is quite well entrenched. Some of the latest developments are briefly discussed hereunder: (i) Commodity Murabaha (Short-term Inter-bank deposit or placement): “Islamic Banking & Finance in the Kingdom of Bahrain”, a publication of the Bahrain Monetary Agency (BMA) provides the structure of Commodity Murababha contract in the Figure-16: The process of Commodity Murabaha involves a Conventioanal Bank as a commission agent whose payment to Broker A on the Value Date includes interest for the period between the buying of Commodity and the deferred paymnet date (Value Date). The commodity provides the asset backing for the short-term inter-bank deal between the Islamic Bank and the Conventional Bank. The deal between the two banks involves the Murabaha mark-up only, and therefore accepted as Islamic. But, the deal does promote payment of interest between the commodity broker and the conventional bank which raises questions about the validity of Islamic spirit in the contract. But, Bahraini banks have utilised this innovation extensively ‘to bridge the liquidity gap’. (ii) Islamic Credit Cards: Dubai Islamic Bank Visa card provides credit facilities and all the benefits of a normal credit card without any interest charges. So do other Islamic banks. This is one sector where it was difficult to imagine how the concept of interest-free credit could succeed. But, it gives us a picture of the level of convergence that is taking place. For a detailed discussion on these credit cards, the reader is referred to Darwish (2003). (iii) Islamic Interbank Money Market (IIMM): Islamic Interbank Money Market (IIMM) has been operative in Malaysia since October 1998. Liquid money market is an important issue in the Islamic Financial system. The main concern of financial experts is how to improve liquidity in the Islamic financial markets with the Islamic concept of money as not being able to generate any income on its own. Money has to be associated with goods or service to generate income. Making Money from Money is not permissible – that is the basic difference between money and commodity. Money (of the same denomination) is not held to be the subject matter of trade, like other commodities. It can only be used as a medium of exchange and a measure of value. If money is to be exchanged for money or it is borrowed, the payment on both sides must be equal, so that it is not used for trade in money itself. Money is just “potential capital”; to become real capital it must associate with other resources and undertake a productive activity. Islam recognizes the time value of money, but only when it acts as capital, not when it is “potential capital”. For the conventional banking system, the inter-bank money market serves as an efficient means to transform excess money into income by short-term placements or overnight lending. With modern technology assisting such activities almost eliminating geographical barriers, transaction time and costs, this trade has been on the rise helping achieve great deal of liquidity in the money market. Interest-based system through inter-bank deals not only helps tackle the asset-liability mismatch but also allows generation of income out of it. The Islamic banking system needs to tag some productive activity to every transaction which becomes an impossible task particularly for overnight trades. This means that Islamic banks have no motivation to deal in such trades making the money market highly illiquid. Although regulations can force a bank to part with its excess money to help another bank in need of cash without charging any interest on it. The Central banks can play an important role in this respect. Bank Negara Malaysia allows Malaysian Islamic banks to participate in the interbank money market in order to prevent illiquidity. It also participates in open market operations to stabilize the market. A recent mechanism introduced for accepting “Islamic interbank deposits under the liquidity management operations based on the Islamic concept” is termed as “Wadiah Yad Dhamanah (Guaranteed custody). Under this concept, the Islamic banking institutions will offer to deposit their excess funds with the Central Bank over a period of time, as agreed between both parties. As a custodian to the deposits, the Bank is not under obligation to promise any return to the depositors. However, based on the Central Bank’s discretion, a sum amount of money may be paid as hibah (gift) to the depositors on the maturity date.” The total volume of Islamic money market instruments traded in the IIMM reached RM32.7 billion in the year 2002. (iv) Islamic Bonds (Sukuk) Funds: The Islamic Bond market is becoming vibrant with successful large issues at international levels by Malaysia, UAE, Bahrain and IDB. Fig-4, showing growth of Malaysian Islamic Bond Market, provides us with a glimpse of growing Islamic bonds market. Recently, there has been a flurry of Bond issues by Islamic Financial Institutions, led by Bahrain and Malaysia. The news clip in Box-8 gives us an idea about the sincerity of the Bahraini Institutions in developing the primary as well as secondary Bond market. The biggest challenge for the bond market, of course, is acceptability of the fixed nature of return on these bonds by the Islamic scholars. The rental return on the Islamic leasing bonds (Ijara sukuk) is 60 basis points over the LIBOR for six months. Finding it difficult to understand how this bond was any different from a conventional bond, and whether this could be called an Islamic Bond at all, I posed the question to Islamic Financial Scholars on [email protected]. [the most successful virtual discussion forum related to Islamic principles and the IBFs, launched by Dr. Obaidullah of XIM, Bhubneshawar]. Numerous responses came to the author including one from Dr. M Shahid Ebrahim (four of his papers are cited in this dissertation). They tried to convince us that the bond does not lose its Islamic character just because it is pegged to the LIBOR. But why LIBOR? Simply because, they do not have an alternative. It will take time, but the growth rate of innovations is encouraging. The only fear is whether we are proceeding on the right path, or are we straying towards the path followed by our cousins, and falling into a trap? A general belief among the Islamic financiers is that any benchmark can be used, in calculating profit or rent, so that compliance with Shari’a principles is indicated. They think that as long as the document does not explicitly indicate that the profit or rent is LIBOR but only the benchmark for calculations is LIBOR, nobody would object. But, it will be too naïve a belief, as for many of us it is difficult to see a real financial difference between the conventional and Islamic financing when the actual amount paid by a customer under an Islamic financing has a link to LIBOR. Structure of Sukooks in Bahrain: (a) Al Salam Sukook (Figure-17): These Government securities are equivalent to Treasury bills, and the margin to the buyers (syndicate of Islamic Banks) is competitive with respect to returns from other conventional short-term money market instruments. The counterparty and the market risks involved are the sovereign risks, with Government acting as the seller and buyer of goods (Aluminium, in the case of Bahrain). (b) BMA Ijara Certificates: BMA issued these 5 year 5.25% rental return Islamic Leasing Certificates worth $100 million, on the 3rd September 2001, another first by an Islamic Central bank. The second sukook (Issue size of $ 70 million) with a maturity of 3 years, annual lease rental return of 4.52% (paid semiannually) was issued on 27th February 2002. Steps in an Islamic Leasing (Ijara) Sukook deal: (i) Central bank, as Mudarib, issues Participation Certificates (backed by Special Purpose Mudarabah) to the market and collect subscription money. (ii) The Mudarabah purchases specified tangible assets and Central Bank as Mudarib executes the deed. Property rights of the assets is transferred to the certificate holders with the possibility of further transferability of ownership and inherent benefits built-in. (iii) Purchased tangible assets are then leased out on the basis of Ijara-wa-iqtina to earn rental income. Mudarib executes the Ijara contract against collaterals & security from the lessee, and collects rentals. The certificate holders having the property rights on the assets are the lessors and thus entitled to the rental proceeds. (iv) Mudarib executes a contract for sale of the leased assets on maturity. Mudarabah is then liquidated and Sukook redeemed. The leased assets in this Sale deed may be purchased by the lessee or his agent, or any third party at a fixed price on maturity of Ijara. The property right to the asset is represented by the Ijara certificate. (v) The Participation Certificates can be traded in the secondary market during the validity of Mudarabah. So, how Islamic are these bonds? The debate on how far the fixed rentals/ guaranteed margins, or a fixed spread over LIBOR in the Islamic sukooks differ from the interest rates of the conventional bonds will continue. One simple test that can be applied to ascertain whether or not these returns are same as the interest rates is whether or not the asset or commodity backing is genuine. Asset or commodity backing can be considered as genuine if it satisfies the basic tenet of the Sharia, i.e., the transactions actually result in producing the asset or commodity at some level. The whole cycle of activity does result in some productive economic activity unless it is purely speculative, in any system whether conventional or Islamic. But, the test for Islamic sukook deal is whether the economic activity is related to the asset or commodity that is used as backing for the deals. A cursory look at the whole cycle leaves an impression that in the whole process, the asset or commodity acts like the hypothetical Eurodollar deposit used for the Eurodollar interest-rate futures traded on the Chicago Mercantile Exchange (CME) and the Singapore International Monetary Exchange (SIMEX). As in the case of the futures, the underlying asset may never actually change hands in the sukook deals. But jumping to conclusions so easily would be negating all the efforts put into these excellent innovations accepted by the Sharia Supervisory Boards. The question whether or not the asset or commodity backing is genuine may not be answered easily, but what about the fixedness of returns guaranteed by these bonds? The price of an asset or commodity widely fluctuates in the market due to supply and demand factors in case perfect competition exists. In such a scenario, the prices can be predicted in the short run based upon the factors that govern the demand and supply. In case speculative players dominate the market or in case where cartels exist, which is the case in many product/ commodity markets (particularly in Aluminium) of the contemporary world, how can the prices be guaranteed? If the future prices cannot be guaranteed, how can a return from a deal in such products/ projects/ commodities be guaranteed? Is it not speculation? This is one of the arguments that form the basis for prohibiting a guaranteed return to investors. The discussion on the BMA’s Al Salam Sukooks (described above) may yield interesting insights. It provides us with some explanation why the Ijara based bonds are replacing the Salam based bonds. Under Ijara concept, fixing a rent in advance may not be considered unIslamic whereas in Al Salam concept, a fixed rate of return may be termed speculative and thus may not be allowed. Considering the fact that BMA’s Al Salam Sukooks are based on Aluminium as the underlying commodity, let us examine the fluctuation in the price of Aluminium during last five years. With Aluminium prices being so volatile, and guided by large international players, can the sovereign guarantee be sustainable? It is not difficult to conclude from the guaranteed rate offerings tagged to the recent bond issues that the necessity to provide the fixed returns as competitive as the returns from conventional securities of similar maturity may actually be guiding them instead of any forecasting methodologies. This may be the main reason why some scholars have termed only two modes of transactions, Mudarabah and Musharakah as strongly Islamic (Siddiqui-1982, Mohsin-1982, Qureshi-1984, Qureshi-1985, Chapra-1982). Khan and Mirakhor (1987) argue on the same line and suggest “all other modes of operations … are recommended only in cases where risk-return sharing (i.e., Mudarabah and Musharakah) cannot be implemented.” The size of the disposable funds owned by high networth Arabs is estimated to exceed $11 trillion. After 11th September 2001, in particular, there has been a rush to tap this fund which used to be mostly invested in the US markets. In this mad rush, is it a possibility that Islamic Shariah principles are being kept aside or backdoors are being invented in the name of innovation? A more transparent system will provide better explanation apart from being helpful in clearing doubts from investor’s minds. (v) Global Bond Market Growth: As reported by failaka.com, USD180bn worth of funds were available for investment in Islamic-approved holdings worldwide as of mid-2002, an amount anticipated to grow by 15% YoY. Some indications of things to come are provided by the news item in Box-8. Some more developments are described below. (vi) When Issue (WI): Players in the Islamic money market of Malaysia are allowed to perform WI transactions prior to the issuance date of the Islamic securities. WI is a preissuance transaction of debt securities that will be issued in the Islamic debt market to facilitate players in estimating the appropriate price to bid on the issuance date. The Council viewed that the WI transaction is allowed based on the permissibility to promise for sale and purchase transactions …… Bank Negara. (vii) Sell and Buy Back Agreement (SBBA): The SBBA transaction is permissible, in Malaysia, as long as it is an outright sale and purchase and enforced by two different contracts for each transaction. In addition, compensation can only be effected on the party who defaulted on his promise …… Bank Negara. (viii) Collateralised Borrowing: The National Shariah Advisory Council of Malaysia approved the proposal to introduce the collateral borrowing transaction in the Islamic money market based on the principle of Rahnu. The transaction is an alternative to the SBBA and the loan extended is based on the concept of Qardh. Although there is no profit element being introduced in the transaction, the banks are expected to prefer this transaction due to its simplicity and its mutual-help feature …… Bank Negara. (ix) Islamic Securitization: Islamic Securitization in a wider sense is defined as the process of pooling assets, packaging them into securities, and making them marketable to investors. In Islamic finance, the concept of securitization is in consonance with what is known as Taskeek in Arabic, which is a process of dividing ownership of tangible assets, usufructs, or both, into units of equal value and issuing securities as per their value. The underlying assets, contracts, and payment mechanism, while being commercially viable must be aligned with the requirements of Sharia. By and large, the Sharia treatment of sukuk is similar to an equity security where shares are evidence of ownership in a going concern. Islamic Development Bank’s recent debut issue of US$400 million Islamic sukuks received overwhelming response from both conventional and Islamic investors around the world. The issue size originally targeted at US$300 million was increased based on strong demand for the high quality instrument. The issue is unique in almost all its aspects ranging from the issuer, the guarantor, the arranger and more importantly the innovative structure of the deal, which is a combination of securitization of Ijarah, Mudaraba and Istisna contracts with a minimum of 51% on the Ijarah assets. It should be noted that although some of these securitized financial instruments have been generally accepted as being in compliance with Islamic principles so that they can be traded in the secondary market, the negotiability of certain others still remain controversial due to their legal acceptability or compliance with Sharia. For instance, Murabaha is a transaction, which cannot be securitized independently to create a negotiable instrument to be traded in the secondary market. The certificate representing a monetary obligation from a third party or dayn arising out of a Murabaha transaction can be traded at face value and any difference in value will be tantamount to riba. However, if the security represents a mixed portfolio consisting of a number of transactions like Musharaka, leasing and Murabaha, then this portfolio may issue negotiable certificates, subject to certain conditions. (a) Securitization of Mudaraba Bonds: AAOIFI’s Sharia standard No-18 defines the arrangement of Mudaraba bonds as below: “The issuer of the certificates is the Mudarib, the subscribers are the capital owners and the realized funds are the Mudaraba capital. The certificate holders own the assets of Mudaraba operation and profit share as per agreement. The certificate holders, being the capital providers, bear the loss, if any.” Mudaraba means an agreement between two parties where one partner gives money to another for investing in a commercial enterprise. The investment comes from the first partner who is called “Rab-ul-Maal” while the management and work is the exclusive responsibility of the other, who is called “Mudarib” and the profits generated are shared in a predetermined ratio. The objects of a Mudaraba are restricted to only such businesses as are permitted under the Sharia. The concept of mudaraba is akin to revenue bond financing in the conventional system. Revenue bonds are generally backed by revenue generated mainly for public sector projects funded by the bond issue. The bondholders are solely dependent on the revenue generated by the project being financed and in the event of non-performance of the project, there is no recourse to the local government’s general treasury fund. Likewise, the Mudaraba bonds give its owner the right to receive capital at the time the bonds are liquidated, and an annual proportion of the realized profits in accordance with the predetermined profit sharing ratio. The Mudaraba bonds can be instrumental in the process of development financing because it is related to the profitability of the projects. (b) Securitization of Musharaka: AAOIFI’s Sharia standard No 18 defines the arrangement of Musharaka bonds as follows: “The issuer of the certificates is the inviter to a partnership in a specific project or activity. The subscribers are the partners in the Musharka contract. The realized funds are the share contribution of the subscribers in the Musharaka capital. The certificate holders own the assets of partnership and are entitled to profit, if any”. Musharaka bonds are relatively similar to Mudaraba bonds. The only major difference is that the intermediary-party will be a partner of the group of subscribers represented by a body of Musharaka bondholders in a way similar to a joint stock company while the Mudaraba capital is only from one party. In securitizing a Musharaka arrangement, every subscriber can be given a participation certificate, which represents his proportionate ownership in the assets of the venture or project for which financing is being raised. Subsequent to the acquisition of substantial non-liquid assets, these Musharaka certificates can be treated as negotiable instruments and can be bought and sold in the secondary market. There is a strong Sharia opinion against the trading of these certificates if the underlying assets of the Musharaka are in liquid form (i.e. in the shape of cash or receivables or advances due from others). (c) Securitization of Ijarah: Ijarah sukuks have aspects in common with conventional assetbacked securities and are of particular interest to a broad range of investors representing both the conventional and Islamic financial communities. Benchmark for lease rentals can be based on a conventional index such as US$ LIBOR which can be either fixed or floating. Since Ijarah sukuks evidence the undivided pro-rata ownership of the underlying leased asset, it could be freely tradable at par, premium or discount. Such flexibilities can allow Ijarah sukuks to be priced at par with their conventional counterparts. A case in point is the issue of US$ 600 million 5-year floating rate trust Ijarah certificates by the Malaysian government in 2002. The issue was priced flat to the country’s conventional credit curve and attracted no premium despite being a new deal structure. Ijarah is a contract, according to which a party purchases and leases out equipment required by the client for a rental fee. The duration of the rental and the fee are agreed in advance and ownership of the asset remains with the lessor. The lessor in Ijarah owns the leased assets, he can sell the asset, in whole or in part, to a third party who may purchase it and may replace the seller in the rights and obligations of the lessor, with regard to the purchased part of the asset. Typically, the issuer of the Ijarah certificates acquire assets, transfer its ownership to a special purpose vehicle (SPV, then sell investors shares in the SPV. The returns on the shares, which come from leasing out the assets owned by the SPV, could be either fixed or a floater. Thus, the expected returns are fixed and can be treated as predictable as the coupon on a conventional bond. A third party can also guarantee rental payments and since the yield is predetermined, the underlying assets are tangible and secured, the Ijarah certificates can then be traded in the secondary market. The securitisation of leasing transactions and the creation of tradable, liquid investment funds have facilitated Islamic secondary market, which is instrumental in alleviating the liquidity constraints of Islamic financial institutions. (x) Islamic hedge fund: At the outset of September 2003, the Saudi Economic and Development Company (SEDCO) launched the world’s first-ever hedge fund compliant with Islamic Sharia’h law, in conjunction with Saudi Arabian financial services group Permal. Fund managers Fostman-Leff of New York were responsible for managing the fund which were expected to start doing business by early October 2003 (as per their press release). SEDCO has been examining possible alternatives to prohibited derivates. One such alternative is based on an innovative concept like “stipulated options” – a buyer makes an advanced partial payment for deferred delivery of a product, and if he decides not to buy this later, the seller keeps the advance – closest analogy to an option in IBF system. Another such alternative likely to be used by them is the old concept of Al Salam, where one sells a commodity to a buyer against full up-front payment for delivery at a future date. An investor can hedge his downside risk by selling stocks to be delivered later, receive payment in advance for productive use without bearing the price risk. SEDCO claims that the fund is fully transparent to investors. An existing Sharia’h compliant offer from this group is a 5-year medium-term note with 100% principal protection provided by Societe Generale. Rating Agencies: Do we need separate rating agencies for the IBFs? Perhaps, yes. We have seen that the system in its purest form is entirely different from its conventional counterpart, hence the rating methodology has to be uniquely suited to the IFBs. This will be important for inter-bank dealings. Credit ratings for customers may not be different simply because the target customers are mostly the same for both. However, project evaluation becomes an important and integral role for pure IBFs based mainly on the PLS principles. This may require specialized technical skills largely absent in the present lot of banks the world over. Apart from the evaluation of projects, its monitoring during execution and participation in managing the project may be important to avoid false reporting by the other party. In an age where creative accounting is considered as creativity rather than sin, costs to the IBFs may escalate beyond expectations. On the other hand, the benefits resulting from IBFs are likely to far exceed the costs. IDB initiated a scheme to establish an Islamic Rating Agency recently called the “International Islamic Rating Agency”(IIRA) to be incorporated as a profit-making independent company. IBFs will hold a total of 35% of the capital, the IDB 15%, and 50% will be held by rating agencies. A working group comprising of representatives from IDB, AAOIFI, selected Islamic banks and Malaysian Rating Corporation (MARC) has been formed. Basel II Implications: The Basel Committee guidelines do not specifically focus on the Islamic Banking and Financial System, but still the adequacy norms and risk management are areas that affect them as much as they affect the conventional banks. The BMA has developed a framework, known as Prudential Information and Regulations for Islamic Banks (PIRI) which takes into consideration standards developed by AOOFIFI and the Basel Committee’s various guidelines. When the International Islamic Financial Market, being developed in cooperation with the Islamic Development Bank and other central banks, will be operational the need to comply with the Basel II regulations would be felt even more. The main problem for the IBF, today, even after more than twenty eight years in operation is in defining what they are all about, i.e., the confusion as to whether they are banks, mutual funds, asset managers, or investment funds. Although some of the regimes regulating Islamic financial institutions are already very stringent, and some like Bahrain which may claim to be over-regulated as they have started applying Basel II in terms of liquidity risk issues. Some implications that can be more easily visualized are as follows: – Cost implications (mainly for estimation of new risk components like operational risks). Majority of Islamic banks have no such liberty in investing a large amount for that purpose. Speculations are rife that banks will need to invest additional amounts (in millions) to comply with Basel II. – CAR implications: There is much debate at present amongst western banks if Basel II will be implemented or not. This is because of the cost implication to implement operational risk monitoring which may cost billions. There are views that in western countries it may likely improve the capital risk weighting for Islamic products. Products like mortgages already benefit from Murabaha structure in terms of capital risk weighting (50%) but Murabaha is not considered efficient in terms of early repayment, or determining a profit amount etc. Ijara is the preferred mode at present for developing mortgage products, but it attracts 100% capital risk weighting. One could argue that if Islamic mortgages based on Ijara are more efficient, they should attract less capital risk weighting. The Basel committee is unlikely to allow lesser risk weighting for lease across the board, as all banks will rush to reap benefits from Islamic leases. Modaraba and Musharika will continue to still attract 100% capital risk weighting. Important Institutions supporting the development of IBF: Institute of Islamic Banking and Insurance: Dar Al-Maal Al-Islami (DMI): HQ in Geneva Al-Baraka: HQ in Jeddah. IIBI Established in 1991 Publications: (a) International Directory of Islamic Banks and Institutions 2000, (b) International Directory of Islamic Insurance 2000 AAOIFI: The Accounting and Auditing Organization for Islamic Financial Institutions is an Islamic international autonomous non-profit making corporate body that prepares accounting, auditing, governance, ethics and Shari’a standards for Islamic financial institutions. Managed funds: over $200 billion Agreement of Association signed by Islamic financial institutions on 26 February, 1990 in Algiers. AAOIFI was registered on 11 Ramadan 1411 corresponding to 27 March, 1991 in the State of Bahrain. The International Islamic Rating Agency The Islamic Financial Services Board The International Islamic Financial Market, and The Liquidity Management Center The Dow Jones Islamic Market Indexes: Dow Jones Islamic Market World Index Dow Jones Islamic Market Titans 100 Index Dow Jones Islamic Market Asia/Pacific Index Dow Jones Islamic Market Europe Index Dow Jones Islamic Market Canada Index Dow Jones Islamic Market Japan Index Dow Jones Islamic Market U.K. Index Dow Jones Islamic Market U.S. Index Dow Jones Islamic Market Technology Index Some statistics related to the above indices are presented in Appendix-D FTSE Global Islamic Index Series: The FTSE Global Islamic Index Series (GIIS) are equity benchmark indices targeted at those who wish to invest according to Islamic investment guidelines. Islamic investing is growing by 12-15% per annum, as more and more international investment bodies stake an interest in this specialist service. The FTSE Global Islamic Index Series addresses this demand by creating a standard for applicable Islamic equity investing. Initially pioneered in January 1999 by The International Investor (TII) and calculated by FTSE, the series was the first truly global Islamic Index series. It was designed to track the performance of leading publicly traded companies whose activities are consistent with Islamic Sharia principles. Due to its success over the past months, the Global Islamic Index Series will now be incorporated into the FTSE family of indices. Using the FTSE World Index as the universe, TII applies Sharia principles, following guidelines provided by its Fatwa and Sharia Supervisory Committee to rule out those companies whose business activities are incompatible with the Islamic law. After removing companies with unacceptable core business activities, the remaining list is tested by a financial-ratio “filter”, the purpose of which is to remove companies with an unacceptable debt ratio. Finally, any “tainted percentage” of any cash dividend received by a company which is not in accordance with Sharia law is computed, and should be donated to a proper charity. Sub-component Indices: FTSE Americas Islamic Index FTSE Europe Islamic Index FTSE Pacific Basin Islamic Index FTSE South Africa Islamic Index Sector Screens: By way of guidance, stocks whose core activities are or are related to the following are excluded: a) banking or any other interest related activity b) alcohol c) tobacco d) gaming e) insurance f) pork production, packaging and processing or any other activity related to pork g) activities deemed offensive to the principles of Islam h) sectors / companies significantly affected by the above The companies that have incompatible lines of business are removed from the “universe” of stocks included in the FTSE World Index. Companies classified in other industry groups may also be excluded if deemed to have a material ownership in, or revenues from, prohibited business activities. Financial Screen: Debt ratio: (exclude companies) if Interest-Bearing Debt divided by Assets is equal to or greater than 1/3 or 33.33%. Companies that pass these screens are generally eligible for inclusion in the FTSE Global Islamic indices’ investable universe. Dividend Cleansing: “Tainted dividend” receipts relate to the portion, if any, of a dividend paid by a constituent company that has been determined to be attributable to activities that are not in accordance with Islamic Sharia principles and therefore should be donated to a proper charity or charities. Sharia Scholars: The screening criteria of the FTSE Global Islamic range of indices is supported by the credibility of TII’s Fatwa and Sharia Supervisory Committee (Sharia Board). Conclusion: Dr. Ebrahim (1999) argues that the modes of financing selected should not only avoid riba, gharar and maysir but also be economically efficient. In search of this economic efficiency, Islamic Banks now participate in a wide financing domain stretching from simple Sharia-compliant retail products to highly complex structured finance and large-scale project lending. Muslims (and non-Muslims) can now obtain Islamic credit cards, can insure themselves and their property Islamically, can invest on line in Islamic funds can track their investments Islamically and can even get a Sharia-compliant mortgage from a US firm. Islamic banks are now better positioned than ever to participate not only in large scale corporate financing but also more complex wholesale transactions such as syndications and securitization. Bahrain’s recent $255mn al-Hidd power financing is a case in point. Lead arranged by BNP Paribas, HSBC Amanah, Bank of Bahrain and Kuwait and Bank of Tokyo Mitsubishi, the $55mn Islamic tranche arranged by the Saudi-based Islamic Development Bank and Kuwait Finance House was hailed as a landmark in regional power finance. KFH had earlier helped set an inter-creditor agreement precedent when it secured in 1995 a $200mn Islamic tranche for Kuwait’s $1.2bn Equate petrochemical project. This convergence is evidence of how the Islamic financial sector is part of the globalizing trend and not rejectionist. In essence, Islamic finance offers another set of well-understood tools within the understood frameworks of modern banking and finance. – Abdulkader Thomas At first glance, it looks like many techniques that the interest-free banks are practising are neither in full conformity with the spirit of Shari’ah nor practicable in the case of large banks (or the entire banking system). Moreover, they seem to have failed to do away with undesirable aspects of interest, and thus, they seem to have retained what an Islamic bank should eliminate. This is because these institutions have attempted to start from where the conventional banking system has left. The innovations, however genuine and worthy, seem to be swamped within the muddle of well-developed and widely accepted financial system of conventional banking and finance. For a commoner, it becomes very difficult to distinguish the Islamic instruments from the conventional ones. The solution lies not in changing the look or personality (face value) of the conventional instruments – which is the primary reason for all the confusion – but in evolving afresh. We feel that the basic infrastructure necessary for building an entirely new structure for the Islamic Financial System is not just available but is quite strong already. What is needed at this moment is an out-of-the-box thinking even if sounds like reinventing the wheel. This will require a bold initiative towards a total unwinding of the current system and a lot of unlearning before we could even conceive of a reasonable amount of success in clearing the clouds of ambiguity. Even if one concludes that the resource available with Islamic Financial System is peanuts compared to its conventional counterpart, there is no need to despair. The ultimate winner is the one who dares to dream. What is required at the moment is the “strategy as stretch and leverage” that Hamel and Prahlad (1993) advises. Haron et al (1994) who pioneered the research on bank patronage in Malaysia found that almost 100 percent of Muslims and 75% non-Muslims were aware of the existence of Islamic banks. While applying Haron et al’s study, Gerrard and Cunningham (1997) found that just like their Malaysian counterparts, Singaporean Muslims were more aware of the existence of Islamic banking than the non-Muslims. Similarly, this study found no evidence of Muslims and non-Muslims differing in their bank’s selection criteria. In another study wherein the respondents were individuals who had financial decision-making authority in the Malaysian corporate sectors, and 80% of which were non-muslims, Ahmad & Sudin Haron found that more than 55 per cent perceived that both religion and economics were the patronage factors in this system. About 50 percent of the respondents believed that Islamic banking products and services had a good potential to be accepted by customers. About 75 per cent indicated that Islamic banks in Malaysia however had not done enough marketing in promoting their products and services to corporate customers. Almost half of the individuals surveyed believed that the Islamic banking system had a good potential as an alternative to the conventional system. The future is definitely bright for the Islamic banking and finance. They have already established a niche by roping in the Muslim community. And their appeal is expanding, particularly with the number of proponents of Ethical Banking and Finance on the rise in other communities. 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Web Sites: http://www.ajif.org , American Journal of Islamic Finance http://www.hifip.harvard.edu, Harvard Islamic Finance Information Program http://www.aaoifi.com, The Accounting and Auditing Organization for Islamic Financial Institutions http://www.ihilal.com: online distributor of Islamic financial products and services http://www.islamic-banking.com, The Institute of Islamic Banking and Insurance http://www.islamic-finance.net/, Islamic Business and Finance Network http://www.failaka.com http://www.fcsdubai.com/principles.htm http://www.cbuae.gov.ae, Central Bank of UAE http://www.alrajhibank.com.sa/historyandgrowth.htm http://www.khaleejtimes.com http://www.gulfnews.com http://www.islamic-banking.com/ibanking/ifi.php The Dow Jones Islamic Market Indexes (http://www.djindexes.com/jsp/islamicMarketOverView.jsp) AAOIFI (http://www.aaoifi.com/) http://www.failaka.com http://www.fcsdubai.com/principles.htm FTSE Global Islamic Index Series, http://www.ftse.com/ebox/TII.html APENDIX A0: Estimation of TAI for UAE Estimation of TAI for UAE to compare with TAI values of other countries in HDR (2001) is shown as below: (A) Calculation of the Technology Creation Index: Patent Index = (0.990 – 0)/ (994 – 0) ………………. (1999 figure taken from USPO for number of Patents) = 0.001 Royalty and Licence fee Index = 0 (assumed to be zero) Technology Creation Index = (0.000 + 0.001)/ 2 = 0.0005 (B) Calculation of Diffusion of Recent Innovations Index: Internet Host Index = (20.9 – 0.0)/ (232.4 – 0.0) = 0.090 High and Medium Technology Export Index (ERF-2002) = (16.0 – 0.0)/ (80.8 – 0.0) = 0.198 Diffusion of Recent Innovations Index =( 0.090 + 0.198)/ 2 = 0.288 (C) Calculation of Diffusion of old innovations Index: Telephony Index = [log {407 (Tel mainlines per 1000 people) + 347 (Cellular mobiles per 1000 people)} – log(1)]/ [log(901)-log(1)] = 0.974 Electricity Index = 1, because its consumption of 9,892 KWH per capita is above the goalpost (6,969) Diffusion of old innovations Index = (0.974 + 1.000)/ 2 = 0.987 (D) Calculation of the Human Skills Index: Mean Years of Schooling Index = (10.5 – 0.8)/ (12.0 – 0.8) years: Expected Years of schooling from ERF (2002) = 0.866 Gross Tertiary Science Enrolment Index = (3.2 – 0.1)/ (27.4 – 0.1) = 0.114 Human Skills Index = 0.980/ 2 = 0.490 Technology Achievement Index (TAI ) = (0.0005 + 0.288 + 0.987 + 0.490) / 4 = 0.441 APPENDIX-A: Competitiveness of Banking Sector In Case of Opening Local Markets to GCC Banks (Kuwait Foundation For Advancement of Sciences) Ghanem, AlMahmeed, AlMejren, ElSakka, Paul, Al MASARAF, (the official journal of the Union of Kuwaiti Banks, Issue no. 2, 2002). 1. Mudaraba and Murabaha services came at the forefront of Islamic banking services. 2. The Islamic financial institutions are seen as a strong competitor for the banks in Kuwait, now and in the future. Other banks in the GCC countries share the same view with the Kuwaiti banks. Recommendations of the Study By reviewing the weaknesses of the Kuwaiti banks compared to other GCC banks, we find that the Kuwaiti banks need to take the following actions: – Explore methods to increase the return on their assets up to the levels prevailing at nonKuwaiti banks. – Increase the level of expenditure on training and human resources development. – Increase the size of investment in information technology and communications up to the levels prevailing at non-Kuwaiti banks. – Increase the level of experience for national manpower. – Increase the awareness as to the international financial developments and their local implications. – Enhance their confidence in the ability to face foreign competition, and upgrade their readiness to meet the challenges of GCC banks or international banks. – Exploit the opportunities offered by the GCC agreement on the liberalization of banking services. – Increase the attention given to the evaluation and review of training activities, and ensure the good quality of the training provided to their staff , so as to more positively reflect on their performance. – Create more stability for staff in order to avoid the adverse implications of the high turnover. – Improve staff productivity. – Study the problem of staff absence and its reasons and treat it more seriously. – Allocate more financial resources to enhance staff flexibility and reinforce their ability to work as a team. – Periodic review of benefits and incentives, so as to ensure staff satisfaction and consistency of those systems with the standards prevailing in the industry. – Improve annual planning and control systems. – Improve FX and foreign operations risks management. – Develop an IT strategy. – Upgrade capital adequacy ratio to be in line with the levels prevailing at other GCC banks. – Consider the opportunities of merging with other banks, whether local, Gulf or international. – Study the opportunities of forming unions with other banks, whether local, Gulf or international. – Adopt plans for diversifying products and markets in line with other GCC banks, and enhance the readiness for expansion in new markets. – Adopt more intensive plans for automating banking operations in line with other GCC banks. – Reinforce relationships with the segments of the general public and multi- national companies, likewise Qatari and Omani banks. – Strengthen their presence in the areas of advisory and investment services, such as money markets, capital markets, futures, options, investment portfolios management, private funds management and investment advisory services. – Reinforce their Islamic banking services in the areas of Murabaha, Mudaraba, Musharaka and Istisna. – Start to use the Smart Cards, and expand in the areas of issuing certificates of deposits and rendering brokerage services, because their share of these services is the least among GCC banks. – Activate the role of foreign exchange services and certificates of deposits in revenues generation, as these services rank the first at Omani banks and the second at Saudi and UAE banks. – Expand services delivery through the internet, likewise the banks in UAE. – Enhance the role of Musharaka and Istisna services as sources of income. – Expand in advisory and investment services in the manner mentioned above, as such services represent an important source of income, particularly investment advisory services and investment portfolios management. There is also a need for expansion in futures and options. – Expansion in insurance services to strengthen the role of these services as a source of income. – Establish and enhance the presence in GCC and Arab markets in general, because the results of the study indicated that the strength of Kuwaiti banks association with their customers in GCC markets is the weakest, with the exception of Omani banks, and their association with their customers in Arab markets is also the weakest, with the exception of Omani and UAE banks. APPENDIX-B: Islamic Financial Institutions in the World (Source: Islamic Institute of Banking and Insurance; http://www.islamic-banking.com/ibanking/ifi_list.php#albania) 1. Albania a. Arab Albanian Islamic Bank, Tirana 2. Algeria a. Banque Albaraka D’Algerie, Algiers 3. Australia a. MCCA (Muslim Community Co-operative, Australia) b. MCCU (Muslim Community Credit Union) 4. Bahamas a. Akida Islamic Bank International Ltd b. Bank Al Taqwa Ltd c. Dar al Mal al Islami Trust, Nassau d. Islamic Investment Company of the Gulf Ltd, Nassau. e. Istishara Consulting Trust, Bahamas f. Massraf Faysal Islamic Bank & Trust, Bahamas Ltd. 5. Bahrain a. ABC Investment & Services Co EC b. Al Amin Co. for Securities and Investment Funds c. Albaraka Islamic Investment Bank d. Arab Islamic Bank E.C e. Bahrain Islamic Bank Bsc. f. Bahrain Islamic Investment Co. Bsc. Closed g. Bahrain Institute of Banking & Finance h. Bank Melli Iran i. Chase Manhattan Bank N.A. j. Citi Islamic Investment Bank (Citicorp) k. Dallah Albaraka (Europe) Ltd l. Dallah Albarakah (Ireland) Ltd m. Faysal Investment Bank of Bahrain n. Faysal Islamic Bank of Bahrain (Massraf Faisal Al Islami) o. Gulf International Bank BSC p. Islamic Investment Company of the Gulf q. Islamic Trading Company r. ABC Islamic Bank s. ABN Amro Bank t. Deutsche Bank Rep office u. Investors Bank v. TAIB Bank of Bahrain w. Turk Gulf Merchant Bank x. Bahrain Monetary Agency y. Shamil Bank z. Khaleej Investment Company aa. First Islamic Investment Bank 6. Bangladesh a. Albaraka Bangladesh Ltd (Dallah Al Baraka Group), Dhaka b. Islami Bank Bangladesh Ltd, Dhaka c. Faisal Islamic Bank 7. British Virgin Islands a. Ibn Khaldoun International Equity Fund Ltd 8. Brunei a. Islamic Bank of Brunei Berhad b. Islamic Development Bank of Brunei Berhad c. Tabung Amanah Islam Brunei 9. Canada a. Islamic Co-operative Housing Corporation Ltd, Toronto 10. Cayman Islands a. Ibn Majid Emerging Marketing Fund (International Investor Group) b. Al Tawfeek Co. for Investment Funds Ltd. Subsidiary of Albarka Group “DBG” 11. Denmark a. Faisal Finance (Denmark) A/S 12. Djibouti a. Banque Albaraka Djibouti 13. Egypt a. Alwatany Bank of Egypt, Cairo b. Egyptian Company for Business and Trade S.A.E c. Egyptian Saudi Finance Bank (Dallah Al Baraka), Cairo d. Gulf Company for Financial Investment e. Faisal Islamic Bank of Egypt, Cairo f. Islamic Bank International for Investment and Development, Cairo g. Islamic Investment and Development Co., Cairo h. National Bank for Development, Cairo 14. France a. Algerian Saudi Leasing Holding Co. (Dallah Al Baraka Group) b. Societe General c. Capital Guidance d. BNP Paribas 15. Gambia a. Arab Gambian Islamic Bank 16. Germany a. Bank Sepah, Iran b. Commerz Bank c. Deutsche Bank 17. Guinea a. Massraf Faisal al Islami of Guinea, Conakry b. Banque Islamique de Guinee 18. India a. Al Ameen Islamic Financial & Investment Corp. (India) Ltd., Karnatka b. Bank Muscat International (SOAG) c. Al-Falah Investment Ltd 19. Indonesia a. Al Barakah Islamic Investment Bank b. Bank Muamalat Indonesia, Jakarta c. Dar Al-Maal Al-Islami Trust d. PT Danareksa Fund Management, Jakarta 20. Iran a. Bank Keshavarzi (Agricultural Bank), Tehran b. Bank Maskan Iran (Housing Bank), Tehran c. Bank Mellat, Tehran d. Bank Melli Iran, Tehran e. Bank Saderat Iran, Tehran f. Bank Sanat Va Maadan (Bank of Industry and Mines), Tehran g. Bank Sepah, Tehran h. Bank Tejarat, Tehran 21. Iraq a. Iraqi Islamic bank for Investment and Development 22. Italy a. Bank Sepah, Iran b. International Trading Co. of Africa 23. Jordan a. Jordan Islamic Bank (Subsidiary of Dallah Al Barka Group) b. Jordan Islamic Bank for Finance and Investment, Amman 24. Kuwait a. Gulf Investment Corporation b. The International Investment Group c. The International Investor, Safat d. Kuwait Finance House, Safat e. Kuwait Investment Co – Dar Al-IsethmarSecurities House 25. Lebanon a. Gulf International Bank, Bahrain b. Al Barakah Bank c. Bank of Beirut 26. Luxembourg a. Faisal Finance (Luxembourg) S.A b. Faisal Holding, Luxembourg c. Takafol S.A d. Islamic Finance House Universal Holding S.A 27. Malaysia a. Adil Islamic Growth Fund (Innosabah Securities Sdn Bhd), Labuan b. Arab Malaysian Merchant Bank Berhad, Kuala Lumpur c. Bank Bumiputra Malaysia Berhad, Kuala Lumpur d. Bank Islam Malaysia Berhad, Kuala Lumpur e. Bank Kerjasama Rakyat Malaysia Berhad, Kuala Lumpur f. Dallah Al Baraka (Malaysia) Holding Sdn Bhd g. Lembaga Urusan Dan Tabung Haji (Fund), Kuala Lumpur h. Malayan Banking Berhad (Maybank), Kuala Lumpur i. Multi-Purpose Bank Berhad, Kuala Lumpur j. United Malayan Banking Corp. Berhad, Kuala Lumpur k. Bank Muamalat Berhad, Malaysia l. Securities Commission m. Labuan Offshore Financial Services Authority (LOFSA) n. Islamic banking & Takaful Dept, Bank Negara Malaysia 28. Malaysian banks with Islamic windows a. Commercial Banks: i. Affin Bank Berhad ii. Alliance Bank Berhad iii. Arab-Malaysian Bank Berhad iv. Bank Utama (Malaysia) Berhad v. Citibank Berhad vi. EON Bank Berhad vii. Hong Leong Bank Berhad viii. HSBC Bank (M) Berhad ix. Malayan Banking Berhad x. OCBC Bank (Malaysia) Berhad xi. Public Bank Berhad xii. RHB Bank Berhad xiii. Southern Bank Berhad xiv. Standard Chartered Bank Malaysia Berhad b. Finance Companies: i. Alliance Finance Berhad ii. Arab-Malaysian Finance Berhad iii. Asia Commercial Finance Berhad iv. EON Finance Berhad v. Hong Leong Finance Berhad vi. Kewangan Bersatu Berhad vii. Mayban Finance Berhad viii. MBf Finance Berhad ix. Public Finance Berhad x. United Merchant Finance Berhad c. Merchant Banks: i. Alliance Merchant Finance Berhad ii. Arab-Malaysian Merchant Bank Berhad iii. Aseambankers Malaysia Berhad iv. Malaysian International Merchant Bank Berhad v. Affin Merchant Bank Berhad d. Discount Houses: i. Abrar Discounts Berhad ii. Affin Discount Berhad iii. Amanah Short Deposits Berhad iv. BBMB Discount House Berhad v. KAF Discounts Berhad vi. Malaysia Discount Berhad vii. Mayban Discount Berhad 29. Mauritania a. Banque Alabaraka Mauritaninne Islamique (Dallah Al Baraka Group), Mauritania 30. Morocco a. Faisal Finance Maroc S.A b. The Netherlands c. Faisal Finance (Netherlands ) B.V d. Faisal Finance (Netherlands Antilles) N.V 31. Niger a. Banque Islamique Du Niger, Niamey 32. Nigeria a. Habib Nigeria Bank Ltd b. Ahmed Zakari & Co 33. Oman a. Bank Muscat International b. Bank Saderat Iran, Muscat c. Oman Arab Bank 34. Pakistan a. Al Faysal Investment Bank Ltd, Islamabad b. Al Towfeek Investment Bank Ltd (Dallah Al Baraka Group), Lahore c. Faysal Bank Ltd, Pakistan d. National Investment Trust Ltd., Karachi e. Shamil Bank f. Meezan Bank Limited 35. Palestine a. Arab Islamic Bank b. Arab Islamic International Bank (AIIB) Plc c. Cairo Amman Bank d. Palestine International Bank e. The Palestine Islamic Bank 36. Qatar a. Islamic Investment Company of the Gulf Ltd, Sharjah b. Qatar International Islamic Bank, Doha c. Qatar Islamic Bank SAQ, Doha 37. Russia a. BADR Bank 38. Saudi Arabia a. Albaraka Investment and Development Co., Jeddah b. Al Rajhi Banking and Investment Corp., Riyadh c. Arab Leasing International Finance (ALIF) Ltd d. Faysal Islamic Bank of Bahrain E.C., Dammam e. Islamic Development Bank, Jeddah. f. National Commercial Bank Ltd, Jeddah g. Riyad Bank h. Saudi American Bank, Jeddah i. Saudi Holland Bank j. Bank Al Jazira 39. Senegal a. Banque Islamique Du Senegal 40. South Africa a. Albaraka Bank Ltd, Durban (Dallah Al Baraka Group) 41. Srilanka a. Amana Islamic Bank b. Amana Takaful Limited 42. Sudan a. Al Baraka Al Sudani, Khartoum. (Dallah Al Baraka Group) b. Al Shamal Islamic Bank c. Al Tadamon Islamic Bank, Khartoum d. Animal Resources Bank e. El Gharb Islamic Bank (Islamic Bank for Western Sudan) f. Faisal Islamic Bank of Sudan, Khartoum g. Islamic Bank of Western Sudan, Khartoum h. Islamic Co-operative Development Bank, Khartoum i. Sudanese Islamic Bank 43. Switzerland a. Cupola Asset Management SA, Geneva b. Dar Al Maal Al Islami Trust, Geneva c. Faisal Finance (Switzerland) SA, Geneva d. Pan Islamic Consultancy Services Istishara SA, Geneva e. United Bank of Switzerland (UBS) f. Pictet & Cie 44. Tunisia a. Beit Ettamwil al Tunisi al Saudi, Tunis (Dallah Al Baraka Group) b. B.E.S.T. Re-Insurance (Dallah Al Baraka Group) 45. Turkey a. Albarakah Turkish Finance House Istanbul b. Emin Sigorts A.S c. Faisal Finance Institution, Istanbul. d. Faisal Islamic Bank of Kibris Ltd, Turkey e. Ihlas Finance House f. Kuwait-Turket Evkaf Finance House g. Asya Finans Kurumu A.S 46. United Arab Emirates a. Abu Dhabi Islamic Bank b. Bank Muscat International (SOAG) c. Dubai Islamic Bank, Dubai d. Gulf International Bank, Bahrain e. Islamic Investment Company of the Gulf Ltd, Abu Dhabi. f. Islamic Investment Company of the Gulf Ltd, Sharjah Subsidiary of Dar Al Maal Islami Trust g. National Bank of Sharjah h. HSBC, Dubai i. National Bank of Dubai 47. United Kingdom a. Albaraka International Ltd, London b. Albaraka Investment Co. Ltd, London c. Al Rajhi Investment Corporation, London d. Al Safa Investment Fund e. Bank Sepah, Iran f. Dallah Al Baraka (UK) Ltd., London g. Takafol (UK) Ltd, London h. Barclays Capital i. HSBC Amanah Finance j. ABCIB Islamic Asset Management, Arab Banking Corp 48. United Kingdom banks with Islamic windows a. ABC International Bank, London b. ANZ International Merchant Banking, London c. Arab Bank Plc, London d. Riyadh Bank , London e. Citibank International Plc, London f. Cedel International, London g. Dawnay Day Global Investment Ltd h. Global Islamic Finance, HSBC Investment Bank Plc i. Gulf International Bank Bsc, Bahrain j. The Halal Mutual Investment Company Plc k. IBJ International, London (Subsidiary of Industrial Bank of Japan) l. J. Aron & Co. (Goldman Sachs International Finance) Ltd., London m. Islamic Investment Banking Unit (IIBU), United Bank of Kuwait, London 49. Ireland a. Al Meezan Commodity Fund Plc, Dublin b. Jersey, UK (+534) c. The Islamic Investment Company, St Helier. d. MFAI (Jersey) Limited (formerly – Massraf Faysal Al-Islami Ltd, Jersey) 50. United States of America a. Abrar Investments, Inc., Stamford CT b. Al-Baraka Bancorp Inc. Chicago c. Al-Madina Realty, Inc., Englewood NJ d. Al-Manzil Islamic Financial Services e. Amana Mutual Funds Trust, State St. Bellingham WA f. Ameen Housing Co-operative, San Francisco g. American Finance House h. Bank Sepah, Iran i. BMI Finance & Investment Group, New Jersey j. Dow Jones Islamic Index Fund of the Allied Asset Advisors Funds k. Failaka Investments, Inc., Chicago IL l. Fuloos Incorporated, Toledo OH m. Hudson Investors Fund, Inc., Clifton NJ n. MSI Finance Corporation, Inc., Houston TX o. Samad Group, Inc., Dayton OH p. Shared Equities Homes, Indianapolis IN q. HSBC, USA r. MEF Money, USA s. Islamic Credit Union of Minnesota, (ICUM) t. United Mortgage 51. Yemen a. Islamic Bank of Yemen for Finance and Investment, Sana b. Saba Islamic Bank, Sana c. Faisal Islamic Bank d. Yemen Islamic Bank, Sana e. Yemen National Investment Co., Sana APPENDIX-C: Islamic Equity Funds in the World List of Islamic Equity Funds (www.failaka.com) Fund Name Fund Manager(s) Fund Promoter(s) Inception Min. Invest Date Global Equity Funds 1 Al Baraka Global Equity Mercury Asset Management Al Baraka Investment Bank Dec-97 $25,000 2 Al Rajhi Global Equity UBS Asset Management Al Rajhi Banking & Investment Jul-96 50 Shares 3 Al-Ahli Global Trading Equity Wellington Management Co. LLP National Commercial Bank (NCB) Jan-95 $2,000 4 Al-Bait Global Equity Fremont Investment Advisors Inc. Securities House Apr-00 $50,000 5 Al-Bukhari Global Equity Wafra Investment Advisory Group Wafra Investment Advisory Group Aug-98 $100,000 6 Al-Dar World Equities Pictet & Cie The International Investor/Pictet & Cie Feb-98 $100,000 7 Alfanar Investment Holdings Worms & Cie/SEDCO Permal Asset Management Dec-97 $5,000 8 Al-Firas Global Equity Arab Bank Plc Arab Bank Plc Oct-00 $10,000 9 Al-Kawthar Fund Wellington/Al-Ahli Global Trading Eq. National Bank of Kuwait Jan95 $10,000 10 Al-Khair Global Equity Fund Pictet & Cie Bank Al-Jazira Sep-98 $5,000 11 Al-Safwa International Equity Roll & Ross Asset Management Al-Tawfeek Co. for Investment Funds May-96 $10,000 12 Arab Investor Crescent Fund Schroder Investment Mgmt Int’l Arab National Bank Apr99 $5,000 13 Arzaq Investment Fund Global Alliance/Securities House Securities House Mar-98 $50,000 14 Bank Kanz Global Islamic Equity Bank Kanz Bank Kanz N/A $100,000 15 Barclays Global Equity Wellington Management Co. LLP Barclays Private Bank Feb-00 $1,000,000 16 Caravan Fund Wellington Management Co. LLP Commerical Bank of Qatar/BNP Dec99 $10,000 17 Citi Global Portfolios SSB Citi Asset Management Citi Islamic Investment Bank Oct-97 $10,000 18 Dow Jones Islamic Index Fund Brown Brothers Harriman & Co. Wafra Invest. Advisory / AlTawfeeq Jul-99 $10,000 19 Global Equity 2000 Sub-Fund Alliance Capital Management LP First Investment Co Mar-00 $10,000 20 Hegira Global Equity Wellington Management Co. LLP Wellington Management Co. LLP Sep-96 $5,000,000 21 HSBC Amanah Global Equity HSBC Investment Funds (Lux.) SA HSBC Amanah Finance May-00 $5,000 22 Islamic Global Equity * N/A HSBC Bank USA Late 2001 $2,500 23 Miraj Global Equity Royal Bank of Canada Miraj International Investment Ltd. Aug-98 $10,000 24 Musharaka Equity Fund N/A Riyad Bank Jun-97 $10,000 25 Parsoli Global Equity Parosoli Capital & Finance Ltd. Parosoli Capital & Finance Ltd. Jun-01 £1,000 26 QIB Global Equities Global Asset Management (GAM) Qatar Islamic Bank N/A 27 SAMBA Global Equity SAMBA Capital Management SAMBA Capital Management Dec-99 $2,000 28 SUT Ethical Growth Fund Singapore Unit Trust Ltd. Malayan Banking & Daiwa Securities Aug-01 S$1,000 29 SUT Ethical Value Fund Singapore Unit Trust Ltd. Malayan Banking & Daiwa Securities Aug-01 S$1,000 30 TAIB Crescent Global Fund Wright Investors’ Service TAIB Bank of Bahrain Mar-00 $100,00 31 UBS Islamic Fund Global Equities UBS, AG & UBS Brinson UBS Islamic Fund Mgmt Co May-00 $100,000 North American Equity Funds 32 Al-Ahli US Trading Equity INVESCO Capital Mgmt Inc. National Commercial Bank (NCB) Dec-92 $2,000 33 Alfanar US Capital Growth Worms & Cie/SEDCO Permal Asset Management Jun-99 $5,000 34 Alfanar US Capital Value Worms & Cie/SEDCO Permal Asset Management May-99 $5,000 35 Amana Growth * Saturna Capital Saturna Capital Feb-94 $100 36 Amana Income * Saturna Capital Saturna Capital Jun-86 $100 37 Azzad DJIM Index Fund * Azzad Asset Management Azzad Asset Management Dec-00 1,000 38 Azzad Growth Fund LP Azzad Asset Management Azzad Asset Management Feb-98 $50,000 39 Azzad Income Fund Azzad Asset Management Azzad Asset Management Sep-01 $1,000 41 Dow Jones Islamic Index (US) Fund * Allied Asset Advisors Funds Allied Asset Advisors Funds Jun-00 $500 42 SAMI Navigator Nova Bancorp Group Nova Bancorp Group Jul-99 C$500 European Equity Funds 43 Al-Ahli Europe Trading Equity Gulf Int’l Bank (UK) Ltd. National Commercial Bank (NCB) Nov-94 $2,000 44 Al-Dar Europe Equities Pictet & Cie The International Investor/Pictet & Cie Feb-98 $100,000 45 Alfanar Europe Worms & Cie/SEDCO Permal Asset Management Jan-99 $5,000 46 Al-Sukoor European Equity Commerz Int’l Cap Mgmt/Al-Tawfeeq Co. Commerz Bank/Burgan Bank Mar-00 1 Share 47 Al-Thoraiya European Equity Lomard Odier & Cie Bank Al-Jazira Sep-99 $5,000 Small Cap & Technology Equity Funds 48 Al Rajhi Small Companies Franklin Mgmt & Lord Abbott Al Rajhi Banking & Investment Jun-99 200 Shares 49 Al-Ahli Small-Cap Trading Equity Wellington Management Co. LLP National Commercial Bank (NCB) Aug-98 $2,000 50 Alfanar Essex Technology Worms & Cie/SEDCO Permal Asset Management Jun-99 $5,000 51 Orbitex Islamic Comm. & IT Fund Orbitex Management Ltd. Orbitex Management Ltd. Dec-99 $50,000 52 TII Small Cap Equity (European) Pictet & Cie The International Investor Dec-96 $100,000 Balanced, Secured & Other Equity Funds 53 Al Hilal Fund Mercury Asset Management Abu Dhabi Islamic Bank (ADIB) Apr-00 $10,000 54 Al Kawthar Global Equity Secured National Commercial Bank (NCB) National Bank of Kuwait Sep-99 $10,000 55 Al Rajhi Balanced Fund I Al Rajhi Banking & Investment Al Rajhi Banking & Investment Nov-98 $5,000 56 Al Rajhi Balanced Fund II Al Rajhi Banking & Investment Al Rajhi Banking & Investment Dec-98 $5,000 57 Al-Ahli Global Equity Secured (Series B) Wellington Management Co. LLP National Commercial Bank (NCB) Nov-99 $25,000 58 Al-Ahli International Equity Secured Deutche Bank National Commercial Bank (NCB) Feb-00 $25,000 59 Al-Ahli US Equity Secured Deutche Bank National Commercial Bank (NCB) Oct-99 $25,000 60 Alkhawarizmi Fund AXA Rosenberg The International Investor Jul-97 $100,000 61 BHLB Pacific Dana Al Mizan (Balanced) BHLB Pacific Trust BHLB Pacific Trust Mar01 RM 1,000 62 Faysal Shield Fund Banque National de Paris Faysal Islamic Bank of Bahrain Nov-99 $100,000 63 Mutajarah Fund (Balanced) Swiss Alternative Investment Strategies Group (SAIS) Towry Law International Oct-01 $100,000 64 Profit Sharing Fund (Aman-1) (secured) Al Rajhi Banking & Investment Al Rajhi Banking & Investment N/A $2,000 Emerging Market & Country Equity Funds 65 Al Arabi Saudi Co. Shares Arab National Bank Arab National Bank May-93 SR 10,000 66 Al Rajhi Egypt Equity EFG Hermes Al Rajhi Banking & Investment Jun-97 200 Shares 67 Al Rajhi Local Share Fund Al Rajhi Banking & Investment Al Rajhi Banking & Investment Jul-92 1 Share 68 Al Rajhi Middle East Equity Bakheet Financial Advisors Al Rajhi Banking & Investment May-98 200 Shares 69 Al-Ahli Saudi Trading Equity Bakheet Financial Advisors National Commercial Bank (NCB) Jun-98 SR 5,000 70 Al-Dar Eastern Europe Equities Pictet & Cie The International Investor/Pictet & Cie Feb98 $100,000 71 Al-Taiyibat Fund (local share) Bank Al-Jazira Invesmtent Services Bank Al-Jazira Sep98 SR 10,000 72 First Arabian Equity 2000 N/A First Investment Company N/A 73 Ibn Majid Emerging Markets UBS Brinson The International Investor Nov-95 $100,000 74 Khaled Ibn el-Waleed Fund PrimeCorp. Investment Management Al-Mal Islamic Company N/A 75 Oasis Crescent Fund Oasis Asset Management Ltd. Oasis Asset Management Ltd. Jan-99 76 Parsoli Islamic Equity Parosoli Capital & Finance Ltd. Parosoli Capital & Finance Ltd. 1996 77 Pure Specialist Fund Futuregrowth Unit Trust Management Futuregrowth Unit Trust Management Jun-92 R 200 78 Riyad Equity Fund 2 (Saudi Shares) Riyad Bank Riyad Bank Nov-96 SR 10,000 Asian Equity Funds 79 Al-Ahli Asia Pacific Trading Equity Gulf Int’l Bank (UK) Ltd. National Commercial Bank (NCB) May-00 $2,000 80 Al-Mashariq Japanese Equity Julius Baer Asset Management Bank Al-Jazira Apr-00 $5,000 81 Al-Nukhba Asian Equity Nomura Investment Bank Al-Tawfeek Co. for Investment Funds Jul-98 $10,000 82 Mendaki Global Fund DBS Asset Mgmt Mendaki Holding Pte. Ltd Sep-97 S$1,000 83 Mendaki Global Fund DBS Asset Mgmt Mendaki Holding Pte. Ltd May-91 S$500 Malaysian Equity Funds 84 Abrar Investment Fund Abrar Unit Trust Managers Abrar Unit Trust Managers 1996 85 Amanah Saham Bank Islam BIMB Unit Trust Mgmt Bhd. Bank Islam Malaysia Bhd Jun-94 500 Shares 86 Amanah Saham Darul Iman PTB Amanah Saham Darul Iman PTB Amanah Saham Darul Iman Oct-94 87 Amanah Saham Wanita Hijrah Unit Trust Management Bhd Hijrah Managers Bhd May98 RM 100 88 BBMB Dana Putra BBMB Unit Trust Management BBMB Unit Trust Management Jun96 89 BHLB Dana Al-Ihsan BHLB Pacific Trust BHLB Pacific Trust May-98 RM 500 90 Dana Al-Aiman Mara Unit Trust Mara Unit Trust May-68 RM 100 91 Kuala Lumpur Ittikal Fund Kuala Lumpur Mutual Funds Kuala Lumpur Mutual Funds May-97 RM 1,000 92 Mayban Dana Yakin Mayban Mgt Berhad Mayban Mgt Berhad Nov RM 1,000 93 Pacific Dana Amana Pacific Mutual Fund Trust Pacific Mutual Fund Trust Apr-98 RM 1,000 94 RHB Mudarabah Fund RHB Unit Trust Management RHB Unit Trust Management May-96 500 Shares 95 Tabung Amanah Bakti Asia Unit Trust Berhad Tabung Amanah Bakti May-71 RM 500 96 Tabung Ittikal Arab-Malaysian Arab-Malaysian Unit Trusts Bhd Arab-Malaysian Unit Trusts Bhd Jan-93 500 Shares Islamic Bonds (Sukuk) Funds 97 RHB Islamic Bond RHB Unit Trust Mgt RHB Unit Trust Mgt Jun-00 RM 1,000 98 Kuala Lumper Islamic Bond Fund Kuala Lumper Mutual Funds Kuala Lumper Mutual Funds Aug-01 RM 1,000 99 Dahlia Syariah Income Fund Mayban Life Assurance Bhd. Mayban Life Assurance Bhd. Aug-01 RM 1,000 APPENDIX-D: The Dow Jones Islamic Market Indexes Descriptive Statistics Market Capitalization Data (USD Billion) Component Weight (%) Index Name Component Number Full Float-adjusted Mean Median Largest Smallest Largest Smallest Dow Jones Islamic Market Index 1,422 7,603.2 6,591.6 4.6 0.8 234.2 0.0 3.55 0.00 Dow Jones Islamic Market Titans 100 Index 100 4,806.6 4,391.8 43.9 27.5 234.2 4.2 5.33 0.10 Dow Jones Islamic Market Europe Index 271 2,004.2 1,634.2 6.0 0.9 142.1 0.0 8.70 0.00 Dow Jones Islamic Market Asia/ Pacific Index 479 980.2 631.3 1.3 0.4 30.9 0.0 4.89 0.00 Dow Jones Islamic Market Technology Index 292 1,504.5 1,336.5 4.6 0.6 223.4 0.0 16.71 0.00 Dow Jones Islamic Market Canada Index 65 111.0 83.1 1.3 0.7 8.5 0.1 10.28 0.06 Dow Jones Islamic Market Japan Index 192 574.7 401.4 2.1 0.7 30.9 0.0 7.69 0.00 Dow Jones Islamic Market U.K. Index 101 723.7 710.3 7.0 0.9 142.1 0.1 20.01 0.01 Dow Jones Islamic Market U.S. Index 572 4,456.5 4,209.5 7.4 1.4 234.2 0.1 5.56 0.00 Performance Price Return (%) Annualized Price Return (%) Index Name 1-Month YTD 2002 1-Year 3-Year 5-Year Dow Jones Islamic Market U.S. Index 0.50 -3.78 -22.59 -24.93 -23.32 -4.34 Dow Jones Islamic Market U.S. Index 0.85 -4.15 -23.31 -25.18 -21.86 -4.26 Dow Jones Islamic Market U.S. Index -0.57 -8.18 -18.27 -24.44 -22.09 -6.77 Dow Jones Islamic Market U.S. Index -3.31 -6.90 -13.95 -22.90 -27.26 0.01 Dow Jones Islamic Market U.S. Index -1.71 -2.48 -39.18 -36.71 -39.45 -6.83 Dow Jones Islamic Market U.S. Index -2.11 2.49 -22.75 -17.92 -30.87 -6.92 Dow Jones Islamic Market U.S. Index -3.63 -7.61 -9.25 -19.35 -28.80 0.69 Dow Jones Islamic Market U.S. Index 0.55 -7.84 -9.25 -19.35 -28.80 0.69 Dow Jones Islamic Market U.S. Index 1.69 -1.47 -25.71 -25.61 -22.64 -4.01 Fundamentals P/E (including negative) P/E (excluding negative) Index Name Trailing Projected Trailing Projected P/B Dividend Yield (%) P/ Sales P/ Cash Flow Dow Jones Islamic Market U.S. Index 18.42 16.60 19.59 16.91 3.08 1.80 1.42 11.95 Dow Jones Islamic Market U.S. Index 22.24 18.36 19.40 16.91 3.04 1.98 1.75 12.34 Dow Jones Islamic Market U.S. Index 15.43 14.13 16.10 14.45 2.46 2.88 1.14 9.56 Dow Jones Islamic Market U.S. Index 17.29 16.66 19.76 17.18 2.11 1.88 1.24 10.28 Dow Jones Islamic Market U.S. Index 22.88 19.31 22.87 19.55 3.12 0.61 1.73 14.35 Dow Jones Islamic Market U.S. Index 21.79 14.32 19.14 14.32 2.06 0.66 1.52 9.07 Dow Jones Islamic Market U.S. Index 32.03 18.84 24.58 18.84 1.69 0.94 1.06 10.62 Dow Jones Islamic Market U.S. Index 54.03 26.97 14.96 13.77 1.49 3.09 1.08 9.32 Dow Jones Islamic Market U.S. Index 21.16 18.33 21.56 18.33 3.96 1.36 1.70 13.78 Appendix-E1: Assets, Deposits and Loans of 53 Conventional local Banks in GCC (US$ Millions) Source: Research Unit of the Institute of Banking Studies, Kuwait Assets Deposits Loans Bank/ Year 2001 2000 1999 2001 2000 1999 2001 2000 1999 Abu Dhabi Commercial Bank 7,241.24 6,889.63 6,280.50 5,679.71 5,426.96 4,945.30 4453.6 4703.2 4050 AlAhli Bank of Kuwait 3,859.42 3,772.11 3,818.22 3,254.46 3,163.51 3,210.13 1769.6 1625.1 1679.1 Al-Ahli Bank of Qatar 581.10 720.41 732.53 512.78 654.00 644.62 291.88 333.93 364.73 Al-Ahli United Bank 4,102.72 3,512.35 865.97 3,145.19 2,740.21 713.02 1882.7 1766.3 526.82 Al-Bank Al-Saudi Al-Fransi 10,681.64 10,146.85 8,668.23 9,101.41 8,767.28 7,438.68 4479.7 4304.2 3853.5 Arab Bank for Inv. & Foreign Trade 1,572.79 1,509.88 1,435.01 1,215.31 1,130.05 1,060.83 348.92 336.1 336.83 Arab Banking Corporation 26,586.00 26,676.00 24,358.00 21,544.00 21,758.00 20,158.00 14225 14039 12903 Arab National Bank 10,784.30 10,052.71 9,466.77 9,196.05 8,714.86 8,360.40 3948.5 3715.3 3445.9 Bahrain International Bank 887.52 1,039.53 966.81 365.95 339.63 353.76 12.36 16.85 17.56 Bahrain Middle East Bank 512.83 620.85 655.58 189.53 271.86 267.56 14.53 12.53 13.12 Bahraini Saudi Bank 595.40 529.86 424.86 482.11 424.52 327.14 329.15 323.31 266.64 Bank Al-Jazira 1,364.41 1,383.23 1,322.26 1,154.20 1,178.03 1,133.66 568.59 556.85 460.65 Bank Dhofar Al-Omani Al-Fransi 876.61 708.80 680.34 737.09 581.51 556.10 705.96 553.35 513.15 Bank Muscat 3,501.86 3,477.18 1,942.10 2,901.22 2,927.21 1,661.78 2855.9 2592.1 1514.1 Bank of Bahrain & Kuwait 2,928.57 2,815.42 2,734.25 2,322.70 2,190.26 2,094.25 1278.7 1328.3 1344.8 Bank of Kuwait & Middle East 3,519.18 3,379.74 2,949.60 2,941.91 2,800.08 2,434.47 1383.7 1209.4 1095.4 Bank of Sharjah 524.82 514.15 465.52 409.31 404.25 363.43 280.43 298.04 266.81 Burgan Bank 4,839.90 3,721.98 3,777.05 3,994.08 3,141.46 3,195.10 1861.2 1644.5 1545.4 Commercial Bank International 651.76 542.28 469.55 548.74 450.96 390.47 469.47 400.4 357.94 Commercial Bank of Dubai 2,002.46 1,945.28 1,697.09 1,609.16 1,566.68 1,355.11 1237.2 1276.9 1239.7 Commercial Bank of Kuwait 5,504.05 5,056.48 4,530.84 4,278.49 3,822.62 3,646.12 2856 2377.4 1946.3 Commercial Bank of Qatar 1,430.77 1,391.51 1,274.92 1,102.22 1,064.76 1,026.26 749.87 667.37 627.37 Doha Bank 1,786.99 1,514.04 1,391.18 1,562.85 1,325.92 1,227.07 907.97 772.01 746.96 Emirates Bank International 6,405.88 5,335.05 5,605.89 4,622.91 3,671.30 4,554.79 4669.5 3062.9 4049.4 First Gulf Bank 937.99 652.11 556.94 762.82 489.69 408.61 466.91 382.45 356.51 Gulf Bank 6,114.70 5,413.48 5,840.87 5,246.43 4,626.97 5,069.92 3213.5 3067.3 2259.4 Gulf International Bank 15,232.00 15,119.50 15,679.40 10,949.70 11,414.50 11,462.40 3309.4 3923.1 4038 Industrial Bank of Kuwait 1,338.88 1,153.60 1,149.35 160.83 427.13 334.69 334.81 279.53 242.26 Investment Bank 700.28 676.03 607.64 549.59 534.58 478.41 465.6 434.71 399.66 Kuwait Real Estate Bank 2,151.98 2,117.96 1,788.29 1,403.49 1,342.08 1,092.75 1316.9 1192.9 1385.6 Mashreq Bank 6,181.22 6,014.33 5,442.62 5,113.20 5,049.63 4,524.65 2849 2941.5 3039.8 Middle East Bank 673.25 659.81 592.90 467.88 470.06 421.34 324.95 332.13 355.45 National Bank of Abu Dhabi 8,782.33 9,921.12 8,526.32 7,550.78 8,758.01 7,520.84 5538.4 5259.4 4559.7 National Bank of Bahrain 2,867.93 2,753.40 2,628.11 2,426.49 2,280.39 2,078.90 1200.3 1150.2 1068.2 National Bank of Dubai 8,893.32 7,664.57 6,784.70 7,514.11 6,329.01 5,480.48 1957.3 1902.2 1869.6 National Bank of Fujairah 717.79 752.42 667.25 554.03 594.20 522.26 412.89 436.3 386.13 National Bank of Kuwait 14,553.07 13,401.85 12,482.31 12,484.89 11,461.41 10,579.95 5089.3 4580.3 4245.7 National Bank of Oman 2,471.76 2,120.60 2,163.62 2,082.72 1,667.79 1,696.13 1871.3 1670.8 1599 National Bank of Ras Al-Khaimah 659.93 508.06 492.12 504.75 358.91 346.02 480.34 371.84 358.38 National Bank of Sharjah 557.38 505.20 423.17 355.05 346.67 289.76 355.44 362.01 332.03 National Bank of Umm Al-Qaiwain 466.00 461.81 478.03 327.56 328.07 346.73 315.35 317.33 329.05 Oman Arab Bank 832.49 718.40 685.22 705.77 594.36 571.16 600.01 591.42 550.62 Oman Housing Bank 429.18 429.15 444.56 16.36 23.08 80.86 412.99 421.62 435.05 Oman International Bank 1,748.80 1,921.68 2,172.34 1,295.70 1,423.04 1,656.34 1187.6 1332 1456.9 Qatar National Bank 7,795.86 6,763.51 6,141.24 6,416.61 5,444.03 4,934.41 5234.8 3744.3 3982.1 Riyad Bank 17,931.71 17,494.69 17,188.55 14,728.05 14,572.26 14,298.21 5657.3 5473.5 5165.6 Saudi American Bank 20,621.20 21,543.73 20,546.25 17,618.37 18,051.68 17,404.47 8984.2 8418 8452.9 Saudi British Bank 11,192.84 11,521.39 9,939.69 9,700.65 10,153.44 8,622.26 4277.5 4620.6 4338 Saudi Hollandi Bank 6,720.04 5,713.56 5,054.27 5,878.18 5,004.67 4,455.20 3067.3 2676.4 2454.2 Saudi Investment Bank 4,072.27 3,634.40 3,525.94 3,340.74 2,973.05 2,944.47 2009.7 2000.6 1885.8 Union National Bank 3,612.72 3,300.15 2,682.51 3,169.94 2,879.03 2,324.94 2155.7 2029.5 1788 United Arab Bank 484.50 464.59 411.46 358.74 350.17 310.47 364.86 341.22 321.91 United Gulf Bank 931.15 712.32 733.01 443.27 385.48 448.08 78.85 93.45 99.73 Appendix-E2: Assets, Deposits and Loans of 8 Islamic local Banks in GCC (All figures are in US$ Millions) Source: Research Unit of the Institute of Banking Studies, Kuwait Assets Deposits Loans Bank/ Year 2001 2000 1999 2001 2000 1999 2001 2000 1999 Al-Rajhi Banking & Investment Corp. 13,815.03 12,997.68 11,448.90 10,542.35 9,785.78 8,661.74 11,275.91 10,520.67 9,243.73 Kuwait Finance House 7,733.64 6,632.26 5,817.23 5,779.20 5,065.40 4,388.63 5,875.00 4,937.21 4,092.62 Dubai Islamic Bank 4,175.44 3,205.90 2,543.70 3,573.03 2,661.05 2,077.63 3,399.98 2,595.28 2,096.63 Abu Dhabi Islamic Bank 1,664.61 1,188.18 725.72 1,167.26 804.43 408.24 1,460.42 1,038.86 648.05 Shamil Bank of Bahrain 1,241.90 1,316.34 1,092.05 58.19 64.73 44.3 677.92 580.08 555.91 Qatar Islamic Bank 1,212.82 1,115.02 1,094.23 1,003.48 910.66 902.34 974.20 940.30 860.66 Qatar International Islamic Bank 741.67 576.29 505.45 613.95 467.64 419.24 654.38 507.29 439.33 Bahrain Islamic Bank 508.47 516.85 414.86 401.54 408.57 366.26 406.30 417.60 354.87 Categories: Finance and Moneter, Islamic Banking, Islamic Economy, Uncategorized

ANALISIS SEGMEN PASAR DAN PERILAKU NASABAH TERHADAP BANK SYARIAH DI WILAYAH DKI JAKARTA August 22, 2010 isa7695 Leave a comment 2 Votes RR. Kathrin Irviana*), Rita Nurmalina, **) Arif Imam Suroso,**) *) HSBC Amanah Indonesia **) Manajemen dan Bisnis, Institut Pertanian Bogor ABSTRACT The purpose of this research is for identifying market segment and customer behavior toward Islamic Banking and its marketing implications in all regions of DKI Jakarta. The research was conducted on August – October 2008 in East, West, North, South and Central of Jakarta. The survey was conducted by doing face to face interview and questionaires distribution to 120 proportional responden. The analytical tools applied are analysis of cluster, factor & descriptive and using SPSS version 11.5 as the statistic’s tool. The result of this research for segmentation aspect showed the characteristics and size of each market segment of Islamic banks. The market segment consists of syariah loyalist, floating mass and conventional loyalist. From this research, floating mass segment has been showed that this segment is the most potential segment among others in DKI Jakarta regions due to it has the largest target market compared to syariah loyalist and conventional loyalist segments. However responden with Islam as their religion are still priority target market for Islamic banks since floating mass responden have been collected from Islamic’s responden dominantly with employees and entrepreneurs as the occupations. Further, market segment will be analyzed in relation with customers’ category, region of geography, religion and occupation. In customer behavior side, customers preferences and information resources toward Islamic banks will be the important factors which could influence customers behavior when choosing Islamic banks. The four factors influence customers in choosing Islamic banks are building physical’s appearance, ATM network, variety of products and profit rate. Both results of market segmentation and consumer behavior toward Islamic Banking are important factors for Islamic Banking in formulating marketing strategy. Keyword : market segmentation, consumer behavior, islamic banking. PENDAHULUAN Latar Belakang Sejarah berdirinya perbankan sya-riah dikarenakan dua alasan utama yaitu adanya pandangan bahwa bunga (interest) pada bank konvensional hukumnya haram dan dari aspek ekonomi dimana penyerahan resiko usaha terhadap salah satu pihak dinilai melanggar norma keadilan. Hadirnya bank syariah di Indonesia didorong oleh keinginan masyarakat Indonesia (terutama masyarakat Islam) yang berpandangan bahwa bunga bank adalah riba. Sejak tahun 1992, industri perbankan syariah di Indonesia mulai berkembang cukup pesat sampai dengan saat ini, bahkan diperkirakan akan terus berkembang pesat di masa yang akan datang. Bank Indonesia (2004) memperkirakan bahwa jumlah aset perbankan syariah dibandingkan seluruh jumlah per-bankan nasional mencapai 9,10% pada tahun 2011. Hal ini didukung pula oleh terbitnya Undang-Undang No. 10 tahun 1998 tentang Perbankan yang secara eksplisit memperbolehkan operasional bank berdasarkan prinsip syariah baik bagi Bank Umum maupun Bank Perkreditan Rakyat. Era inilah yang menandai dimulainya sistem perbankan ganda (dual banking system) dalam sistem hukum perbankan di Indonesia, yaitu sistem perbankan konvensional dan sistem perbankan syariah. Bahkan bank umum konvensional diperkenankan untuk membuka layanan syariah melalui islamic window dengan terlebih dahulu membentuk Unit Usaha Syariah (UUS). Pertumbuhan ekonomi provinsi DKI Jakarta (termasuk Banten) yang tinggi dan menjadi penyumbang pertumbuhan ekonomi terbesar secara nasional, yaitu sebesar 26,4% pada tahun 2007. Berdasarkan data yang dikeluarkan oleh Bappeda DKI Jakarta (2008), kinerja perbankan di wilayah provinsi DKI Jakarta pada tahun 2007 juga menunjukkan peningkatan. Penghimpunan Dana Pihak Ketiga (DPK) mencapai Rp 725,7 trilyun atau meningkat sebesar 13,6% dibandingkan tahun sebelum-nya. Komposisi DPK terbesar dalam bentuk deposito, yaitu sebesar Rp 401,8 trilyun atau 55,4% dari keseluruhan DPK. Nilai kredit yang disalurkan juga mengalami peningkatan sebesar 26,4% dengan nilai kredit yang telah disalurkan sebesar Rp 503,8 trilyun. Oleh karena itu, DKI Jakarta meru-pakan provinsi yang memiliki pangsa pasar perbankan terbesar di Indonesia sehingga dibutuhkan informasi berbasis pasar yang dapat digunakan sebagai pertimbangan dalam merancang strategi pengembangan sistem perbankan sya-riah yang tepat dan disesuaikan dengan kebutuhan masyarakat. Perumusan Masalah Bagaimana segmen pasar perbankan syariah di wilayah provinsi DKI Jakarta ? Bagaimana preferensi dan sumber informasi nasabah tentang bank syariah ? Apakah faktor-faktor yang mem-pengaruhi responden dalam memilih bank syariah ? Bagaimana formulasi strategi pema-saran bagi industri perbankan sya-riah sesuai dengan segmentasi pasar dan perilaku nasabah terhadap bank-bank syariah yang akan/telah beroperasi di wilayah penelitian ? Tujuan Penelitian 1. Menganalisis segmen pasar per-bankan syariah di Provinsi DKI Jakarta. 2. Menganalisis preferensi dan sumber informasi nasabah tentang bank syariah. 3. Menganalisis faktor-faktor yang mempengaruhi responden memilih bank syariah. 4. Menyusun formulasi strategi pemasaran bagi industri perbankan sya-riah sesuai dengan segmentasi pasar dan perilaku nasabah terhadap bank- bank syariah yang akan/telah beroperasi di wilayah penelitian. Manfaat Penelitian Dapat menjadi literatur bagi kepentingan akademisi, praktisi dan regulator yang ingin memahami tentang segmentasi dan perilaku nasabah terhadap bank syariah Mampu memberikan rekomenda-si strategi pemasaran perbankan syariah sesuai dengan segmentasi pasar beserta dengan karakteristik dan perilaku nasabahnya. Mampu memberikan informasi yang dapat digunakan dalam me-rancang program pengembangan perbankan syariah yang sesuai dengan masyarakat wilayah DKI Jakarta. Dan secara nasional sebagai informasi untuk pemetaan potensi masyarakat dalam pengembangan bank syariah di Indonesia. Ruang Lingkup Penelitian Dibatasi pada analisis segmentasi pasar dan perilaku nasabah perbankan yang dihubungkan dengan karakteristik demografi masyarakat terhadap lembaga perbankan syariah di wi-layah DKI Jakarta. TINJAUAN PUSTAKA Riba secara bahasa bermakna ziyadah yang artinya adalah tambahan. Dalam pengertian lain, secara linguistik, riba juga berarti tumbuh dan membesar (Saeed, 1996). Antonio (1999) menyatakan bahwa menurut istilah teknis, riba berarti pengambilan tambahan dari pokok atau modal secara batil. Riba bukan hanya merupakan persoalan Islam saja, tetapi berbagai kalangan di luar Islam pun memandang serius persoalan ini. Beberapa penelitian terdahulu yang mendasari penelitian ini adalah Karim Business Consulting (2005), melakukan penelitian tentang segmentasi dan perilaku nasabah terhadap bank syariah di Indonesia dengan pendekatan value graphic map dan service orientation. Penelitian ini menghasilkan tiga seg-mentasi pasar perbankan syariah, yaitu syariah loyalist, floating mass dan conventional loyalist. Pembagian seg-men pasar dilakukan dengan pendekatan kualitatif (Focus Group Discussion dan In Depth Interview). Wijaya (2006), melakukan analisis segmen pasar dan perilaku nasabah terhadap bank syariah di wilayah Daerah Istimewa (DI) Yogyakarta de-ngan membagi segmen pasar perbankan syariah menjadi syariah loyalist, floating more syariah, floating less syariah dan conventional loyalist dengan analisis deskriptif, analisis fak-tor dan analisis klaster. Hasil penelitian menunjukkan bahwa segmen floating more syariah merupakan pasar sasaran yang paling potensial di wilayah DI Yogyakarta dibandingkan segmen-segmen lainnya. Harahap (2003) melakukan pene-litian untuk melihat potensi pendirian BNI Syariah di Kota Bogor dengan mellihat respon masyarakat terhadap beberapa perbankan syariah. Pengambilan sampel dilakukan dengan teknik cluster sampling dan non-probability sampling yaitu dengan teknik quota sampling. BI dan LP IPB (2000) melakukan penelitian tentang potensi, sikap dan perilaku masyarakat terhadap bank syariah di Jawa Barat dengan survei yang dilakukan dengan menggunakan metode regresi logistic dan analisis deskriptif. Penelitian ini mengatakan bahwa profesionalisme dan jenis pelayanan bank syariah masih berada di bawah bank konvensional dan masyarakat berpenghasilan menengah ke bawah lebih meminati bank syariah karena sistem “jemput bola” yang diterapkan oleh bank syariah rendah. BI dan CBR Universitas Andalas (2006) melakukan penelitian mengenai identifikasi faktor penentu keputusan konsumen dalam memilih jasa perbankan antara bank syariah dengan bank konvensional. Penelitian dilakukan di 4 wilayah Sumatera Barat dengan kriteria bahwa pada masing-masing wilayah telah beroperasi kedua tipe bank (bank syariah dan bank konvensional) dengan menggunakan analisis statistik deskriptif (tabulasi silang, grafik, ratarata dan frekuensi), analisis faktor, crosstab analysis. Hasil penelitian ini memberikan informasi tentang pertimbangan responden yang paling dominan di dalam memilih jasa bank syariah, yaitu faktor keyakinan bahwa bunga bank bertentangan dengan agama. Hendrawan (2004) melakukan penelitian di Tebet tentang perilaku nasabah tabungan bank setelah dikeluarkannya fatwa MUI mengenai bunga bank. Penelitian dilakukan dengan metode survey dan metode purposive sampling (hanya nasabah muslim dari seluruh populasi). Responden sebesar 100 orang dan pengambilan sampling dilakukan dengan metode convenience sampling. Data yg diperoleh diolah dengan analisis deskriptif, tabulasi silang, uji chi square, regresi logistic dan metode Thurstone. Penelitian ini mendapatkan bahwa perilaku nasabah muslim pasca fatwa MUI adalah menyesuaikan pola pikirnya dengan pengetahuan yang baru. KERANGKA PEMIKIRAN PENELITIAN Kerangka pemikiran penelitian ini disajikan secara ringkas pada Gambar 1. Gambar 1. Kerangka Pemikiran Penelitian METODE PENELITIAN Penelitian dilakukan di wilayah provinsi DKI Jakarta selama bulan Agustus-Oktober 2008.Penelitian dilakukan dengan metode deskriptif dan kuantitatif melalui pendekatan survei. Survei dilakukan dengan melakukan wawancara langsung (face to face interview). Metode pengumpulan data responden dilakukan dengan menggunakan sampel tak berpeluang (non probability sampling). Teknik yang dipilih dalam penelitian ini adalah menggunakan teknik sampel kemudahan (convenience sampling). Jenis data yang digunakan dalam penelitian ini adalah data primer (pengamatan dan penelitian langsung di lapangan, wawancara dan pengisian kuesioner oleh responden) dan data sekunder (literatur-literatur buku, jurnal dan penelitian-penelitian sebelumnya) baik yang bersifat kualitatif maupun kuantitatif. Teknik Pengambilan Sampel Penentuan jumlah sampel dari populasi yang diinginkan (Suharjo, 2002) = Setelah no diketahui maka selanjutnya dilakukan koreksi, sehingga menjadi : n = dimana : Z= tingkat kepercayaan dugaan (1-a) p= proporsi sampel e= kesalahan dugaan (sampling error) n= jumlah sampel setelah koreksi populasi terhingga no= jumlah sampel sebelum koreksi populasi terhingga N= jumlah populasi Berdasarkan pendekatan tersebut, maka dalam menentukan jumlah sampel yang akan digunakan dalam penelitian ini digunakan ketentuan sebagai berikut: N = populasi penduduk provinsi DKI Jakarta 8.468.471 orang Z = 90% (tingkat kepercayaan 90%) p = 50% (proporsi sampel 50%) e = 7,5% (sampling error 7,5%) Perhitungan : = = 120,26778 Setelah no diketahui sebesar 120,26778 maka selanjutnya dilakukan koreksi populasi terhingga dengan jumlah populasi (N) sebanyak 8.468.471 orang. n = n = 120,26608 n = 120 (pembulatan) Berdasarkan perhitungan, maka ukuran sampel yang digunakan sebanyak 120 responden, terdiri dari 13 responden berasal dari Jakarta Pusat (11%), 20 responden berasal dari Jakarta Utara (16,8%), 23 responden berasal dari Jakarta Barat (19,3%), 27 responden berasal dari Jakarta Selatan (22,3%) dan 37 responden berasal dari Jakarta Timur (30,6%). Teknik Pengolahan dan Analisis Data Sebelum penelitian dilakukan, maka terlebih dahulu dilakukan penelitian awal untuk menguji instrumen pengum-pulan data dengan uji validitas dan uji reliabilitas. Setelah mendapatkan hasil yang valid dan reliabel melalui uji validitas dan uji reliabilitas, kemudian dilakukan penelitian lanjutan dengan menggunakan tiga jenis analisis yaitu analisis klaster (cluster analysis), analisis faktor (factor analysis) dan analisis deskriptif (descriptive analysis). HASIL DAN PEMBAHASAN Uji validitas dan reliabilitas pada penelitian awal ini, dilakukan dengan teknik Cronbach’s Alpha dengan alat bantu SPSS 11.5. Hasil pengujian ini menunjukkan bahwa kuesioner yang dibuat telah memenuhi standar yang valid dan reliabel pada taraf kepercayaan 95%. Demografi Responden Responden dianalisis berdasarkan karakteristik demografi. Hasil yang didapat dari analisis ini, yaitu mayoritas responden sudah berusia diatas 40 tahun (28,33%), status keluarga belum menikah (29,17%), beragama Islam (82,50%), jenis kelamin perempuan (53,33%), pekerjaan pegawai swasta (49,17%), memiliki tingkat pendidikan formal sampai dengan S1 atau setara (66,67%), kedudukan sosial masyarakat biasa (94,17%), rata-rata jumlah pengeluaran (per orang) per bulan kurang dari Rp 1.000.000,- (41,67%) dan responden dengan 5,01%-10,00% dari penghasilan ditabung (30,83%). Segmentasi Pasar Perbankan Syariah Analisis segmentasi pasar perbankan syariah menggunakan alat analisis multivariate (KMeans Cluster Analysis) dengan menggunakan data survei dari 120 responden di wilayah DKI Jakarta. Analisis ini menghasilkan klaster 1 yang merupakan segmen syariah loyalist dengan jumlah 32 orang, klaster 2 merupakan segmen floating mass dengan jumlah 49 orang. Sementara segmen conventional loyalist sudah diidentifikasi sebelum analisis ini dilakukan yang terdiri dari responden yang tidak tertarik dengan bank syariah dengan jumlah 39 orang. Preferensi dan Sumber Informasi Nasabah tentang Bank Syariah Segmen pasar syariah loyalist memperoleh sumber informasi mayori-tas dari teman atau keluarga sebesar 20,2%. Sedangkan, segmen pasar floating mass mendapatkan informasi dari melihat iklan di media cetak sebesar 16,9% dan segmen pasar conventional loyalist mendapatkan informasi mengenai bank syariah secara dominan dari 2 jenis sumber informasi yang berbeda yaitu melihat iklan di TV dan melihat langsung kantor cabang bank syariah masing-masing sebesar 18,9%. Penelitian ini juga menganalisis lebih lanjut tentang preferensi tentang Bank Syariah yaitu mayoritas responden memilih menggunakan Bahasa Indonesia sebagai nama ideal produk bank syariah agar dapat lebih mudah dimengerti, daerah perkantoran dan pemukiman sebagai lokasi ideal bank syariah, karyawan bank syariah sebaiknya Islam, jilbab sebaiknya digunakan oleh karyawan wanita di bank syariah. Perilaku Nasabah Berdasarkan Faktor-Faktor Dalam Memilih Bank Analisis faktor dilakukan dengan uji Keiser-Meyer_Olkin (KMO) measures of adequacy dan Bartlett Test of Sphericity. Menurut Simamora (2005), analisis faktor layak untuk dilanjutkan apabila nilai KMO uji berkisar mem-punyai nilai indeks tinggi yakni berkisar antara 0,5 sampai 1,0. Hasil uji KMO menunjukkan bahwa nilai yang didapatkan adalah 0,855 yang berarti bahwa sampel sudah men-cukupi dan dinyatakan baik berdasarkan pedoman rekomendasi dari Sharma (1994). Setelah dilakukan uji Bartlett’s Test, tampak bahwa nilai chi-square adalah 852,856 dengan df 153 dan signifikansi 0,000 yang berarti bahwa matriks korelasi yang diuji bukan merupakan matriks identitas sehingga matriks korelasi dinyatakan layak untuk dilakukan analisis faktor. Tahapan selanjutnya dilakukan pengujian secara parsial terhadap setiap variabel dan didapatkan hasil dari tabel anti-image matrices bahwa nilai MSA (Measures of Sampling Adequacy) dari setiap variabel ³ 0,5 sehingga semua variabel bisa diproses lebih lanjut. Tahap selanjutnya yang dilakukan adalah mengetahui banyaknya faktor yang akan terbentuk yang didentifikasi dari nilai eigenvalues ³ 1. Dengan menggunakan metode ekstraksi Principal Component Analysis, maka terbentuk 4 faktor yang diekstrak dari 18 variabel yang ditandai dengan nilai eigenvalues ³ 1. Setelah diketahui terdapat 4 kelompok faktor, maka dilakukan pro-sedur varimax rotation untuk meng-identifikasi hubungan antara faktor dan variabel individual sehingga matriks menjadi lebih sederhana dan mudah diinter-pretasikan. Berdasarkan hasil out-put Rotated Component Matrix, maka dilakukan interprestasi terhadap faktor yang telah mengelompok dan penamaan terhadap 4 kelompok faktor dengan menggunakan pendekatan surrogate variable yakni pemilihan nama berdasarkan nilai factor loading tertinggi yaitu Faktor 1 : Tampilan Fisik Faktor 2 : Jaringan ATM Faktor 3 : Keragaman Produk Faktor 4 : Tingkat Bagi Hasil Dari hasil analisis faktor (dengan uji KMO) dan analisis deskriptif yang telah dilakukan dalam melihat perilaku nasabah yang berkaitan dengan faktor-faktor yang mem- pengaruhi untuk memilih suatu bank, tampak tidak terdapat perbedaan yang signifikan. Responden menganggap bahwa jaringan kantor dan ATM yang luas, keragaman produk, reputasi dan image suatu bank, kecepatan dan efisiensi pelayanan yang baik, tingkat bagi hasil yang menarik, waktu operasi yang sesuai maupun keramah-tamahan karyawan bank merupakan faktor-faktor dominan yang mempengaruhi mereka dalam memilih suatu bank. Kemudian dilakukan analisis lebih lanjut berkaitan dengan alasan respon-den berminat terhadap produk dan jasa bank syariah berdasarkan kategori nasabah. Nasabah Bank Syariah Alasan responden berminat terhadap produk dan jasa bank syariah bila di-bandingkan dengan bank konvensional adalah karena adanya aspek syariahnya yaitu sesuai dengan syariat Islam (55,0%) dan faktor tidak adanya riba sehingga halal dalam pengelolaan dana (27,0%). Gambar 1. Alasan Nasabah Bank Syariah Berminat Produk dan Jasa Bank Syariah Nasabah Bank Syariah dan Bank Konvensional Alasan responden berminat terhadap produk dan jasa bank syariah bila dibandingkan dengan bank konven-sional adalah karena bank syariah tidak riba atau halal dalam pengelolaan dananya (49%) dan sesuai dengan syariat agama Islam (26%). Gambar 2. Alasan Nasabah Bank Syariah dan Bank Konvensional Berminat Produk dan Jasa Bank Syariah Nasabah Bank Konvensional Alasan responden berminat terhadap produk dan jasa bank syariah dikarenakan sesuai dengan ajaran agama Islam (30,0%), adanya aspek syariahnya yaitu faktor tidak adanya riba dalam pengelolaan dana (28,0%). Gambar 3. Alasan Nasabah Bank Konvensional Berminat Produk dan Jasa Bank Syariah Alasan utama mengenai tetap dipertahankannya rekening di bank kon-vensional bagi nasabah yang mempu-nyai rekening di bank syariah dan bank konvensional secara bersamaan yaitu kurang lengkapnya fasilitas bank syariah (27,0%) sehingga menyebabkan nasabah tetap menggunakan bank konvensional. Gambar 4. Alasan Tetap Mempertahankan Rekening di Bank Konvensional Alasan utama nasabah bank konvensional tidak berminat terhadap produk dan jasa bank syariah yaitu dikarenakan minimnya informasi yang didapat mengenai bank syariah sementara nasabah bank konvensional sangat mudah untuk mendapatkan informasi lengkap mengenai bank konvensional (37,0 %). Gambar 5. Alasan Tidak Berminat Produk dan Jasa Bank Syariah Dari hasil analisis yang dilakukan yaitu analisis klaster dan analisis faktor, tampak bahwa antar segmen yang dihasilkan yaitu segmen syariah loyalist, floating mass dan conventional loyalist tidak terdapat perbedaan yang signifikan terhadap faktor-faktor yang mempengaruhi dalam memilih suatu bank. Yang membedakan hanyalah urutan prioritasnya. Faktor-faktor yang menjadi pertimbangan bagi responden dalam memilih suatu bank adalah ja-ringan kantor dan ATM yang luas, kecepatan dan efisiensi pelayanan, keramah-tamahan karyawan bank serta reputasi dan image bank itu sendiri. Jaringan kantor dan ATM yang luas menduduki peringkat tertinggi sedang-kan bila dilihat dari aspek demografi, responden memilih perkantoran dan pe-mukiman sebagai lokasi ideal bank sya-riah. Hal ini dimungkinkan karena ma-yoritas responden memiliki jenis pekerjaan sebagai pegawai swasta dan wiraswasta. Selain itu, uji analisis KMO menghasilkan tampilan fisik bank baik internal maupun eksternal, jaringan kantor dan ATM yang luas, reputasi dan image suatu bank, keragaman produk, waktu operasi bank serta tingkat bagi hasil yang menarik sebagai faktor-faktor yang mempengaruhi responden dalam memilih suatu bank. Waktu operasi bank juga merupakan hal yang penting bagi pegawai swasta bila dikaitkan dengan waktu bekerja mereka yang terbatas dan sudah ditentukan. Kebutuhan akan keragaman produk muncul dari latar belakang responden yang mayoritas tamat S1 atau setara sehingga cenderung memiliki kebutuhan akan variasi produk bank. Apabila analisis ini dikaitkan de-ngan analisis minat responden terhadap bank syariah, tampak bahwa responden masih tetap memper-tahankan rekening di bank kon-vensional ataupun tidak berminat sama sekali terhadap bank syariah disebabkan faktor-faktor kurang lengkapnya fasilitas bank syariah dibandingkan bank konvensional, ku-rangnya informasi mengenai bank syariah sehingga mereka menganggap belum perlu bank syariah ataupun tidak ada perbedaan antara bank syariah dan bank konvensional. Belum tersosialisasinya sumber-sumber informasi bank syariah merupakan salah satu kendala bagi responden dalam memenuhi kebu-tuhannya akan informasi tentang bank syariah. Bagi responden yang berminat terhadap bank syariah disebabkan aspek syariat Islam dan tidak riba, hal ini dimungkinkan karena responden didominasi oleh responden beragama Islam. Dari semua analisis yang dilakukan, penelitian ini memiliki keterbatasan yaitu tidak dilakukannya identifikasi terhadap hubungan antara faktor-faktor yang mempengaruhi responden dalam memilih suatu bank. Hal ini dapat di-lakukan dengan penelitian selanjutnya menggunakan crosstab analysis. Formulasi Strategi Pemasaran Pencapaian tujuan dan sasaran pemasaran bagi perbankan syariah dapat dicapai dengan menerapkan strategi pemasaran yang tepat dengan memperhatikan faktor-faktor yang mempengaruhi dalam pemilihan suatu bank. Pembahasan tentang formulasi strategi pemasaran bagi perbankan syariah di wilayah propinsi DKI Jakarta didasarkan pada analisis yang telah dilakukan. Dari hasil penelitian ini telah menunjukkan bahwa segmen pasar perbankan syariah di wilayah DKI Jakarta terdiri dari syariah loyalist, floating mass dan conventional loyalist yang memiliki karakteristik maupun besar segmen yang berbeda-beda. Untuk itu, maka bank syariah perlu menggunakan strategi pemasaran yang difokuskan kepada Segmenting, Targeting dan Positioning (STP) didasarkan atas perbedaan karakteristik dan besar segmen yang ada. Setelah karakteristik dan besar setiap segmen pasar diketahui, maka formulasi strategi pemasaran perbankan syariah hendaknya dimulai dengan pemahaman segmen yang ada tersebut. Setelah itu, perbankan syariah dapat merumuskan target market dengan mempertimbangkan potensi pasar serta kekuatan dan kelemahan yang dimiliki oleh bank syariah terkait dengan karakteristik nasabah yang hendak dijadikan target market-nya. Berdasarkan potensi pasar dan besar segmen yang ada, maka segmen pasar floating mass merupakan potential target market di wilayah propinsi DKI Jakarta. Apabila perbankan syariah ingin menjadikan segmen ini sebagai target market nya, maka perbankan syariah harus dapat menentukan positioning yang tepat dengan menjaga keseimbangan antara atribut syariah dengan atribut perbankan, bahkan akan lebih baik lagi bila dapat meningkatkan kualitas dan kuantitas atribut syariahnya sehingga segmen floating mass tidak ragu-ragu untuk menentukan mana prioritas atribut yang dipilihnya. Hal ini dapat dilakukan seperti dengan menjaga secara konsisten penerapan prinsip syariah dalam praktik perbankan syariah sehingga dapat menciptakan rasa aman dan jaminan bebas dari riba. Berdasarkan hasil analisis terhadap faktor-faktor yang dipertimbangkan dalam memilih bank syariah, maka bank syariah sebaiknya memberikan kemudahan aksesibilitas lokasi jaringan kantor dan ATM yang bisa dilakukan dengan pengembangan jaringan kantor kas (office channeling) dan penambahan jumlah mesin ATM ataupun melalui kerjasama dengan beberapa jaringan ATM (seperti penggunaan ATM bersama) di lokasi perkantoran dan pemukiman. Kecepatan dan efisiensi pelayanan dapat diberikan melalui karyawan bank yang cakap dan terlatih. Hal ini dapat dilakukan dengan memberikan pelatihan-pelatihan yang memadai terhadap karyawan bank syariah sehingga tingkat pelayanan yang diberikan oleh bank syariah dapat bersaing dengan bank konvensional. Begitupula dengan keramahtamahan pun perlu dijaga agar nasabah merasa nyaman bila berinteraksi dengan bank syariah. Reputasi dan image bank syariah sebagai bank yang mengedepankan prinsip-prinsip syariah harus dipertahankan sehingga tidak tercipta opini bahwa bank syariah sama saja dengan bank konvensional. Produk perbankan yang dikembangkan hendaknya bervariasi sehingga memudahkan nasabah dalam memilih produk sesuai dengan kebutuhannya. Tingkat bagi hasil simpanan yang menarik dan juga tingkat bagi hasil pembiayaan yang rendah dapat mem-buat nasabah menjadi lebih tertarik de-ngan bank syariah dibandingkan bank konvensional. Fasilitas yang lengkap juga perlu ditingkatkan dan setidaknya dapat sejajar dengan bank konvensional. Selain itu diperlukan juga perbaikan sumber-sumber informasi untuk menso-sialisasikan perbankan syariah. Per-bankan syariah seharusnya mampu memberikan fasilitas dan pelayanan yang dapat bersaing dengan perbankan konvensional. Jika perbankan syariah memiliki keunggulan dalam aksesi-bilitas, fasilitas dan pelayanan diban-dingkan dengan perbankan konvensio-nal, maka segmen floating mass meru-pakan target market yang paling tepat. Sedangkan apabila ingin mengem-bangkan segmen syariah loyalist, maka perbankan syariah harus mampu me-ningkatkan, menerapkan maupun meng-komunikasikan seluruh atribut potensial syariahnya. Pertimbangan utama res-ponden yang berasal dari segmen syariah loyalist memilih menggunakan bank syariah adalah karena sesuai de-ngan syariat Islam dan tidak riba (halal). Untuk menjaga loyalitas responden, bank syariah harus mampu menjaga dengan konsisten aspek-aspek yang berhubungan dengan pertimbangan ter-sebut. Bank syariah harus konsisten menjalankan ekonomi Islam dalam praktek perbankan syariah agar rasa aman yang diharapkan oleh responden dapat terjaga dan terus meningkat. Strategi pemasaran yang harus dikembangkan adalah dengan mengkomunikasikan dengan baik keunggulan aspek syariah terutama aspek yang berhubungan dengan syariat Islam seperti produk yang sesuai dengan akad. Walaupun responden bank syariah sudah dalam tahap penggunaan, namun bank syariah harus meningkatkan loyalitas responden terhadap penggunaan bank syariah dengan menjaga harapan-harapan responden, termasuk menjaga motivasi responden dalam menggunakan bank syariah karena sistem bagi hasil, untuk menjalankan syariat agama dan karena tidak meng-gunakan sistem bunga. Hal ini mengindikasikan bahwa responden bank syariah lebih mengedepankan aspek fanatisme sebagai muslim bukan karena faktor ekonomi. Tantangan bagi bank sya-riah adalah harus menonjolkan aspek-aspek yang logis dan real bagi responden agar penggunaan bank syariah lebih karena faktor ekonomi Islam yang ideal. Selain itu, jumlah segmen pasar ini memang relatif kecil dibandingkan seg-men pasar yang lain, namun memiliki keunggulan yakni tidak terlalu sensitif dengan pricing produk. Apabila perbankan syariah mampu menunjukkan konsistensinya terhadap aspek syariah, maka akan membuat nasabah menjadi loyal. Keberhasilan perumusan dan penerapan formulasi strategi pemasaran sangat ditentukan oleh kemampuan untuk mempelajari karakteristik dan besar segmen pasar, sehingga penentuan target market dan positioning dapat dirumuskan dengan tepat sehingga akhirnya dapat membuat perbankan syariah khu-susnya di wilayah DKI Jakarta mampu bersaing dengan perbankan konvensional lainnya. KESIMPULAN DAN SARAN Kesimpulan Terdapat 3 segmen pasar perbankan syariah di wilayah DKI Jakarta yaitu segmen syariah loyalist, segmen floating mass dan segmen conven-tional loyalist. Segmen syariah loyalist dominan berada di wilayah Jakarta Timur dan Jakarta Selatan, segmen floating mass berada di wilayah Jakarta Timur dan segmen conventional loyalist berada di wilayah Jakarta Barat. Selain itu, segmen floating mass merupakan target pasar yang paling potensial di wilayah provinsi DKI Jakarta karena memiliki pangsa pasar terbesar bila dibandingkan dengan segmen syariah loyalist ataupun segmen conventional loyalist. Walaupun demikian, masyarakat beragama Islam masih merupakan target pasar utama bagi bank syariah dikarenakan jumlah segmen floating mass secara dominan diperoleh dari responden beragama Islam dan didominasi oleh jenis pekerjaan pegawai swasta dan wiraswasta. Berdasarkan analisis klaster dan analisis faktor, dihasilkan bahwa se-mua segmen tidak memiliki perbe-daan yang signifikan terhadap fak-tor-faktor yang mempengaruhi da-lam memilih suatu bank. Yang membedakan hanyalah urutan prio-ritasnya. Faktor-faktor yang mem-pengaruhi responden dalam memilih suatu bank adalah jaringan kantor dan ATM yang luas, kecepatan dan efisiensi pelayanan, keramah-tamahan karyawan bank serta reputasi dan image bank itu sendiri. Jaringan kantor dan ATM yang luas menduduki peringkat tertinggi. Sedangkan bila dilihat dari aspek demografi, responden lebih memilih perkantoran dan pemukiman sebagai lokasi ideal bank syariah. Hal ini dimung-kinkan karena mayoritas respon-den memiliki jenis pekerjaan se-bagai pegawai swasta dan wiraswasta. Uji analisis KMO menghasilkan tampilan fisik bank baik internal maupun eksternal, jaringan kantor dan ATM yang luas, reputasi dan image suatu bank, keragaman produk, waktu operasi bank serta tingkat bagi hasil yang menarik sebagai faktor-faktor yang mempengaruhi responden dalam memilih suatu bank. Waktu operasi bank juga merupakan hal yang penting bagi pegawai swasta bila dikaitkan dengan waktu bekerja mereka yang terbatas dan sudah ditentukan. Kebutuhan akan keragaman produk muncul dari latar belakang responden yang mayoritas tamat S1 atau setara sehingga cenderung memiliki kebutuhan akan variasi produk bank. Semua segmen dikaitkan dengan analisis minat responden terhadap bank syariah, maka hasil analisis yang didapat adalah bila responden masih tetap memper-tahankan rekening di bank konvensional ataupun tidak berminat sama sekali terhadap bank syariah disebabkan faktorfaktor kurang lengkapnya fasilitas bank syariah dibandingkan bank konvensional, kurangnya infor-masi mengenai bank syariah sehingga mereka menganggap belum perlu bank syariah ataupun tidak ada perbedaan antara bank syariah dan bank konvensional. Belum tersosialisasinya sumber-sumber informasi bank syariah merupakan salah satu kendala bagi responden dalam memenuhi kebu-tuhannya akan informasi tentang bank syariah. Sedangkan, bagi responden yang berminat terhadap bank syariah cenderung disebabkan aspek syariat Islam dan tidak riba, hal ini dimungkinkan karena responden didominasi oleh respon-den beragama Islam. Empat kelompok faktor yang mem-pengaruhi nasabah dalam memilih suatu bank dengan pendekatan sur-rogate variable yakni : (1) Faktor 1: Tampilan Fisik, terbentuk karena responden menganggap bahwa tam-pilan internal dan eksternal bank yang menarik merupakan salah satu faktor penting dalam memilih bank. Hal ini tentunya berkaitan dengan kenyamanan bagi nasabah apabila sedang berada di bank; (2) Faktor 2: Jaringan ATM, terbentuk karena kebutuhan jaringan kantor dan ATM yang luas serta reputasi dan image baik suatu bank. Jaringan kantor dan ATM yang luas dapat memudahkan responden dalam mendapatkan ak-ses bank. Begitu pula dengan repu-tasi dan image bank juga menetukan apakah bank yang dipilih merupa-kan bank yang besar serta aman; (3) Faktor 3 : Keragaman Produk, terbentuk dari waktu operasi per-bankan dan keragaman produk yang ditawarkan. Waktu operasi perbank-an merupakan salah satu faktor yang dipertimbangkan oleh responden mengingat responden sebagian besar adalah pegawai swasta yang terikat dengan waktu bekerja. Sedangkan, keragaman produk juga mempeng-aruhi responden dalam memilih suatu bank; dan (4) Faktor 4 : Ting-kat Bagi Hasil, terbentuk dari ting-kat bunga atau margin/bagi hasil pembiayaan uang rendah dan pembayaran bunga atau bagi hasilsimpanan yang tinggi. Responden menginginkan tingkat bunga/bagi hasil yang rendah apabila mereka akan mengambil fasilitas pembiayaan mengingat besarnya bunga pembiayaan bank konven-sional yang ada saat ini. Sedang-kan, tingkat bagi hasil simpanan yang tinggi juga merupakan hal yang menarik bagi responden. Sumber informasi mengenai bank syariah untuk segmen pasar syariah loyalist mayoritas didapatkan dari teman atau keluarga, segmen pasar floating mass mendapatkan informasi dari melihat iklan di media cetak dan segmen pasar conventional loyalist mendapatkan informasi mengenai bank syariah secara dominan dari 2 jenis sumber in-formasi yang berbeda yaitu melihat iklan di TV dan melihat langsung kantor cabang bank syariah. Sedangkan preferensi nasabah tentang bank syariah adalah responden cenderung memilih bahasa Indonesia sebagai bahasa yang digunakan untuk nama produk, daerah perkantoran dan pemukiman sebagai lokasi ideal bank syariah, karyawan bank syariah sebaiknya beragama Islam dan karyawan wanita sebaiknya menggunakan jilbab. Formulasi strategi pemasaran bagi perbankan syariah khususnya di wilayah provinsi DKI Jakarta seba-iknya disesuaikan dengan segmen-tasi pasar, preferensi dan sumber informasi nasabah tentang bank syariah dan faktor memilih bank. Dikarenakan DKI Jakarta memiliki segmen pasar, karak-teristik maupun besar segmen yang berbeda-beda, maka bank syariah perlu menggunakan stra-tegi pemasaran yang difokuskan kepada Segmenting, Targeting dan Positioning (STP). Berdasarkan potensi pasar dan besar segmen yang ada, maka segmen floating mass merupakan potential target market di wilayah propinsi DKI Jakarta. Apabila perbankan syariah ingin menjadikan segmen ini sebagai target market-nya, maka perbankan syariah harus dapat me-nentukan positioning yang tepat de-ngan menjaga keseimbangan antara atribut syariah dengan atribut per-bankan, bahkan akan lebih baik lagi bila dapat meningkatkan kualitas dan kuantitas atribut syariahnya (seperti bank syariah dapat memberikan rasa aman dan bebas dari riba) sehingga segmen pasar floating mass tidak ragu-ragu untuk menentukan mana prioritas atribut yang dipilihnya. Walaupun demi-kian, bank syariah juga dapat tetap menjadikan segmen syariah loyalist sebagai target pasarnya dengan mengedepankan aspek syariah dibandingkan atribut perbankan lainnya dikarenakan mayoritas responden tertarik dengan bank syariah karena alasan aspek syariahnya. Saran Peningkatan upaya sosialisasi lebih intensif dalam memberikan gambar-an yang jelas mengenai keunggulan komparatif perbankan syariah mengingat ada kesan dalam masyarakat bahwa bank syariah tidak berbeda dengan bank konvensional lainnya sebagian besar disebabkan olah belum pahamnya masyarakat terhadap sistem dan produk perbankan syariah melalui media interpersonal (kyai/ulama) maupun media cetak dan elektronik. Lebih mempertegas diferensiasi produk antara bank syariah dengan bank konvensional sehingga masyarakat yakin bahwa terdapat keunikan pada produk bank syariah melalui komunikasi below the line. Komunikasi yang ada saat ini, seperti misalnya komunikasi above the line hanya mampu menciptakan awareness masyarakat terhadap keberadaan bank syariah, tetapi belum mampu untuk mengubah keyakinan masyarakat terhadap bunga bank. Bagi kelompok yang sudah dan ingin berhubungan dengan perbankan syariah harus dijaga rasa sim-patinya jangan sampai dikecewakan, karena sekali dikecewakan maka upaya pemulihan memerlukan waktu dan upaya yang tidak sedikit. Prospek perbankan syariah di wilayah DKI Jakarta ke depannya masih relatif besar untuk dikembangkan (40,8% nasabah yang masih ragu tetapi memiliki minat terhadap bank syariah). Kurang lengkapnya fasilitas bank syariah dan informasi tentang manfaat dan kelebihan yang bisa diperoleh dari bank syariah perlu ditunjang oleh kegiatan promosi yang lebih bersifat informatif (bukan imaginer) seperti seminar dan brosur. Aksesibilitas bank syariah oleh masyarakat menjadi hal penting yang harus dipertimbangkan dalam menetapkan lokasi bank syariah yang meliputi kemudahan masyarakat dalam mengakses bank syariah berupa jaringan layanan yang luas. Perlu diperhatikan pula bahwa umumnya wilayah-wilayah dengan aksesibilitas yang baik telah berkembang bank-bank konvensional sehingga diperlukan kombinasi yang baik antara aksesibilitas, pemanfaatan media interpersonal dan profesionalisme bank syariah menjadi syarat mutlak dalam pengembangan bank syariah. Dapat dilakukan penelitian selanjutnya menggunakan crosstab analysis untuk mengidentifikasi hubungan antara faktor-faktor yang mempengaruhi responden dalam memilih suatu bank maupun penelitian yang sejenis untuk wilayah-wilayah lain dikarenakan karakteristik responden tiap wilayah berbeda sehingga dapat menambah jumlah referensi bagi perkembangan bank syariah di Indonesia. DAFTAR PUSTAKA Antonio, M.S. 1999. Bank Syariah : Wacana Ulama dan Cendekiawan. Bank Indonesia dan Tazkia Institue, Jakarta. Bank Indonesia dan CBR Universitas Andalas. 2006. Identifikasi Faktor Penentu Keputusan Konsumen dalam Memilih Jasa Perbankan antara Bank Syariah dengan Bank Konvensional di wilayah Sumatera Barat. Bank Indonesia dan LP Institut Pertanian Bogor. 2000. Potensi, Sikap dan Perilaku Masyarakat terhadap Bank Syariah di wilayah Jawa Barat. Bank Indonesia dan Pusat Penelitian Kajian Pembangunan Lembaga Penelitian Universitas Diponegoro Semarang. 2000. Penelitian Potensi, Preferensi dan Perilaku Masyarakat terhadap Bank Syariah di Wilayah Jawa Tengah dan Daerah Istimewa Yogyakarta. Bappeda DKI Jakarta. 2008. Data Perbankan Provinsi DKI Jakarta (termasuk Banten). http://www.jakarta.go.id diakses tanggal 26 februari 2008 Direktorat Penelitian dan Pengaturan Perbankan Bank Indonesia. Desembar 2000. Potensi, Preferensi dan Perilaku Masyarakat terhadap Bank Syariah di Pulau Jawa. Direktorat Perbankan Syariah Bank Indonesia. 2004. Bank Indonesia. Statistik Perbankan Syariah. http://www.bi.go.id diakses tanggal 25 Febtuari 2008. Direktorat Perbankan Syariah Bank Indonesia. 2008. Bank Indonesia. Statistik Perbankan Syariah. http://www.bi.go.id diakses tanggal 25 Febtuari 2008. Karim Business Consulting. 2005. Inslamic Banking Consumer Behaviour in Indonesia : A Qualitative Approach. Priyatno, D. 2008. Mandiri Belajar SPSS untuk Analisis Data dan Uji Statistik. MediaKom, Yogyakarta. Saeed, A. 1996. Islamic Banking and Interest : A Study of prohibition of Riba and its Contemporary Interpretation. Leiden : EJ Brill Sharma, S. 1994. Applied Multivariate Techniques. Penerbit Erlangga, Jakarta. Simamora, B. 2005. Analisis Multivariate Pemasaran. Penerbit PT Gramedia Pustaka Utama, Jakarta. Suharjo, B. 2006. Sampling Technique. Mars School of Marketing & Research, Jakarta. Suku Dinas Kependudukan dan Catatan Sipil DKI Jakarta. Januari 2008. Jumlah Penduduk Provinsi DKI Jakarta. http://www.jakarta.go.id. Undang-Undang No. 10 Tahun 1998 tentang Perbankan Wijaya, A. 2006. Analisis Segmen Pasar dan Perilaku Nasabah tergadap Bank Syariah di Wilayah Yogyakarta dan Implikasi Pemasarannya. Tesis MB-IPB. Categories: Islamic Banking, Islamic Economy, Islamic Management

URGENSI PENGUATAN BANK SYARIAH PADA PEMERINTAHAN MENDATANG August 22, 2010 isa7695 1 comment Rate This Warsono The next govenment must recover every sectors including monetary. The syariah bank will push the realization of monetary inter-mediation. With its different business charateristics to conventional banks, syariah banks are hoped to be able to hush up fluctuation in intermediation monetary business in Indonesia. In addition, with the large number of moslems, Bank Indonesia along together with goverment should have strengthen the role of syariah banks, not only on monetary inter-mediation but also on other monetary services. Pendahuluan Krisis ekonomi global dan domestik yang terjadi pada tahun 1998 dan masih berlangsung hingga kini, bersumber dari krisis yang terjadi dalam dunia perbankan. Di Indonesia, krisis yang terjadi pada 1998 dipicu oleh terjadinya banyak pelanggaran terhadap peraturan perbankan, seperti dilanggarnya prinsip kehati-hatian perbankan (prudential-banking principle) dalam menyalurkan kredit dan juga pelanggaran terhadap peraturan Batas Maksimum Pemberian Kredit (BMPK). Akibatnya, kredit macet (NPL) melebihi batas maksimum. Di sisi lain, kepercayaan masyarakat terhadap dunia perbankan pada waktu itu menurun, sehingga terjadilah penarikan dana besar-besaran (rush). Krisis ekonomi pada 2008 dan awal 2009, bersumber dari krisis di pasar keuangan Amerika Serikat. Krisis itu bermula dari krisis kredit macet di sektor perumahan di Amerika Serikat (sub-prime mortgage) yang mulai merebak pada Juli 2007. Krisis keuangan global semakin parah pada 2008, yang ditandai dengan bangkrutnya perusahaan keuangan raksasa Amerika Serikat Lehman Brothers pada 15 September 2008 (Kompas, 16 September 2008). Dengan semakin terintegrasinya pasar keuangan antar negara, maka krisis keuangan global ini akhirnya mengimbas ke Pasar Keuangan Indonesia, termasuk pasar perbankan. Imbas krisis Pasar Keuangan Amerika Serikat yang segera dapat dirasakan oleh industri keuangan Indonesia adalah jatuhnya harga aset-aset keuangan dan semakin langkanya likuiditas perbankan. Indikasi kejatuhan harga aset keuangan yang langsung dapat diamati adalah terjadinya penurunan IHSG di Bursa Efek Indonesia, sedangkan kelangkaan likuiditas karena terjadinya penarikan dana secara serentak, seperti yang terjadi pada Bank Century. Dalam dunia perbankan, prinsip bisnis yang digunakan adalah kepercayaan (trust) dan kerahasiaan (secret). Jika kedua prinsip ini hilang, maka bisnis perbankan akan mengalami masalah. Kepercayaan dan kerahasiaan akan terbangun di antara bank dengan deposan, dan bank dengan debitor, jika kedua belah dalam melakukan transaksi disertai dengan kejujuran, menggunakan etika bisnis yang sehat, dan saling menguntungkan. Hal inilah yang sekarang relatif sulit dipraktikkan pada sistem perbankan berbasis bunga. Akibatnya, kejahatan dalam dunia perbankan relatif tinggi. Selama 2006, potensi kerugian negara akibat kejahatan perbankan mencapai Rp 1,209 triliun dan US$52 juta. Indikasi ini muncul dari 134 kasus perbankan (Kompas, 9 Maret 2007). Dengan adanya praktik-praktik bisnis yang kurang sehat dalam pasar keuangan konvensional, baik di pasar perbankan maupun pasar modal, maka perlu adanya lembaga keuangan alternatif yang dapat digunakan untuk menjalankan fungsi intermediasi dengan lebih sehat dan baik. Dengan karakteristik bisnisnya yang berbeda, perbankan syariah dapat digunakan sebagai intermediasi keuangan alternatif di luar lembaga keuangan konvensional yang ada, dalam rangka menjembatani antara pihak-pihak yang mengalami kelebihan dana dengan pihak yang mengalami kekurangan dana. Dari sisi fungsinya, antara perbankan konvensional dan perbankan syariah sama, yaitu sebagai lembaga penyedia jasa intermediasi dan jasa keuangan lainnya. Jasa intermediasi dijalankan dengan berusaha mempertemukan antara kepentingan pemilik dana (unit surplus) dengan kepentingan pengguna dana (unit defisit). Jasa keuangan meliputi jasa pembayaran, penjaminan, sewa, dan sebagainya. Sekalipun demikian, antara perbankan konvensional dan syariah memiliki karakteristik yang berbeda. Perbankan syariah, yang dalam operasi bisnisnya mendasarkan diri pada tuntunan Islam, memiliki karakteristik yang berbeda secara fundamental dibanding perbankan konvensional. Menurut Chapra (2000: 107-108), ada enam perbedaan mendasar antara perbankan syariah dibanding perbankan konvensional. Pertama, penghapusan riba. Dalam perbankan syariah, unsur riba dalam bentuk pengenaan bunga (interest) dilarang. Pengembalian bagi pemilik dana dilakukan dengan sistem bagi hasil. Perbedaan antara sistem bunga dengan bagi hasil dapat dilihat pada Tabel 1. Kedua, fokus pelayanan adalah kepentingan publik, bukan individu atau kelompok. Perbankan syariah menggunakan semua deposito yang berasal dari publik untuk merealisasikan kepentingan publik dan sasaran sosioekonomi Islam. Mereka menjalankan peran yang berorientasi pada tujuan dan bukan sekadar mencari keuntungan sebesarbesarnya dan harus melakukan penyesuaian-penyesuaian terhadap kebutuhan-kebutuhan perekonomian Islam. Ketiga, perbankan syariah akan bersifat universal atau suatu bank yang memiliki tujuan ganda dan bukan sekedar bank komersial. Perbankan syariah menjalankan fungsi ganda, yaitu sebagai bank komersial dan bank investasi, dan mereka akan berusaha menawarkan produk pelayanan bagi para pelanggan yang mempunyai hubungan jangka panjang. Perbankan syariah akan melayani pembiayaan jangka panjang, yaitu dalam bentuk penyertaan modal, dan mayoritas melayani pembiayaan jangka pendek. Tabel 1 Perbedaan antara Sistem Bunga dan Bagi Hasil No. Bunga Bagi Hasil 1. Penentuan bunga dibuat pada waktu akad. Penentuan besarnya rasio/nisbah bagi hasil dilakukan pada waktu akad. 2. Besarnya dana dinyatakan dalam bentuk prosentase. Besarnya rasio bagi hasil didasarkan pada jumlah keuntungan. 3. Bunga dapat mengambang/variabel. Rasio bagi hasil tetap tidak berubah selama akad masih berlaku. 4. Pembayaran bunga tetap seperti yang diperjanjikan. Bagi hasil bergantung pada keuntungan usaha yang dijalankan. Jika rugi akan ditanggung bersama. 5. Jumlah pembayaran bunga tidak meningkat sekalipun keuntungan berlipat ganda. Jumlah pembagian laba meningkat sesuai dengan peningkatan keuntungan. 6. Eksistensi bunga diragukan oleh semua agama. Tidak ada yang meragukan keabsahan bagi hasil. Sumber: Ascarya dan Yumanita, 2005. Keempat, perbankan akan melakukan evaluasi yang hati-hati terhadap permohonan pembiayaan yang berorientasi kepada penyertaan modal. Perbankan syariah melakukan hal ini karena mereka harus berbagi risiko dengan pemohon dana. Jika ternyata bahwa bisnis yang dibelanjai mengalami kerugian di masa mendatang, maka bank syariah harus ikut menanggungnya, sesuai dengan akad di awal. Dengan demikian, praktik berbagi risiko ini dapat menciptakan dimensi yang sehat dalam keseluruhan bisnis peminjaman. Ini berbeda dengan praktik yang dilakukan oleh perbankan konvensional. Kelima, bagi hasil akan cenderung mempererat hubungan antara bank dan pengusaha yang merupakan tonggak bank multitujuan. Langkah ini diharapkan dapat meningkatkan keahlian keuangan pada perusahaan-perusahaan pemohon dan juga menjadikan bank mampu berperan sebagai konsultan teknis dan penasehat pemasaran, dan bertindak sebagai katalisator dalam proses industrialisasi dan pembangunan. Keenam, suatu kerangka kerja didesain untuk membantu bank mengatasi kesulitan likuiditasnya. Dalam sistem berbasis bunga, bank dapat berlindung kepada pasar uang atau bank sentral. Akses kepada pasar uang tidak mungkin dilakukan untuk pinjaman yang berjangka sangat pendek karena sulitnya bagi hasil dalam transaksi pinjaman yang terpisah. Akses bebas bunga kepada bank sentral dapat menimbulkan penggunaan yang salah terhadap fasilitas ini, sedangkan pinjaman mudharabah oleh bank sentral hanya dapat dilakukan dalam suatu kerangka yang disepakati yang ditentukan oleh besarnya kebutuhan ekonomi terhadap uang berdaya tinggi (high-powered money). Kondisi Umum Kinerja Perbankan Syariah Perbankan syariah secara resmi mulai berdiri di Indonesia pada 1 November 1991, dengan ditandatanganinya pendirian PT Bank Muamalat Indonesia (BMI) sebagai Bank Umum Syariah pertama, dan mulai beroperasi pada 1 Mei 1992 (Antonio, 2001). Untuk Bank Perkreditan Rakyat Syariah (BPRS) yang pertama adalah BPRS Dana Mardhatillah dan BPRS Berkah Amal Sejahtera, yang didirikan pada tahun 1991 di Bandung, yang diprakarsai oleh Institute for Sharia Economic Development (ISED). Perkembangan perbankan syariah di Indonesia selanjutnya tidak terlepas dari dukungan pemerintah yang dicerminkan dari kebijakan di bidang perbankan yang dikeluarkan oleh pemerintah. Dukungan nyata ditunjukkan oleh pemerintah melalui penerbitan UndangUndang No. 10 Tahun 1998, tentang Pokok-Pokok Perbankan. Undang-undang tersebut memberikan landasan kelembagaan dan operasional untuk perkembangan perbankan syariah secara komprehensif, sehingga landasan hukumnya menjadi lebih jelas dan kuat. Perbankan syariah di Indonesia, secara umum dikelompokkan menjadi tiga jenis, yaitu; (1) Bank Umum Syariah (BUS), (2) Unit Usaha Syariah (UUS), dan (3) Badan Perkreditan Rakyat Syariah (BPRS). Bank Umum Syariah, seperti Bank Umum Konvensional, menawarkan jasa intermediasi dan jasa keuangan lainnya, termasuk jasa pembayaran, dengan ciri bebas bunga. Unit Usaha Syariah merupakan bank berbasis syariah yang merupakan divisi khusus yang dimiliki oleh Bank Umum Konvensional. Bank Perkreditan Rakyat Syariah, mempunyai karakteristik seperti Bank Umum Syariah, tetapi tidak menawarkan jasa pembayaran. Perkembangan jumlah BUS, UUS, BPRS, dan jumlah kantor BUS dan UUS, pada tahun 2002 – 2008, secara lengkap dapat dilihat pada Tabel 2. Ditinjau dari jumlahnya, Bank Umum Syariah, mengalami perkembangan yang stagnan. Hal ini disebabkan karena persyaratan untuk pendiriannya memang relatif berat. Penambahan jumlah BUS syariah hanya terjadi pada 2004 dan hingga saat ini belum ada tambahan baru. Perkembangan jumlah bank syariah relatif tinggi terjadi pada UUS. Selama 5 (lima) tahun terakhir perkembangan jumlah UUS yang beroperasi ini tinggi, terutama didorong dengan pembukaan UUS oleh Bank Umum Konvensional milik pemerintah, seperti Bank Mandiri, Bank BNI, dan Bank BRI. Tabel 2 Jumlah Bank Umum Syariah (BUS), Unit Usaha Syariah (UUS), Bank Perkreditan Rakyat Syariah (BPRS), dan Jumlah Kantor BUS dan UUS, Tahun 2002 – 2008 Kelompok Bank 2002 2003 2004 2005 2006 2007 2008*) BUS 2 2 3 3 3 3 3 UUS 6 8 15 19 20 26 28 BPRS 83 84 86 92 105 114 117 Jumlah Kantor BUS dan UUS 127 299 401 504 531 564 609 Sumber: http://www.bi.go.id, 2009 Keterangan: *) sampai Juni 2008 Berdasarkan Tabel 2, dapat dilihat bahwa jenis perbankan syariah yang jumlahnya terbanyak adalah BPRS. Dengan persyaratan pendirian yang relatif lebih ringan, dan dengan melayani operasi perbankan lokal, jumlah BPRS meningkat relatif cepat. Dari sisi lain, sekalipun jumlah Bank Umum Syariah dan Unit Usaha Syariah jumlahnya relatif sedikit jika dibanding BPRS, tetapi jika dilihat dari perkembangan jumlah kantor mengalami peningkatan tinggi sejak 2002 hingga 2008. Dalam operasinya, selama tiga tahun terakhir perbankan syariah memiliki kinerja yang semakin membaik. Hal ini dapat dilihat pada 6 indikator kinerja, yaitu: nilai aset yang dikelola, Dana Pihak Ketiga (DPK) yang dihimpun, nilai pembiayaan yang disalurkan, pangsa pasar (share), rasio pembiayaan terhadap deposito (FDR), dan kredit bermasalah bersih (NPF nett). Data indikator-indikator kinerja perbankan syariah di Indonesia tersebut sejak 2006 hingga 2008, secara lengkap tersaji pada Tabel 3. Tabel 3 Kinerja Perbankan Syariah 2006–2008 (dalam triliun rupiah) Indikator 2006 2007 November 2008 Aset 26,722 36,536 47,178 DPK 20,445 27,944 34,422 Pembiayaan 20,672 28,011 38,557 Share (%) 1,58 1,84 2,07 FDR (%) 98,9 99,8 111,7 NPF Nett 3,3 2,4 2,4 Sumber: Jawa Pos, 27 Januari 2009 Berdasarkan data pada Tabel 3, dapat diamati bahwa nilai aset yang dikelola perbankan syariah mengalami pertumbuhan yang relatif tinggi selama 2 tahun terakhir. Pada tahun 2007 nilai aset yang dikelola tumbuh sebesar 36,73% dibanding pada tahun 2006, sedangkan pada tahun 2008 tumbuh sebesar 29,13% dibanding pada tahun 2007. Dana pihak ketiga yang berhasil dihimpun perbankan syariah mengalami pertumbuhan yang tinggi. Selama dua tahun terakhir DPK perbankan syariah mengalami pertumbuhan rata-rata sebesar 29,93%. Dari sisi pembiayaan yang dilakukan, kinerja perbankan syariah juga mengalami peningkatan. Selama dua tahun terakhir, pembiayaan yang dilakukan tumbuh lebih dari 35%. Dari sisi pangsa pasar pembiayaan kepada pihak lain, walaupun pangsa pasar untuk penyaluran dana masih sangat kecil jika dibandingkan dengan perbankan konvensional, tetapi perbankan syariah mengalami pertumbuhan yang signifikan dari tahun ke tahun. Dalam menjalankan fungsinya sebagai lembaga intermediasi keuangan, perbankan syariah memiliki kinerja yang sangat baik. Hal ini dibuktikan dengan hasil perbandingan antara dana yang disalurkan dengan dana yang dikumpulkan dari pihak ketiga yang sangat tinggi, bahkan pada tahun 2006 melebihi 100%. Ini mengindikaskan bahwa hampir seluruh dana yang dihimpun dari pihak ketiga disalurkan kepada pihak yang membutuhkan dana. Indikator ukuran kinerja terakhir adalah kredit bermasalah, ternyata selama dua tahun terakhir mengalami penurunan. Tantangan Penguatan Perbankan Syariah Sebagai intermediasi keuangan yang relatif baru, perbankan syariah menghadapi cukup banyak tantangan dalam melakukan operasinya. Secara umum tantangan-tantangan yang teridentifikasi meliputi enam macam. Pertama, belum terbangunnya pemahaman masyarakat dan dunia usaha tentang operasi perbankan syariah. Pemahaman masyarakat dan dunia usaha tersebut berkaitan dengan posisinya sebagai pihak ketiga (deposan), pengguna dana, dan pengguna jasa keuangan yang ditawarkan oleh perbankan syariah, yang secara mendasar sangat berbeda dengan perbankan konvensional. Dalam menyalurkan dana, ada kemungkinan bank syariah mengalami kerugian. Hal ini perlu juga dipahami oleh deposan, sehingga jika mengalami kerugian, mereka sadar juga ikut menanggung risiko tersebut. Di sisi lain, pengguna dana dan jasa keuangan juga harus mempunyai kesadaran bahwa dalam menggunakan dana bank syariah merupakan amanah, sehingga dituntut kejujuran, baik untuk peruntukan maupun implementasi atas hasil kesepakatan sebelumnya. Kedua, adanya image dalam sebagian masyarakat bahwa perbankan syariah dikhususkan hanya untuk Islam. Perbankan syariah merupakan konsep bermuamalat dalam Islam sesuai dengan tuntunan Al-Qur’an dan Al-Hadist, yang diterapkan dalam mengatur simpan-pinjam dan penyediaan jasa keuangan lainnya dalam masyarakat sehingga dapat meningkatkan kesejahteraan hidup manusia. Ini berarti sebagai konsep bisnis islami, sebenarnya perbankan syariah dapat diterapkan secara universal. Ketiga, dukungan pemerintah. Pada awal-awal pendiriannya, dukungan pemerintah terhadap perbankan syariah memang relatif besar. Hal ini dibuktikan dengan dipenuhinya komitmen modal disetor awal sebesar Rp 106.126.382.000,00 kepada PT Bank Muamalat Indonesia (BMI) oleh Presiden pada tanggal 3 November 1991. Di samping itu dengan keluarnya peraturan-peraturan tentang operasi perbankan syariah. Seiring dengan perkembangan operasi perbankan syariah akhir-akhir ini, tuntutan terhadap pembaharuan dan pendalaman aturan yang ada saat ini, sangat mendesak. Keempat, ketersediaan tenaga kerja yang menguasai operasi perbankan syariah. Antara kebutuhan tenaga kerja yang menguasai operasi perbankan syariah dengan yang tersedia di pasar tenaga kerja sangat timpang. Dalam kenyataannya cukup banyak tenaga kerja yang menguasai hukum Islam yang berkaitan dengan muamalat, tetapi masalahnya kurang menguasai tentang konsep-konsep ekonomi dan bisnis yang dapat diterapkan dalam dunia perbankan. Sebaliknya, cukup banyak tenaga kerja yang menguasai tentang konsep-konsep dan teori-teori ekonomi dan bisnis perbankan, tetapi lemah dalam penguasaan hukum muamalat. Kelima, persaingan yang semakin ketat dengan perbankan dan lembaga keuangan konvensional lainnya. Dengan pangsa pasar atas penyaluran dana yang selama 3 tahun terakhir kurang dari 2,5%, perbankan syariah masih kalah jauh dibanding perbankan konvensional. Pangsa pasar kurang dari 2,5% ini belum termasuk penyaluran dana yang dilakukan lembaga keuangan nonbank. Dengan kondisi ini menuntut perbankan syariah untuk melakukan terobosan-terobosan dalam operasinya, sehingga dapat mengejar ketertinggalan ini secara lebih cepat. Keenam, keterbatasan kantor cabang. Kantor cabang merupakan ujung tombak pemasaran produk-produk perbankan, baik dalam pengumpulan maupun dalam penyaluran dana. Dengan jumlah kantor cabang sebagaimana tercantum pada Tabel 2, jumlah kantor cabang perbankan syariah masih sangat sedikit jika dibanding kantor cabang yang dimiliki oleh perbankan konvensional. Pada tahun 2006, jumlah kantor cabang bank umum konvensional sebanyak 9.110 buah, sedangkan pada akhir September 2007 sudah mencapai sebanyak 9.619 kantor cabang (Kompas, 16 November 2007). Peluang Penguatan Perbankan Syariah Dalam rangka mengelola bisnis, terutama di masa krisis ekonomi seperti saat ini, teridentifikasi enam peluang yang mendukung perbankan syariah mencapai tujuannya apabila mampu mengelolanya. Pertama, mayoritas masyarakat Indonesia beragam Islam. Dengan jumlah penduduk lebih dari 220 juta saat ini, lebih dari 80%-nya beragama Islam. Selama beberapa dekade terakhir ini, seperti yang diungkapkan Huntington dalam bukunya The Clash and the Remaking of the World Order, telah terjadi trend global, yaitu adanya peningkatan kesadaran atas identitas etnis, kultural, dan agama. Sebagai bagian dari masyarakat global, jika fenomena kesadaran akan identitas agama ini benar, maka akan terjadi kecenderungan bahwa masyarakat Indonesia yang beragama Islam akan berusaha menjalankan syariat Islam secara konsekuen, termasuk dalam bermuamalat. Dalam menyimpan dan meminjam dana, tentunya akan berusaha untuk menggunakan intermediasi keuangan yang sesuai dengan akidah Islam. Dengan demikian dapat disimpulkan bahwa potensi pasar perbankan syariah di Indonesia sangat besar. Kedua, penerapan prinsip profit and risk sharing. Dalam kondisi krisis ekonomi, risiko berinvestasi sangat tinggi. Dalam kondisi ini jika dalam simpan-pinjam menggunakan sistem bunga, dapat dipastikan bahwa risiko yang harus ditanggung para pemilik dana sangat tinggi. Dengan menanggung risiko sangat tinggi, maka pemilik dana akan mensyaratkan tingkat bunga sangat tinggi. Akibatnya, bisnis di sektor riel kurang dapat berkembang. Hal ini akan berbeda jika menggunakan prinsip bagi hasil, jika penggunaan dana oleh pengguna dana menghasilkan keuntungan akan dinikmati bersama, sebaliknya jika terjadi kerugian akan ditanggung bersama pula, walaupun proporsi pembagiannya tidak harus sama. Ketiga, krisis ekonomi yang masih terjadi dan tidak pasti kapan akan berakhir. Krisis ekonomi yang masih mendera Indonesia hingga saat ini, bisa justru menjadi blessing in disguise (berkah terselubung) bagi perbankan syariah. Berdasarkan pengalaman pada tahun 1998, krisis dalam dunia perbankan konvensional dianggap sebagai salah penyebab krisis ekonomi Indonesia. Begitu juga beberapa krisis keuangan pasca 1998, kebanyakan bersumber dari perbankan konvensional. Dengan semakin meningkatnya risiko yang harus ditanggung oleh deposan, maka perbankan syariah dapat digunakan sebagai alternatif untuk menginvestasikan dana, karena karakteristiknya tidak hanya mengejar keuntungan sematamata dan terbebas dari praktik spekulasi.

Keempat, ketersediaan dana yang berlimpah di Timur Tengah. Dana yang jumlahnya berlimpah di kawasan tersebut, sebagai hasil peningkatan harga minyak mentah yang sanga tajam pada tahun 2008. Harga minyak mentah waktu itu mencapai rekor tertinggi sepanjang jaman, yaitu mencapai US$147 per barelnya pada Juli 2008. Dengan dana miliaran dollar yang tersedia, jika perbankan syariah di Indonesia mampu memanfaatkan peluang ini, maka itu merupakan sumber dana yang sangat potensial. Kelima, potensi perkembangan Usaha Mikro, Kecil, dan Menengah (UMKM). UMKM diakui tahan banting, kebal terhadap krisis, dan menyerap tenaga kerja dalam jumlah yang banyak. Sudah empat tahun pencanangan program aksi penanggulangan kemiskinan melalui pemberdayaan UMKM oleh Presiden Susilo Bambang Yudoyono, tetapi usaha ini masih menghadapi banyak masalah, antara lain sulitnya akses ke bank untuk mendapatkan kredit. Dengan jumlah UMKM sebanyak 47.102.744 unit dan tenaga kerja yang terserap sebanyak 83.233.793 orang atau 96,28% dari total penyerapan tenaga kerja (Kompas, 29 Februari 2008), ini merupakan pasar potensial yang dapat digarap oleh perbankan syariah dalam menyalurkan dananya. Keenam, jumlah dana Departemen Agama yang besar, baik di pusat maupun daerah. Jika dana ini ditaruh di perbankan syariah, maka ini merupakan salah satu sumber dana pihak ketiga (DPK) yang besar. Muhammad Nafik (Jawa Pos, 27 Januari 2009) memberikan contoh untuk pengelolaan dana yang bersumber dari biaya haji. Dengan jumlah calon jemaah haji sebanyak 210 ribu, dengan biaya rata-rata Rp30,00 juta, maka akan terkumpul dana di Departemen Agama sebesar Rp63,00 triliun. Jika ini ditaruh di perbankan syariah, maka menjadi DPK yang potensial. Solusi untuk Penguatan Perbankan Syariah Berdasarkan tantangan dan peluang yang dihadapi perbankan syariah saat ini, ada beberapa solusi alternatif yang dapat diusulkan kepada pihak-pihak terkait. Pertama, peningkatan intensitas sosialisasi dan edukasi tentang operasi perbankan syariah. Hal ini dapat dilakukan kepada masyarakat dan dunia usaha. Dengan sifatnya yang universal, perlu adanya penekanan bahwa perbankan syariah merupakan bentuk penerapan akidah bermuamalat dalam bisnis perbankan. Salah satu ilustrasi bahwa perbankan syariah bersifat universal dibuktikan dengan pembukaan kantor cabang Bank HSBC yang berkantor pusat di Hongkong di Indonesia yang merupakan Unit Usaha Syariah. Manajemen Bank HSBC berani melakukan pembukaan UUS ini dengan pertimbangan bahwa potensi pasar perbankan syariah di Indonesia sangat besar dan prospektif. Kedua, dukungan pemerintah yang lebih besar. Undang-Undang Nomor 10 Tahun 1998, memang sudah mengatur tentang operasi perbankan syariah, tetapi kebanyakan aturan lebih terfokus pada perbankan konvensional. Dengan karakteristik bisnisnya yang berbeda dengan perbankan konvensional, dan terjadinya perkembangan yang cepat dalam praktik-praktik bisnis perbankan syariah, maka sudah saatnya peraturan-peraturan di bidang perbankan syariah dipisahkan dari perbankan konvensional. Bentuk dukungan pemerintah nyata lain dalam bisnis perbankan syariah dapat dilakukan dengan mewajibkan Departemen Agama untuk menaruh dana-dananya pada perbankan syariah Ketiga, pengintensifan pelatihan dan pengembangan sumberdaya manusia. Dengan terjadinya kelangkaan sumberdaya manusia yang menguasai operasi perbankan syariah, perlu adanya usaha bersama dari pihak-pihak yang terkait dengan pengelolaan perbankan syariah, seperti manajemen perbankan syariah, Majelis Ulama Indonesia, Bank Indonesia, dan Perguruan Tinggi. Dalam kenyataannya hingga saat ini masih sangat sedikit Perguruan Tinggi yang membuka program studi yang mengkhususkan kajian-kajiannya pada perbankan syariah, termasuk Fakultas Ekonomi UMM. Keempat, diversifikasi produk. Persaingan yang semakin ketat dalam bisnis perbankan, menuntut para pelakunya untuk kreatif dan inovatif dalam memasarkan produk-produknya, sehingga dapat tetap bertahan dan berkembang. Produk perbankan dikelompokkan menjadi dua macam, yaitu: produk pengumpulan dana, dan produk penyaluran dana. Secara umum, prinsip pengumpulan dana yang digunakan perbankan syariah meliputi: wadi’ah (rekening giro dan tabungan), mudharabah (mutlaqah dan muqayyamah), sedangkan prinsip dalam penyaluran dananya meliputi: bai’ (jual beli), ijarah wa iqtina (sewa beli), syirkah (bagi hasil), dan pembiayaan lain. Kelima, perbaikan dalam manajemen permodalan. Dalam teori perbankan, modal berfungsi sebagai penyerap atas kerugian. Dengan sistem permodalan yang sehat, maka jaminan atas keamanan dana deposan di perbankan syariah menjadi semakin baik. Di samping itu, modal dapat digunakan sebagai instrumen untuk keperluan ekspansi bagi perbankan syariah dalam rangka mengejar pertumbuhan. Berdasarkan data pada Tabel 3, FDR tahun 2008 melebihi 100%. Ini mengindikasikan bahwa potensi pasar perbankan syariah dalam penyaluran dana sangat besar dan ini membutuhkan tambahan dana di luar DPK, termasuk modal, dalam nilai yang relatif besar. Keenam, perluasan kantor cabang. Kantor cabang perbankan syariah saat ini masih berada di kota-kota besar dan belum menjangkau kota-kota kecil. Dengan besarnya potensi pasar perbankan syariah yang tidak hanya berada di kota-kota besar, maka sudah saatnya pendirian kantor cabang di kota-kota kecil segera dilakukan. Hal ini untuk mengimbangi ekspansi yang dilakukan oleh perbankan konvensional, walaupun segmen pasarnya berbeda. Penutup Berdasarkan tantangan dan peluang yang dimiliki, dapat disimpulkan bahwa perbankan syariah kemungkinan besar akan memiliki peranan yang semakin besar dalam perekonomian Indonesia di masa mendatang, khusus pada era pemerintahan mendatang. Khusus untuk tahun 2009 saja, proyeksi Bank Indonesia menyatakan bahwa pertumbuhan perbankan syariah akan lebih besar dibanding pertumbuhan perbankan konvensional (Jawa Pos, 27 Januari 2009). Dengan skenario pertumbuhan moderat, aset perbankan syariah diperkirakan akan tumbuh sebesar 37%, yang berarti pada akhir 2009 aset tersebut akan menjadi sebesar Rp68,00 triliun. Sementara skenario lain adalah skenario optimis, yang memproyeksikan bahwa perbankan syariah akan tumbuh sebesar 75%, dengan total aset di akhir tahun 2009 mencapai Rp87,00 triliun. Untuk mencapai peranan yang semakin besar, dan dengan tingkat pertumbuhan yang tinggi perbankan syariah memerlukan upaya perkuatan, terutama dari Bank Indonesia dan pihak pemerintah. Upaya perkuatan peranan perbankan syariah dari Bank Indonesia dalam bentuk regulasi dan pengawasan operasi, sedangkan dari pihak pemerintah dilakukan melalui penciptaan iklim usaha perbankan syariah yang kondusif. Di samping itu upaya perkuatan dapat dilakukan melalui pihak manajemen perbankan syariah (sebagai pengelola langsung), Majelis Ulama Indonesia (dalam bentuk dukungan dari aspek hukum syariah), dunia usaha (sebagai pengguna dana), individu atau masyarakat (sebagai deposan dan sekaligus pengguna dana), dan Perguruan Tinggi (sebagai penyedia sumberdaya manusia). Daftar Pustaka Antonio, M. S. Bank Syariah, dari Teori ke Praktik. Edisi Pertama. Penerbit Gema Insani: Jakarta. 2001. Ascarya dan D. Yumanita. Bank Syariah. Seri Kebanksentralan No. 14 (1st). Jakarta: Penerbit Bank Indonesia. 2005. Chapra, M.U. Sistem Moneter Islam (1st). Jakarta: Penerbit Gema Insani. 2000. Jawa Pos, 27 Januari 2009. Muhammad. Manajemen Bank Syariah. Yogyakarta: Penerbit UPP AMP YKPN. 2005. Kompas. 16 September 2008. Kompas, 29 Februari 2008. Kompas. 16 November 2007. Kompas. 9 Maret 2007. Sumitro, W. 2004. Asas-Asas Perbankan Islam (1st) Jakarta: Penerbit PT RajaGrafindo Persada. Categories: Islamic Banking, Islamic Economy, Islamic Management

Islamic Banking A Performance Analysis August 22, 2010 isa7695 Leave a comment Rate This M. Raquibuz Zaman,* Ithaca College Hormoz Movassaghi, Ithaca College Source: The Journal of Global Business, Volume 12, No. 22, Spring 2001, pp. 31-38. Acknowledgment: This paper is being made available through the kind permission of the author. He has written extensively on Islamic economics and finance. To learn more about his works, you can visit http://www.ithaca.edu/faculty/zaman/publications.htm#journals. This study reviews the growth of Islamic banking since its inception nearly four decades ago. It examines the major products/services offered by various Islamic banking institutions (IB) as well as analyzing such institutions’ financial performance based on the latest data available. The study concludes that some of the practices and the financial instruments used by the Islamic banks do not seem to conform to the traditional Islamic principles, and it offers suggestions for improvements. Introduction From its humble start in Egypt in 1963 and its sporadic progress in 1970S, the Islamic banking has grown notably in size and number in the 1980s and 1990s. According to the latest published figures by International Association of Islamic Banks, there were 166 Islamic banks and financial institutions worldwide at the end of 1996 with total assets of $137 billion, deposits exceeding $100 billion, paid-up capital of $7.3 billion, and net profit of $1683 million [Timwell 1998]. These figures exclude the funds managed in accordance to Islamic law (sharia) held by conventional banks in Muslim and non-Muslim/Western countries. Indeed, an increasing number of Western banks have established subsidiaries and/ or specialist divisions to offer corporate finance and investment banking services for tapping the deposits of high net worth individuals. The list of these Western financial institutions includes such well known names as Citigroup, ANZ, Grindlays, JP Morgan, Deutsche Bank, ABN AMRO, Goldman Sachs, Chase Manhattan, NatWest, Societe General, and HSBC among others [Siddiqi 1999]. Islamic banks operate in over sixty countries, though mostly concentrated in the Middle East and Asia. In most of these countries, the banking system is dominated by conventional banking institutions with Islamic banks operating alongside. In three countries, however Iran, Pakistan, and Sudan -the entire banking system has been converted to Islamic banking. Islamic banking is noted as “the fastest growing segment of the credit market in Muslim countries that have Islamic banks: their market share has risen from 2 percent in the late 1970s to about 15 percent today, as measured by assets in the banking system” [Aggarwal and Yousef 2000]. And by some estimates, funds under Islamic management are increasing at the rate of 15-20 percent a year [The Banker 2000], with some banking sources suggesting the total value of Islamic funds may well be approaching $200 billion [Frenchman 1998]. The main objectives of this paper are to review the growth of the Islamic banking on a global basis, assess its performance based on the latest financial data available, discuss its salient products/services, evaluate them for likely departures from traditional Islamic principles, and offer suggestions for improvement based on the experience of the authors and evidence provided by other recent studies in this area. Islamic Banking: Origin, Scope, and Growth The first modern experiment with Islamic banking was undertaken in Egypt under cover, for fear of being labeled as a manifestation of Islamic fundamentalism, which was anathema to the government in power. It took the form of a saving bank based on profit-sharing in the town of Mit Ghamr, lasted until 1967, by which time there were nine such banks in the country. These banks neither charged nor paid interest, invested mostly in trade and industry, directly or in partnership with others, and shared profits with depositors [Ariff 1988]. The 1970s heralded the arrival of a new age in Islamic finance witnessing the establishment of the Nasr Social Bank in 1971 (Egypt), Philippine Amanah Bank in 1973, the Dubai Islamic Bank in 1975, the Kuwait Finance House, the Faisal Islamic Bank of Sudan, and the Faisal Islamic Bank of Egypt, all in 1977, the Bahrain Islamic Bank in 1979, and the Qatar Islamic Bank in 1981, to mention a few [Ariff 1988, Wilson 1995, Edward 1999]. By the end of 1996 the number of Islamic banks, IBs, rose to 166 with a total paid-up tier-one capital of $7.3 billion, and total assets of $137 billion [Timewell 1998]. Moreover, if one excludes the Iranian and Pakistani IBs, the countries that operate under the Islamic system of banking (along with Sudan), only 40 percent of the paid-up capital and 30 percent of total assets are commanded by those from other countries. These percentages do not tell the whole picture. The 19 Gulf Cooperative Council, GCC, states command 18 percent of the total paid-up capital, and 13 percent of total assets of all IBs. In other words, 10 Iranian, 46 Pakistani, and 19 GCC IBs totaling 75 out of 166, command 78 percent of total paid-up capital and 83 percent of total assets for the IBs. These numbers appear impressive if one ignores the size of a single large commercial bank in many developed economies of the West [Business Week July 13, 1998]. Thus, it is quite obvious that IBs are relatively very small and a few of them are not even profitable [Timewell Op. Cit.]. Table 1 shows the number of IBs by region, their capital, total assets, and capital-to-asset ratios for the year-end 1996. Of the 50 financial institutions in South Asia, 5 are in Bangladesh (total capital of $20.6 million, total assets of $594 million), 1 is in India (total capital of $1.2 million, total assets of $3.5 million), and the remaining 46 are in Pakistan. Of the 35 institutions in Africa, Algeria, Djibouti, Gambia, Guinea, Mauritania, Niger, South Africa, Senegal, and Tunisia have 1 bank each, and the remaining 26 are in Sudan. Total capital of those 9 countries’ institutions is $102 million with assets of $376 million representing roughly 48 and 19 percent respectively of those of all Africa. Of the 30 IBs in Southeast Asia, 3 are in Brunei, 4 are in Malaysia, 1 is in the Philippines, and the remaining 22 are in Indonesia. Two Malaysian Banks-Bank Islam Malaysia Berhad and Lembaga Tabung Haji-together account for $3.3 billion of the total assets of $3.8 billion for the entire region. Middle East is defined here as Egypt, Iran, Iraq, Jordan, Lebanon, Turkey and Yemen. Egypt has 4 IBs (total capital of$337 million with assets totaling $4. billion), Iran has 10 (total capital of $32.4 billion with assets totaling $50.2 billion), Iraq has 1 (capital $402 million with assets of $9.9 billion), Jordan has 2 (capital of $23.5 million TABLE 1 ISLAMIC BANKS AND FINANCIAL INSTITUTIONS AT YEAR-END 1996 (in $ million) Region # of Banks Capital Total Assets Total Deposits Net Profit Capital to Asset in % Net Profit as % of Total Assets South Asia 50 962 45,201 27,042 350 2.1 0.8 Africa 35 213 1,951 603 39 10.9 2.0 Southeast Asia 30 136 3,801 1,572 184 3.6 4.8 Middle East1 24 4,060 67,142 54,288 373 6 0.6 GCC2 19 1,340 18,084 16,494 686 7.4 3.8 Europe & America 8 559 952 1,164 54 58.7 5.7 Total 166 7,270 137,131 101,163 1,686 5.3 1.2 1 -Middle East includes Egypt, Iran, Iraq, Jordan, Lebanon, Turkey, and Yemen. 2- GCC stands for Gulf Cooperation Council, consisting of Bahrain, Kuwait, Qatar, Saudi Arabia, and United Arab Emirate (UAE). SOURCE: International Association of Islamic Banks, Jeddah, Saudi Arabia, quoted by Timewell (1998). with assets of $871 million), Lebanon has 1 (capital of $7.7 million with assets of $21.6 million), Turkey has 4 (capital of $33.8 million with assets of $1.2 billion), and Yemen has 2 IBs with a total capital of $12 million. It should be pointed out that about 49 percent of all assets of IBs in the world are commanded by this region and this is principally because of Iran, whose entire financial system is based non-interest bearing transactions and instruments. The various states constituting the Gulf Cooperation Council, GCC, have 19 IBs of which 10 are located Bahrain, the de facto center of financial activities for the GCC. Of the 10 IBs, data are incomplete for 2. Except for Faysal Islamic Bank of Bahrain E.C., the rest of them have capital less than $100 million each. Bahrain Islamic bank with assets of $376 million is the largest, with the Faysal Islamic Bank a close second with $356 million in assets. Kuwait has three IBs (total capital of $276 million with assets of $4.9 billion), Qatar also has three (capital of $78 million with assets of $1.3 billion), Saudi Arabia has two (capital of $453 million with assets of $10.5 billion), and the United Arab Emirates has one Islamic banking institution with capital of $136 million and total assets $1.9 billion. The IBs in Europe and America are 8 in numbers shown in Table 1. Of these, one is in the Bahamas ( capital of $15 million with assets of $26 million), one is in the Cayman Islands (capital of $300 million with assets of $388 million), one is in Switzerland (capital of $14 million and assets of $73 million), one is in United Kingdom (capital of $182 million and assets of $385 million), and four are in the U.S., of which data are available only for two (capital for the two totals $49 million with assets of $60 million). These eight IBs are essentially investment banking, credit and fund management outfits as can be seen from their combined capital-to-asset ratio of 58.7 percent. In general, the IBs of the various regions except Africa seem to have inadequate capital by the basic standard of capital adequacy. The worst situation is in South Asia where Pakistan dominates the number and assets of the IBs. Like Iran, Pakistan declared that its banking is to be based on the Islamic system, and it does not seem to be running them efficiently. The next precarious region is Southeast Asia where Indonesia dominates the IBs. Most of the IBs in Indonesia are very small-only three of them have capital between $100 and $162 million with combined assets of $2.3 billion. In general, return to assets (net profit as percentage of total assets) of the IBs seem to be very low in South Asia and the Middle East where most of them are located. Table 2 sheds more light on this. Table 2 FINANCIAL POSITION OF THE TOP 20 ISLAMIC BANKING INSTITUTIONS AT YEAR-END 1996 (in $ millions) Region Rank by Assets Capital Total Assets Total Deposits Net Profit Capital to Asset in % Net Profit as % of Total Assets Bank Melli Iran 1 656 19,297 18,617 53 3.4 0.2 Iraqi Islamic Bank for Develop. & Invest 2 402 9,900 10,900 NA 4.0 NA Halib bank of Pakistan 3 72 9,827 5,684 21 0.7 0.2 National Bank of Pakistan 4 73 9,348 6,081 90 0.8 1.0 Al-rajhi Bkg & Ivest. Corp.-Saudi Arabia 5 400 8,608 6,051 322 4.6 3.7 Bank Tejarat, Iran 6 326 8,544 6,978 23 3.8 0.3 Bank Sedarat, Iran 7 542 7,055 466 0.5 7.7 — Bank Mellat, Iran 8 346 6,535 4,967 NA 5.3 NA United Bank, Pakistan 9 49 5,088 3,704 9 1.0 0.2 Kuwait Finance House 10 169 4,732 3,767 271 3.6 5.7 Muslim Comm. Bank Pakistan 11 45 4,071 2,816 3 1.1 — Agricult. Bank of Iran 12 233 3,024 1,001 11 7.7 0.4 Allied Bank of Pakistan 13 20 2,558 1,493 4 0.8 0.2 Islamic Int’l Bank for Invest. & Develop, Egypt 14 134 2,358 1,494 34 5.7 1.4 Agricult. Develop. Bank of Pakistan 15 104 1,982 81 6 5.2 0.3 Dubai Islamic Bank, UAE 16 136 1,935 1,754 16 7.0 0.8 Faisal Islamic Bank of Egypt 17 100 1,900 1,508 85 5.3 4.5 Lambaga Tabung Haji, Malaysia 18 NA 1,877 1,817 145 NA 7.7 Bank of Industry & Mine, Iran 19 729 1,778 147 88 41.0 4.9 Bank Islam Malaysia Berhad 20 53 1,442 1,278 15 3.7 1.0 NA = not available — = insignificant percentage. SOURCE: International Association of Islamic Banks, Jeddah, Saudi Arabia, quoted by Timewell (1998) Table 2 presents data on financial positions of the Top 20 IBs for the year-end 1996. It appears from the data that the IBs in Pakistan and Iran, the two countries officially under Islamic system, fared rather poorly compared to the other IBs operating under dual banking systems. Only an Iranian bank, Bank of Industry and Mine, which performed relatively well, is a very specialized bank with a capital-to-assets ratio of 41 percent. The banks in GCC, with the exception of Dubai Islamic Bank, showed relatively higher return to assets ratios among the Top 20 IBs. One Malaysian bank, Lembaga Tabung Haji, had the highest return to assets for the year-end 1996 among this group. Probably, this picture is completely changed in the aftermath of the crash of the financial markets in the South East Asian region in 1997. To gauge the relative performance of the IBs in terms of returns to assets, we examined around 200 banks worldwide with total assets ranging between $1.5 billion and $20 billion– the same range as the top 20 IBs in Table 2. For the year-end 1996, we found that the mean return was 1.53 percent, with a median of 1.22, and these ranged between — 12.43 and 16.451. Twelve of our top twenty banks performed well below the averages, for two we have no information, and only six IBs were above these averages. The June 1998 ranking of world’s banks by Moody’s Investor Services show that the banks in IBI countries are in either vulnerable or very weak financial condition with rankings of Ds and Es, respectively [The Wall Street Journal 1998]. The better performance of the IBs in the dual banking system countries (i.e., IBs working side by side with predominantly modern banking and financial institutions) calls for an explanation. It seems as though the need to compete with the regular banks in attracting depositors’ money, pressures the IBs to essentially follow the practices of those banks under Islamic garb and try to manage their portfolios more carefully so that their customers and investors do not get disillusioned [see for example the study of IBs and conventional commercial banks in Turkey [Kuran 1995]. As we discuss the actual practices of IBs in the next section, this point will be made clearer. Products/services of Islamic Banking Institutions It would be helpful, at the outset, to review some of cardinal elements of economic transactions according to Islam, which laid the foundation of the Islamic banking system. The most salient characteristic of such system is the prohibition of riba (often translated as usury or interest), a pre-determined -fixed or variable -charge levied for the use of a loaned commodity be it real or financial asset. That riba is unequivocally banned in Islam is borne by four specific references in Islam’s holy book, Quran, and several ahadith -narrations attributed to prophet Mohammad. For example, Quran states, ” Believers! Do not consume riba, doubling and redoubling. ..” 2 (Ch. 3, verse 130), and “…God has made buying and selling lawful, and riba unlawful…” (Ch. 2, verse 274). Prophet Mohammad condemned not only those who take interest but also those who give it, record it, or witness it, saying that they are all alike in guilt. Indeed, not only Islam, but also Judaism and Christianity ask their followers to shun usury to avoid hell fire [Homer 1977]. The common thread running through all such condemnations of riba is its exploitative nature and not the concept of profit, which is lawful in Islam if justly and fairly earned. As such, while there is considerable debate among Muslim scholars as to the exact nature of this prohibition and exactly what constitutes a usurious transaction3, there is a common perception that ban on riba is tantamount to ban on interest, be it paid or received. Hence, the various financial instruments developed by Islamic banks have been based on two principles: the profit-and-loss sharing (PLS) principle and the mark-up principle [Errico and Farahbaksh, 1998, Aggarwal and Yousef 2000]. The financial contracts offered by the IBs can be classified into five basic categories: (1) non-interest bearing demand deposits (checking accounts); (2) mudaraba, (3) murabaha, (4) musharaka, and (5) ijara. Conventional checking accounts in modern commercial banks are non-interest bearing deposits, and since IBIs shun interest rate based dealings, most of them offer such demand deposit accounts. Ideally, IBs should not be charging any fees on checking accounts as they are free to employ the depositors’ money, subject to the reserve requirements, if there are any, into earning assets [Siddiqui 1978]. In practice, however, this is not always the case. Depending on the size of the deposit, service charges and fees get collected to meet operating “costs”. IBs offer savings and time deposits in the form of investment accounts under the system of mudaraba. The depositors of such accounts share profits and/or losses of the institutions under an agreed-upon formula [Siddiqui 1986]. The depositors in mudaraba accounts are the suppliers of capital, rabb al-mal, who entrust their funds to the bank, mudarib, in the tradition of Western style investment banking, subject to dealings with only non-interest bearing instruments [De Belder and Khan 1993]. The mudarib, acting as money manager or agent, invests the money and then distributes the profits and/or losses on the basis of the agreedupon contract. The following conditions must be met: 1) Profits to be shared must be proportional to the funds contributed to the mudaraba account and these cannot be in lump sums or in guaranteed amounts. 2) The loss to the depositor (contributor of funds) cannot be more than the amount of deposit. 3) The mudarib does not share in the losses, except for the time and efforts put into the management of the mudaraba funds or in cases of mudarib’s negligence. The third principle leaves it wide open for an unscrupulous or careless money manager to engage in questionable transactions leading to losses to depositors, or worse–even failure of the financial enterprise. This is especially problematic in the Muslim countries where there is a general lack of transparency in economic transactions, and where periodic public disclosure of financial performance of firms to their stakeholders, are essentially non-existent. Siddiqui ( 1986) cites the use of four other forms of mudaraba ventures by the existing IBs. In one case, two-tier mudaraba, the depositors and the bank combine their funds to invest in ventures such as mutual funds and then share profits and/or losses. Another variation of the mudaraba account is that an outside entrepreneur comes to the bank and borrows depositors’ (and the bank’s) money to invest in a venture. The bank and the entrepreneur become partners and share in profits and/or losses. The examples Siddiqui provides to illustrate the cases of mudaraba accounts deal with a 20 percent profit or loss on the invested amount and the way they are distributed among the parties. In this particular type of mudaraba, the entrepreneur has to return the principal amount borrowed and share equally in the profits and losses. It is not clear, however, what would happen if the entrepreneur lost the funds borrowed completely. There are two other variations of these types of accounts. The jurists are not all in agreement as to the conditions that satisfy a particular transaction in a mudaraba [Naqvi 1993]. The mudaraba accounts are popular with the IBs partly because they assume very limited liability and risk while earning rather hefty margins. As currently practiced, they simply collect “profits” (estimated ahead of time) from the borrowers. Suppose an individual wants to borrow $100,000 for building a single-family home. The IBI agrees to lend the money at an agreed upon “profit” rate of 12 percent per year. However, the borrower receives a check for only $88,000 and is asked to pay back the full amount of $100,000 at the year-end. This mudaraba account yields the equivalent of 13.64 percent to the bank. If the “profit” rate were named “interest” rate, the borrower would still pay the 13.64 percent effective rate. If the borrower could not pay back the loan because the project failed for whatever reason, it is not clear how the IBs will treat the loan and the defaulting borrower. Similar problems are faced by depositors and/or subscribers of capital to the IBs. If the institutions fail to invest their depositors’ and shareholders’ money judiciously, there is no recourse to recover some of the funds lost. The failure of the Ar-Ryaan investment banking outfit in Egypt devastated the poor Egyptian subscribers, some of whom lost their life’s savings. The third instrument, murabaha (or more specifically, bai-mujal murabah -cost plus financing), used by the IBs consist of transactions where the institution buys a product (e.g., a car or a machinery) on a client’s behalf and then resells this with a mark-up to a client, the borrower [DeGelder and Khan, Op Cit., Chapra 1985]. Thus, an automobile selling at a price of $20,000 may be bought by the IBI and resold to a client at $25,000, to be paid back in monthly installments (or a lump sum at the end of the loan term) over a 2-year period. The implied rate of interest is 11.21 percent for this transaction. If the buyer of the car went to a conventional bank and borrowed $20,000 at a rate of 11.21 percent interest for buying the car directly from the dealer, s/he would pay a total of $22,418.59 (monthly installment of $934.11 multiplied by 24 months), instead of the $25,000 charged by the IBI. The additional sum of $2,581.41 for the same car for the privilege of calling interest rate a profit rate cannot be justified on any ground. Other variants of murabaha transaction are al-bay’ bithaman ajil where a bank allows deferred payment within an agreed period, and bay’ salaam where a buyer pays an agreed price in advance for commodities that will be delivered at a future date [Chapra, Op. Cit., Siddiqi 1999]. In order to justify murabaha transactions, IBs have come up with elaborate contract requirements between the bank and the seller of the merchandise, and between the bank and the buyer of the product [De Belder and Khan, Op Cit., Edwards, 1999]. These contracts detail the rights and responsibilities of each party including financial terms of the contract. The title to the property is retained until the debt is paid off just like in conventional banking. Borrowers with deep religious feelings may accept murabaha transactions, but average consumers or business clients would notice the higher implied costs and the striking similarity with conventional discount loans! [see Abdul Gafoor 1995, ch. 4, section titled “Uneasy questions of morality” for further discussion of such dubious practices]. The fourth instrument used by IBs is musharaka, which is a form of equity financing through joint ventures. Unlike the case of mudaraba, here the bank not only participates in the supply of capital to the venture, but also in its management. Thus, the IBI assumes the role of an entrepreneur as well as that of a financier [Chapra, Op Cit., 1999]. Like mudaraba and murabaha transactions, musharaka also requires elaborate written contracts defining the conditions under which the parties are to operate. For an IBI to become an efficient partner in projects under musharaka agreement while performing the role of a depository institution and that of a financial intermediary seems to be unrealistic. Even the well-trained bankers in the modern financial institutions of the West seldom perform such varied tasks for their clients! If the return on assets and the size of net profits are any indication of the performance of financial institutions, then surely the IBs are not up to par with the modern financial institutions. The fifth instrument used by the IBs is ijara or leasing. Two types of leases are used. In one, the lessee pays the lessor installment payments that go towards ultimate purchase of the equipment by the lessee [Wohabe 1997]. This type of lease/purchase agreement is known as ijara Wa-iqtina [Martin 1997]. The second type of lease maintains the ownership of the lessor as per the lease contract. DeBelder and Khan (1993) cite the provisions of a model contract between the lessor (the IB) and the lessee in Pakistan. These provisions seem to have been drawn from the practices of modern finance companies, only these are more favorable to the IBs. For example, the provision that “The lease can be terminated at any time by the Lessor after twelve months…”, or “…current Pakistani business practice results in monthly lease rentals generally working out to be equal to installments of principal plus about an amount equivalent to interest of 22 percent per annum” (p. 6 of the electronic version). The demand for lease financing seems to have prompted the IBs to come up with contract instruments that satisfy their religious councils and yet earn them returns equivalent or better than those earned by conventional finance and banking institutions. Conclusion The foundation of the Islamic banking system is based on the prohibition of interest from transactions. The IBs, under the guidance of their religious councils (usually such councils differ among themselves on the Islamicity of various transactions) have developed various financial instruments discussed above. Despite their intention to avoid interests, most of the transactions indeed involve use of fixed percentages of profits (and presumably, losses) that are nothing but interest under a different name. The financial instruments are based on contracts made by the various parties. It is argued that as long as all conditions are written down and known to the participants in the contract, it does not matter whether the financial institution collects “profits,” fees and commissions ahead of time or later. From the various references cited in the paper, it appears that the IBs set their “profit” rates for each contract that reflect the going interest rates plus, usually, some premium. The Annual Reports of Bank Islam Malaysia Berhad for 1994 through 1996 show that the rate of profit for investment accounts (similar to time deposit) to the depositors goes up consistently as the time length of deposits increases. For interest-based banks, this should not be surprising because the depositors would expect to be compensated for maturity risks. However, for an Islamic bank based on “profit” sharing, how is it possible that all long-term investments are more profitable than the ones with shorter durations? These “profit” rates seem to be prefixed just like interest rates of conventional banks, or “quite comparable with the rates of return offered by conventional banks”! [Ariff, 1988]. In the same vein, Aggarwal and Yousef (2000), based on their own case studies of banks in Jordan, Malaysia, Egypt, and Iran, as well as other studies that they review, find that Islamic banks rely much more heavily on markup (debt-like) financing than on PLS (equity-like) financing. Only in Iran, they note, is there a significant PLS component to new flows of financing; that most financing does not appear to be long term in nature4; and the evidence on whether or not Islamic banks provide financing to capital intensive sectors of the economy, such as, industry , to be mixed at best. Large banks, they note, use murabaha financing more frequently than do smaller banks and offer more financing to agriculture/industry. The prohibition of usury (riba) in Islam is to ensure economic justice and fair play by providing the stronger partner in transactions from taking advantage of the weak one. This can be achieved if the lender receives a return that covers the costs of funds and provides a return to shareholders commensurate with earnings that a silent partner can muster from the joint ventures in business. That is, the return must be in proportion to actual earnings from the borrowed funds, minus the compensation to the borrower as the entrepreneur and manager of the undertaking. Of necessity, this return will vary over time. As a result, the stipulated profits to be distributed will also vary from one period to the next (whether monthly, quarterly, semi-annually or annually). Whether this is called interest rate or profit does not make any difference to the nature of payments by the borrower and receipts to the lender. The ideal Islamic transactions (i.e., transactions that establish economic justice) will be the one where rates of payments and receipts closely resemble the ever-changing costs and returns. Flexible interest rates that adjust quarterly, or as soon as costs and profits can be estimated, would go a long way toward the abolition of usury than the current methods of ascertaining “profits” by the IBs. Until this is done, it is not feasible to establish standard banking practices across the Muslim countries. Such absence of the institutional framework needed to create the type of security and standardization required by the international banking system is noted as one of the major limitations constraining the growth of Islamic banking [Proctor 1997, The Banker 2000]. At present, religious scholars of different countries differ on the suitability of one instrument or another. The conventional banking institutions are not the answer for the Muslims. What are needed are institutions that charge or pay interests which are not only flexible, but also reflect actual costs of and returns from operations. Thus, a true IBI could not offer long-term CDs on fixed rates, nor could it provide fixed-rate mortgages or installment loans. The ideal rates will vary with the changing business and economic conditions so that neither the depositors nor the borrowers and investors face undue economic hardships from financial transactions. To make this possible, there is an urgent need for qualified and trained people, a free press and unobstructed flows of information. All these are wanting in today’s Muslim states. Note 1 The data were collected from the World Scope of the Disclosure Data Base, June 1998, and the estimates were made by using the Minitab statistical package. 2 According to Tabari (Jami, no date, V .4:49), riba in the pre-Islamic period consisted of doubling and re-doubling of the principal amount of commodities lent over a period of time. When a borrower, at the appointed date could return the original amount borrowed in full, no additional amounts were charged to him. However, if he failed to pay in full, the lender would allow the borrower to pay back next year in double the quantity borrowed originally. If again, the borrower could not pay back the next time, the loan would be extended for another year for double the amount that was due at the end of the second year. Similarly, alZamakhshari (al-Kashshaf, no date, :234) points out that even a small debt could consume the wealth of a debtor because of repeated doubling of the original amount of goods borrowed arising out of the inability of the debtor to pay back. Afzal (1996) details the various interpretations of riba by classical as well as modern Islamic scholars/jurisprudents and goes on to show how the controversies arose since the early time of Islam. 3 Despite the interpretation of riba as doubling and redoubling of the principal lent, the Fuqaha extended the scope of riba to cover all transactions that call for any increase over the amount lent, and at any time any faqih (a religious scholar) gives contrary opinion is declared a heretic. Among those who do not believe all transactions involving interest are usurous are Sanhuri (1954-1959), al-Saud (1985), Tantawi (1989), Salus (1991), Suhail (1936), Ali (1994, commentary on Quran Chapter 2, Verse 275, commentary no.324), Shah (1967), and Rahman (1980:41), to name a few. 4 Such focus on short term project is also noted by Abdul Gafoor [1995] as well as Edward [1999] and, at times, has been attributed to the shortage of trained personnel with expertise in assessing long-term projects [Iqbal and Miakhor, 1987] or absence of backup institutional structures such as secondary capital markets for Islamic financial instruments [Ariff 1988]. References Abdul Gafoor, A.L.M., Interest-Free Commercial Banking, ch.4.1995, available at http://www.islamic-finance.com. Afzal, 0. “Riba: Usury or Interest or Both”, a Conference paper for the Islamic Chamber of Commerce and Industry (ICCI), San Jose, California, November 7-9, 1996. Aggarwal, R.K., and Yousef, T., “Islamic Banks and Investment Financing”, Journal of Money, Credit, and Banking, 32, I (February 2000): 93-120. Ahmad, M., Business Ethics in Islam, Academic Dissertations-5, Islamabad, Pakistan, The International Institute of Islamic Thought, 1995. Ali, A.Y., The Holy Qur’an: Text, Translation Commentary, Washington, D.C., The American International Printing Company, 1946. al-Saud, A.M., “Bain al-Faida wa al-Riba,” AI-Shuruq al Islami, (April 1985): 18 -20. al- Tabari, A.J.M, Jami’ al-bayan ‘an ta ‘wil ay al-Quran, English translation of the abridged version by Cooper, J., New York, Oxford University Press, 1987. al-Zamakhshari, M.I.U, al-Kashshaf ‘an Haqa ‘iq al-tanzil wa-‘uyun al-aqawil fi wujuh al-ta ‘wil. Anwar, M., Modelling Interest-Free Economy: A Study in Macroeconomics and Development, Herndon, Virginia, The International Institute of Islamic Thought, 1987. Ariff, M., “Islamic Banking”, Asian-Pacific Economic Literature, 2, 2 (1988): 48-64. Bank Islam Malaysia Berhad, Annual Report, Kuala Lumpur, Malaysia, 1994, 1995, and 1996. Chapra, M.U., Towards a Just Monetary System, London, The Islamic Foundation, 1985. DeBelder, R.T., and Khan, M.H., “The Changing Face of Islamic Banking”, International Financial Law Review, 12, II (1993): 23-29. Disclosure Data Base, World Scope, June 1998. EI-Gamal, M.A., “Can Islamic Banking Survive? A Micro- Revolutionary Perspective”, Working Paper, Department of Economics, University of Wisconsin, Madison, Wisconsin, Feb.21 , 1997. Edwards, W., “Islamic Banking”, Princeton Economic Journal, First Quarter, 1999. Errico, L. and Frahbaksh, M. ( 1998), “Islamic Banking:Issues in Prudential Regulations and Supervision”, IMF Working Paper, March 1998. Faridi, F.R., Essays in Islamic Economic Analysis, edited volume, New Delhi, Genuine Publications (P) Ltd.1991. Frenchman, M., “Growth on a Global Scale”, Middle East, 275, (Feb. 1998): 27-29. Homer, S., A History of Interest Rates (Second Edition), New Brunswick, New Jersey, Rutgers University Press, 1977. Iqbal, Z. and Mirakhor, A., Islamic Banking, IMF Occasional Paper # 49, Washington, D.C., 1987. Ibn al-‘ Arabi (no date ), Ahkam al-Quran, Beirut: Dar-al-ikzat al-‘ Arabia, I (1968): 24. Khan, M.S. and Mirakhor, A., “Islamic Banking: Experiences in the Islamic Republic of Iran and in Pakistan”, Economic Development and Cultural Change, 1990. Kuran, T., “Islamic Economics and the Islamic Subeconomy”, The Journal of Economic Perspectives, 9, 4, (Fall 1995): 155-173. Martin, J., “Islamic Banking Raises Interest,” Management Review, (Nov. 1997): 86, and (1997): 25- 29. Mirakhor, A., “Progress and Challenges of Islamic Banking,” Review of Islamic Economics, 4, 2 (1997): 1- IJ. Muslim, I., Sahih Musli (Volume III), translated into English by Siddiqi, A.H., Lahore, Pakistan: Sh. Muhammad Ashraf, 1990. Naqvi, S.R., History of Banking and Islamic Laws, Karachi, Pakistan: Hayat Academy, 1993. O’Sullivan, E., “Islamic Banking: A Market in Search of an Industry”, Middle East Economic Digest, 38, 34 (1994): 7-12. Proctor, D., “Islamic Banking: AN Expanding Market”, Institutional Investor, 31,2 (1997): B18. Rahman, F., Major Themes of the Quran, Chicago, Bibliotheca Islamica, 1980. Salus, A.A., al-Rad ‘ala Kitab Mufti Misr, Cairo: Dar al- Manar al-Hadithah, 1991. Sanhuri, A., 1954-1959), Masadir al-Haqfi al-Fiqh al-Islami, 6 parts in 2 volumes, 1954-59, no other information available. Shah, y., Chand Ma’ ashi Masail our Islam, Lahore, Idara- I Thaqafat-i Islamiya, 1967. Siddiqi, M., “The Growing Popularity of Islamic Banking”, Middle East, 291 (June 1999): 33-35. Siddiqui, M.N., Some Aspects of the Islamic Economy, Second Edition, Lahore, Pakistan: Islamic Publications Ltd.,1978. Siddiqui, M.N., Model of an Islamic Bank, Chicago: Kazi Publications, 1986. Suhail, I., Haqiqat al-Riba, 1936² no other information available. Tantawi, M.S., et. al., Arbah al-bunuk baina al-Halal wa al-Haram, Cairo: Dar al-Ma’arif, 1989. The Banker, “Islam: The New Mover”, June 2000: 67-68. Timewell, S. “A Market in the Making,” The Banker,148, (1998): 57-61. London. Wall Street Journal, “Rating the World’s Banks,” The Wall Street Journal, (August 14,1998): A13. Wilson, R. “Going Global”, The Banker, March 1995, London. Wohabe, D., “Why Islamic Leasing is Popular,” The American Journal of Islamic Finance, (Summer 1997): 11-12. Wohlers-Scharf, T. (1983), Arab and Islamic Banks: New Business Partners for Developing Countries, Paris, OECD Development Center Studies, 1983. _________________________________ *M. Raquibuz Zaman is Charles A. Dana Professor of Finance & International Business and Chairman, Department of Business at Ithaca College. His publications are in the fields of foreign direct investment, financial markets, trade and development, and Islamic economics. Hormoz Movassaghi is associate professor of Finance & International Business in the School of Business, Ithaca College. His research interests are in the areas of foreign direct investment, international trade, export behavior of small and medium sized companies, banking, and e-commerce. Home Study Resource Page Index of My Writings Have you visited my other sites? Kazi Nazrul Islam? Genocide/Bangladesh/1971? Hadith Humor? Economics-Finance? Categories: Islamic Banking

ISLAMIC BANKING MEETS “CONVENTIONAL” BANKING: A SURVEY OF RECENT DEVELOPMENTS IN BANKING IN PAKISTAN August 22, 2010 isa7695 Leave a comment Rate This Isobel Lobo, Benedictine University Frank Bonello, University of Notre Dame In 1985, Pakistan declared that interest had been eliminated from banking. Its religious court ruled otherwise in 1991. The Supreme Court upheld the ruling and directed the government to bring a number of banking laws into conformity with Islamic injunctions by June 30, 2002. As the deadline approached, however, in a surprising last minute reversal, it remanded the case back to the religious court for reconsideration. Granted a reprieve, the country appears headed towards a dual banking system. A Synopsis of the Elimination of Interest and the Evolution of Interest-Free Banking Islam prohibits riba which is generally taken to include the interest banks pay and receive. Pakistan began planning for an interest-free banking system in 1977. It followed a cautious, and gradual transition that started with the acceptance of profit/loss sharing (PLS) deposits by the nationalized commercial banks in January 1981. The transition was declared complete in July 1985 when bank assets and liabilities (except for foreign loans and foreign currency deposits), were converted to various non-interest bases. The country’s central bank, the State Bank of Pakistan (SBP), provided the banks inter alia with a list of approved modes of finance and a method for calculating rates of return on the banks’ PLS deposits. A number of “qualitative deficiencies” were, however, found to characterize the procedures used by the banks. [Institute of Policy Studies]. Recognizing this, the terms interest-free or noninterest-based (NIB) banking, rather than Islamic banking, have commonly been used to describe the system in place since 1985. One of the main shortcomings of the noninterestbased system is the banks’ almost exclusive reliance on a single mode of finance – mark-up with or without buy-back arrangements – that closely resembles interest, and their virtual exclusion of any form of PLS or partnership-based finance (e.g. musharaka or mudaraba) that many Muslim scholars of religion and economics consider more truly reflects the spirit of the Quranic prohibition of riba. In 1992, for example, mark-up based finance accounted for over eighty percent of the finance extended by the nationalized commercial banks (who at the time accounted for about 90 percent of bank assets), while their musharaka finance was insignificant. Another shortcoming is the fact that banks are (still) allowed to invest in (interest-paying) government securities. As one writer concludes, the elimination of interest “was carried out without serious regard to Islamic legal doctrine, leaving the interest-based banking system fundamentally unchanged, but covering it with an Islamic varnish.” [Ray]. The elimination of riba (interest) had not been carried out with regard to the true spirit of the prohibition. [Makhdoom]. Moreover, the minimal nature of the change was apparent to most people. [Gieraths]. Key Judicial Rulings on the Banking System From 1991 to 2002 Monetary and fiscal issues had been excluded from the jurisdiction of Pakistan’s religious court, the Federal Shariat Court (FSC) up to June 26, 1990. On November 14, 1991, after hearing 115 petitions challenging twenty banking and fiscal laws, the Court found that provision for interest in these laws came under the definition of riba and was, therefore, repugnant to the injunctions of Islam. It set a deadline of June 30, 1992 after which the various provisions would cease to have effect. The Shariat Appellate Bench (SAB) of the Supreme Court of Pakistan upheld the FSC’s ruling on December 23, 1999. The Bench explained its opinion of the modes of finance that appear in the different laws under consideration. Unlike the FSC, the Bench noted that a sale on mark-up (murabaha) is permissible if it is based on the genuine sale of a commodity. Mark-up may not be charged on a money loan. It endorsed the use of some modes of finance (including lease and hire-purchase in approved forms) while emphasizing musharaka and mudaraba as true alternatives to interest Its judgment indicates that: (i) any amount over the principal in a contract of loan or debt is riba forbidden by the Quran; (ii) the prevailing interest-based financial system has to be subjected to radical change to bring it into conformity with Islamic injunctions; and (iii) provisions for payment of interest in eight specific laws (on money lending) would cease to be have effect from March 31, 2000 and all other laws considered in the judgment would be ineffective from June 30, 2001. The Appellate Bench suggested the following measures be taken to transform the existing system: (i) austerity measures to curtail government expenditure; (ii) laws to regulate government borrowing powers; (ii) laws to ensure transparency and freedom of information; (iv) establishment of an institution to control “white collar and economic crimes; (v) establishment of credit rating agencies; (vi) establishment of evaluators to scrutinize feasibility reports; and (vii) establishment of special departments and a Shariah Board within the central bank (to scrutinize and evaluate procedures and products). The Bench directed the government inter alia to establish a Commission for Transformation of the Financial System in the SBP to prepare a strategy, and to constitute task forces in the Ministries of Finance and Law, for preparation and approval of model financing agreements, and for conversion of the government’s domestic borrowing into project-related financing (inter-government loans and central bank finance were to be interest-free). The SAB admitted it would be difficult to implement the prohibition of interest in the area of foreign loans. It directed the government to renegotiate existing loans, to avoid foreign debt, and to structure any necessary future foreign borrowings on the basis of Islamic modes of finance. The Bench set deadlines for the government to comply with each of its instructions. On December 29, 2000 the government issued a prompt and categorical reassurance that banking transactions would continue to be protected and that Pakistan would honor its foreign debt commitments. Despite this, the SAB’s ruling cast uncertainty over the country’s dealings with international lenders. [Bokhari 2000]. During the period between the FSC’s judgment in 1991 and the SAB’s decision to uphold it in 1999, all financing arrangements in the country contained force majeure clauses referencing the possibility of the riba judgment being finally upheld. [Raja] In 2001, the Shariat Appellate Bench extended its earlier deadline to June 30, 2002. The United Bank appealed the SAB’s verdict and it was joined by the government early in 2002. Some of the country’s conservative religious groups sent their own lawyers to defend the earlier ruling. [BBC]. On June 24, 2002 the SAB reversed its own decision of 1999 (which had upheld the FSC’s ruling of 1991) and remanded the case back to the FSC for re-determination. It has been suggest that revised national priorities may explain the SAB’s reversal of its own ruling. [Shah and Wasti]. A constitutional lawyer notes that it is significant that prior to the SAB’s reversal, the President of Pakistan had removed from office a member who had been on the bench since 1980. [Raja]. In arriving at its decision, the SAB took note of a number of points raised by the counsels for United Bank Limited and the Federation. The counsel for United Bank contended: that the SAB had not properly distinguished between usury, interest, and riba; that usury is a kind of riba; that what is prohibited is not what is reasonable and fair, but what is doubled and multiplied; that Quranic verses explaining the prohibition mainly contrast riba with sadaqat (almsgiving); that banks cannot be made to give alms to industrialists; and that the business of banking is covered by the term “bai,” an approved method of finance, which includes sale, business, investment and so forth. Counsel for the Federation argued that the FSC had no jurisdiction to declare riba illegal or impermissible: the Constitution makes it the duty of the Federal Government (not the FSC) to eliminate riba. He stated also that, in pursuance of the SAB’s judgment of 1999, the government had formed a Commission and two task forces to direct the transformation of interest-based government borrowing to Islamic modes of finance, to effect a transition in the financial sector, and to establish a legal and regulatory framework for an Islamic economy. In an affidavit to the SAB, the government stated that after its best efforts to find ways to implement the SAB’s directives, it had found that implementation was neither practical nor feasible, and if attempted would pose great risk to Pakistan’s economic stability and security. The SAB took note of a number of contentions of other counsel for the Federation including inter alia the arguments (i) that the “impugned judgment amalgamated legal and moral aspects of riba” in violation of injunctions in the Quran and the Sunnah and against the opinion of eminent jurists; (ii) that the SAB’s failure to define the word qarz (which is involved in almsgiving) rendered the impugned judgment against Islamic law since the word “loan” is not the exact translation of qarz; (iii) that exploitation is an essential ingredient of riba; (iv) that the present system of bank accounts and investments in various government savings schemes do not involve riba; (v) that the views of certain jurists and scholars on riba and banking practice had been ignored; (v) that the SAB ought to have asked the FSC to decide whether indexation was permissible; (vi) that the SAB had applied the prohibition to non-Muslims although this was not the issue before it; and (vii) that the Islamic banking system suggested in the judgment under review was a misnomer and that (except for Musharaka) all the other recommended modes of finance involve riba in disguise. The Deputy Governor of the State Bank of Pakistan filed an affidavit with the SAB stating that after taking steps to promote Islamic banking and after considering all other practical problems of transforming the financial system, it was the considered judgment of the Bank that “a parallel approach will be in the best interest of the country. This means that Islamic banking is introduced as a parallel system of which a beginning has already been made … .This approach will eliminate the risk of any major costs/damage to the economy, give a fair chance to Islamic banks to develop alongside conventional banks, and will provide a choice to the people of Pakistan, and the foreigners doing business in/with Pakistan, to use either of the two systems.” [SAB] In remanding the case back to the Federal Shariat Court, the SAB directed the FSC to redetermine the issues after thorough research, and after comparative study of financial systems in other Muslim countries and to give a definite finding on all the issues involved (which the FSC had not done in 1991). It asked the FSC to make its determination “in the light of the contentions of the parties noted above and the observations made which are germane to the controversy. Besides the points … , the parties would be at liberty to raise any other issues relevant to these cases and the Federal Shariat Court may also, on its own motion, take into consideration any other aspect which may arise or may be found relevant … .” [SAB] Towards A Parallel Banking System: Establishing an Institutional Structure and a Regulatory Framework for Islamic Banking In December 2001, even before the SAB heard the appeals, the central bank took a step towards promoting a parallel banking system that would offer consumers a choice by announcing criteria for the establishment of private sector Islamic commercial banks. The criteria covered eligibility conditions, licensing requirements, guidelines on set up, Shariah compliance and other operational matters. In September 2002, after the SAB’s reversal of its earlier judgment, an amendment was enacted in the Banking Companies Ordinance (the major banking law), making it possible for commercial banks to establish Islamic banking subsidiaries. The banks were also allowed to apply for permission to set up Islamic banking branches in the country. On January 1, 2003, the central bank issued Policies for the Promotion of Islamic Banking. In it, the central bank enunciated its strategy of promoting Islamic banks, Islamic banking subsidiaries of existing commercial banks, and stand-alone branches of existing commercial banks that engage only in Islamic banking. In September 2003, the central bank established within itself an Islamic Banking Department to regulate and promote Islamic banking. This department is responsible for the licensing, supervision, regulation, Shariah audit, and training the personnel of Islamic banks and Islamic branches. The central bank established a Shariah Board within the department to ensure Shariah compliance, and to advise banks on modes, procedures, laws and regulations for Islamic banking. The Board includes three religious scholars, a banker and a lawyer. The central bank also arranged for an accounting firm to conduct Shariah compliance audits of Islamic banks, to create a Shariah audit manual, and to train State Bank officers. Further, the central bank initiated an Islamic Banking Awareness Program to train banking and other personnel and a Learning Program to learn from the experiences of other Muslim countries. To establish either an Islamic commercial bank, an Islamic subsidiary of an existing commercial bank, or an Islamic banking branch of an existing commercial bank, permission must first be sought from the Director of the Islamic Banking Department (IBD) of the central bank. The proposed institution must also appoint a Shariah advisor in accordance with the “Fit and Proper Criteria” issued by the central bank’s Shariah Board, and the advisor must be approved by the central bank (the institutions may also appoint a Shariah Committee if they so choose). To prevent conflict of interest, the central bank mandated that a bank’s Shariah advisor must not serve in the same capacity at any other Islamic banking institution. This restriction does not apply to the central bank’s nomination of a Shariah advisor to its own Shariah Board. Islamic commercial banks and Islamic subsidiaries of (conventional) commercial banks are subject to prevailing banking and other laws and to the rules and directives of the central bank. Islamic banking branches of commercial banks are required to comply with all the directives and guidelines of the central bank, particularly those applicable to Islamic banking. Criteria specific to the establishment of an Islamic commercial bank include capital adequacy requirements, standards for integrity of sponsors and directors, measures for broad-based ownership and measures directed against interlocking ownerships of banks and other institutions. Their financial transactions must be in accordance with the injunctions of Shariah. The application for permission from the IBD must indicate the modes of finance proposed to be used to raise resources and extend finance. According to IBD Circular No. 2 of 2004, an Islamic commercial bank inter alia: is a public limited company; must be listed on the stock exchange; must offer at least 50 percent of shares to the general public; must have a minimum paid-up capital of Rest. 1 billion and maintain a minimum capital adequacy ratio of 8 percent of risk-weighted assets; and must have at least seven sponsor directors who subscribe at least 15 percent of total paid-up capital and retain their shares for at least three years (they must obtain the central bank’s approval if thereafter they choose to dispose of their shares). The sponsors may make foreign capital investment which is non-repatriable (dividends are repatriable). In addition, not more than 25 percent of the sponsor directors can be from the same family (as defined in the Banking Companies Ordinance). The directors cannot serve as directors of any other financial institution (nor can any one group own more than one bank). The proposed bank must begin operations within six months of permission and must open at least five branches within twelve months. Existing commercial banks (who meet the central bank’s guidelines on capital adequacy and) who wish to establish subsidiaries to carry on Islamic banking must also apply to the IBD for permission. These subsidiaries are also public limited companies, and are considered to be Islamic commercial banks. Like the latter, the chief executive officer of a subsidiary of an existing commercial bank must be approved by the central bank. (In addition, each director of the subsidiary must be cleared by the central bank.) Applications for permission to establish both Islamic commercial banks and Islamic subsidiaries of existing commercial banks must submit risk management guidelines and plans for internal control. At least 51 percent of a subsidiary’s shares must be subscribed by the parent commercial bank and no more than 49 percent may be offered to the public. Finally, existing commercial banks (including foreign banks) may apply to the central bank for a license to open stand-alone Islamic banking branches to offer Shariah compliant products and services. The applicant bank is required to maintain a minimum “Islamic Banking Fund” of Rs. 50 million funded by allocation from its head office (or 8 percent of the risk-weighted assets of its Islamic banking branches, whichever is higher). In making its decision, the central bank will consider the financial strength of the bank. The applicant bank must inter alia indicate the number of Islamic banking branches it proposes to open in the next financial year and their location, the deposits, finance, investment, and other products and services proposed to be offered, how it will segregate the funds of its Islamic banking branches from the funds of its commercial banking branches, the accounting policies to be followed, and the profit and loss sharing mechanism. After the central bank’s approval, the applicant bank must set up an Islamic Banking Division at its head office in Pakistan to control the Islamic Banking Fund and inter alia to ensure that all the central bank’s directives are followed including, for example, the statutory cash reserve and liquidity requirements. The Islamic branches have to meet the same cash reserve requirement as conventional banks i.e. 5 percent of their time and demand liabilities. They are, however, required to maintain a liquidity reserve of only 6 percent of their liabilities with the central bank – instead of 15 percent for the conventional banks – until such time as Shariah-compliant approved securities are developed. The central bank’s guidelines list the systems and control guidelines to be followed. For example, while the applicant bank may authorize some of its existing branches to sell Islamic banking deposit schemes, these branches must transfer the funds raised to the Islamic banking branch on the same day and must not receive or pay interest on such services. They may, however, receive a reasonable fee or commission on sale of deposit schemes. On April 15, 2005, the central bank issued a press release communicating the “Essentials and Model Agreements for Islamic Modes of Finance” approved by its Shariah Board to “ensure compliance with minimum Shariah standards by banks conducting Islamic banking in Pakistan,” and to serve as guidelines which will eventually be enforced as prudential regulations for Islamic banks. The central bank also provided model agreements for the modes. Individual banks could, with the approval of their Shariah advisor, adapt these to suit the products they design. The main features of the approved modes are described below. The seven Islamic modes of finance include: Murabaha, Musawama, Ijara (leasing), Salam, Istisna, Musharaka and Mudaraba. Only the last two modes involve sharing in profits and losses. For each of the five cases not involving profit (loss) sharing, the Shariah Board approved the stipulation of a penalty for late payment or default in the agreement. The penalty is expressed in terms of percent per day or per annum as an interest rate would be. The Shariah Board’s guidelines (and the model agreement forms) note, however, that the penalty will go to the bank’s charity fund and cannot become a source of further return to the bank. The bank may, however, ask a court for award of solatium, which is determined “on the basis of direct and indirect costs incurred, other than opportunity cost.” Furthermore, the bank is allowed to sell any collateral or security it holds (without court intervention). All of the agreements approved by the Shariah Board contain provision for insurance of assets under the Islamic concept of Takaful when this is available (and with a reputable insurance company until this time). The Shariah Board defines murabaha as a sale of goods for cash or on a deferred payment basis. The seller is required to disclose the cost of the goods and a margin of profit is included in the sale price of the goods — which once determined cannot be changed. The financier bears the risk for the period between the purchase of the good (by the bank’s agent) and its sale to the buyer (the bank’s client). As noted earlier, much controversy surrounds the use of Murabaha. The Shariah Board’s guidelines therefore include caveats: murabaha contracts cannot be rolled over (although the repayment date can be extended with no increase in the sale price), and buy-back arrangements are prohibited. A Musawama is defined like a Murabaha except that the seller is not obliged to reveal his cost. Ijara is a permissible lease arrangement. A Salam is an advance payment against deferred delivery of goods. The approved guidelines note that it can be made with respect to homogenous units of goods (traded by counting, measuring or weighing) but not, for example, in precious stones or cattle heads each unit of which is different. A salam cannot require the seller to buy back the goods. The bank is allowed, however, to enter into a parallel salam contract with a third party under given conditions. In an istisna (which is a mode of sale), the buyer (bank) places an order to manufacture a commodity to be delivered at a future date. If the seller fails to deliver the goods in the stipulated period, the price can be reduced by a specified amount per day as agreed upon. The bank (as buyer) is allowed to enter into a parallel but independent istisna contract with a third party in which it is the seller. Musharaka is defined as a relationship to share profits and losses of a joint enterprise. All partners make an investment and share profits as agreed in the contract and losses in proportion to their capital. A managing partner may (under a separate agreement) receive a fee. Assets are jointly owned in proportion to capital contributed. Like earlier definitions of this form of financing, the definition approved by the Shariah Board is silent on the extent of the partners’ liability (i.e. whether limited or unlimited). In fact, the circulated model agreement for a musharaka includes a clause stating that the agreement shall not be deemed to create a partnership or company and that in no way has the client any authority to bind the bank. The model agreement also contains a clause (as in the other modes of finance) for payment of penalty for default of a payment due. The penalty (as in the case of the other modes) is expressed as a percentage per day (or per annum) and is to be used by the bank for charitable purposes only. A Mudaraba is an arrangement in which one person (e.g. bank) contributes money and the other, the Mudarib (who may be a natural person, group of persons, legal entity or corporate body) contributes his efforts. Profit is divided in the proportion contracted for and losses (except in the case of fraud, negligence or willful misconduct) are borne by the party providing the funds (bank) and are limited to this amount. Mudaraba contracts may be multior single purpose, open-ended or closed, for a fixed period or perpetual, restricted or unrestricted. The Mudarib may be permitted by the financier to invest his own funds in the business as well. In this case, the financier may not receive a share in profits that is greater than the ratio of his capital to total investment, and losses are shared in proportion to the capital invested. Neither the model agreement nor the guidelines for a mudaraba include provision for penalty, solatium or damages. The model agreement for a mudaraba indicates that it is not deemed to create a partnership — just as the model agreement for musharaka does. The central bank constituted a committee with the Institute of Chartered Accountants, Pakistan to develop accounting standards for Islamic modes of financing. The committee has prepared the standard on Murabaha and is working on the Ijara and Musharaka standards. In August 2004, the chairman of the Shariah Board expressed his appreciation of the proactive role being played by the State Bank of Pakistan in promoting Islamic banking in the country. He observed that the current regulations governing Islamic banking are in line with the best and the most progressive regulations being followed in countries like Bahrain and Malaysia. In a speech earlier that year, the director of the Islamic Banking Department described the central bank’s introduction of Islamic banking side by side with “traditional banking” as a hybrid of the Malaysian and Bahrain models. The central bank has collaborated with the Bahrain Monetary Agency on Islamic banking regulations and on sukuks (Islamic bonds or government securities). It also arranged an orientation program on Islamic banking and insurance (Takaful) with the central bank of Malaysia. It is actively involved with other Muslim committees and forums on Islamic banking and finance. Islamic Banking in Pakistan: Performance and Issues The Meezan Bank, which was the first bank to be issued an Islamic commercial banking license in Pakistan, was already operating as an investment bank. It converted and began functioning as an Islamic commercial bank in 2002 and has 25 branches today. The bank has a paid up capital of Rs. 1.7 billion contributed by local and international financial institutions (from Kuwait, Bahrain and Saudi Arabia). According to its website, the bank strives to find “commonalities with the conventional banking system” while not compromising on Shariah rulings. Meezan Bank has a Shariah board staffed with Islamic scholars who also serve on the boards of Islamic banks in other countries. It recently introduced a new account, the Meezan Islamic Institution Deposit Account or MIIDA for Islamic financial institutions needing an outlet for their excess liquidity. Meezan Bank uses the deposit pool to provide financing on Islamic modes mainly on the basis of Murabaha and Ijara. The bank also issues a long-term deposit certificate for Pension Funds. Twenty percent of gross profit on the deposit pool goes to certificate holders. In September 2005, Meezan Bank’s Shariah Board approved of diminishing musharaka-based Islamic financing for medium and long term financing of plant and machinery and non-commercial vehicles. The Board also declared day trading (as currently practiced) unIslamic and approved an alternative product for futures trading. Two other Islamic banks were issued licenses in 2005: Al-Baraka Islamic Bank, which is a foreign bank that converted to Islamic banking, and Bank Islami Pakistan, which was licensed on March 31, 2005. In addition, there are 29 Islamic banking branches of conventional banks (including two foreign banks) operating in the country. Al-Baraka offers a number of deposit accounts including PLS savings deposits, incentive accounts, khazana accounts, term deposits, AMI accounts, and foreign currency savings accounts. According to the central bank, at the end of March 2005, the share of Islamic banking in overall banking in Pakistan was only about 1.6 percent. During the first quarter of 2005, the total assets of these banks in Pakistan had increased by 13.6 percent to Rs. 50.2 billion and their deposits had risen by 10 percent to Rs. 33.3 billion. Murabaha dominates as their preferred mode of finance (53%) followed by Ijara (28 percent), Diminishing Musharaka (8 percent), and Musharaka (1 percent). The central bank took up and resolved the issue of double taxation on murabaha transactions with the Central Board of Revenue. Savings deposits account for the largest share in the deposits of the Islamic banking institutions (47 percent), followed by fixed deposits (28 percent) and non-remunerative current account deposits (24 percent). The central bank is working on the creation of an Islamic inter-bank market once there is a sufficient number of Islamic banks. Government securities that conform to Islamic principles are not widely available in Pakistan. The first Pakistani International Bond, the Sukuk Al-Ijara was launched in the international capital market at the beginning of 2005 and was heavily oversubscribed by conventional and Islamic institutions (resulting in a foreign inflow of $600 million). Meezan Bank, the first domestic Islamic bank was the local structuring advisor for the Sukuk issue and the government hopes that the issue will spur the creation of domestic Islamic capital and money markets. According to the central bank’s strategic plan (2005-2010), a two-pronged approach will be followed to promote Islamic banking as a parallel and compatible system: attract international banks of quality to locate in Pakistan and nurture domestic professional Islamic bankers. The central bank also plans to design and implement new tradable instruments necessary for Islamic banking treasury operations. [SBP, Strategic Plan]. In addition, the plan briefly mentions the future enactment of new laws in the area of Islamic Banking. The IMF believes that despite legal ambiguities regarding the process Islamization of the financial sector, the establishment of new Islamic banking institutions is likely to continue. It recommended inter alia close monitoring of the Islamic financial institutions, development and standardization of Islamic banking products and financial instruments, and the development of a specific framework for risk management and lender of last resort arrangements for the Islamic banking sector. The IMF regards the central bank’s vision of Islamic banking and conventional banking operating parallel to each other as appropriate since this set-up affords users a choice compatible with their religious beliefs and fits in with the country’s position as an emergent market that is integrated into the global economy. The “conventional” banking system in Pakistan is the system in place since the transition to non-interest based banking. Banking in Pakistan has, however, undergone substantial reform in the last decade and more reform is envisaged. For example, the central bank’s strategic plan calls for a deposit insurance scheme. The structural changes already made include the privatization of four of the five nationalized commercial banks, the divestiture of a portion of the shares of the fifth bank, central bank autonomy, liberalization of the financial sector, and increase in the minimum capital requirements for banks from Rs. 500 million to Rs. 1 billion. The IMF noted improvements in financial soundness indicators as non-performing loans have fallen and profitability indicators such as return on assets and equity have begun to approach international norms. According to central bank data, local private banks continue to dominate commercial banks in the private sector in terms of share in total assets (87 percent) although foreign banks are more numerous (20 versus 14). Foreign banks account for about 34 percent of profits of all commercial banks in the private sector although they only account for about 15 percent of deposits and 16 percent of advances. The macroeconomic environment in which the banks operate has improved. The government of Pakistan’s data estimates real GDP growth at 8.4 percent in the fiscal year ended June 30, 2005 (making Pakistan the second fastest-growing economy after China). Indicators of social and living conditions are also better. The country’s public (and external) debt burden declined to the lowest level in decades. The inflation rate (9.3 percent) is high, however, and the current account just turned deficit after three years of surpluses. Closing Thoughts There are about 300 Islamic banking institutions operating in some 70 countries with assets estimated at over $250 billion growing at the rate of about 15 percent per annum. The market is largely untapped, according to an article in Global Finance since the majority of Muslims still use conventional products. For example, Malaysia has 15 million Muslims, and nine Islamic financial institutions, but only 10% of total banking assets are held in Shariah compliant accounts. Malaysia and Bahrain served as models for Pakistan’s dual banking system. In Malaysia, separate Islamic legislation and banking regulations exist side-by-side with those for the conventional banking system. The legal basis for the establishment of Islamic banks is the Islamic Banking Act (1983) which empowers the central bank with supervision and regulatory powers over Islamic banks. According to its central bank, Islamic banks in Malaysia offer over 40 financial products and services. An Islamic interbank money market began functioning in 1994. Takaful, an Islamic insurance system, began in 1985. Malaysia has set up a dedicated high court to try Islamic banking and finance cases. Bahrain also has a dual banking system and the largest concentration of Islamic financial institutions in the Middle East region. It hosts a Liquidity Management Center and the International Islamic Financial Market, and its monetary agency has introduced a prudential and reporting framework that is specific to Islamic banking and finance. According to Pakistan’s central bank the interpretation and Shariah position of contracts (e.g. sale and purchase of debt instruments and grant of gifts on savings and financial papers) is different in Malaysia. Another source supports this view, “there is a certain polarization between the schools of thought centred in Asia and those centred in the Middle East with a general perception that the Middle Eastern schools of thought are more conservative in their views. This has a material effect on the acceptability of some Islamic investment products structured in Asia and offered to investors in the Middle East.” The Federal Shariat Court’s re-determination of the case is widely expected to take several years and the IMF notes that “there remains a degree of legal uncertainty about the ultimate basis for banking activities in Pakistan.” In a letter of intent to the IMF, the government and the central bank, however, regard the Supreme Court’s decision as having cleared the way for the pursuit of “an evolutionary approach to Islamic finance, through encouraging the development of Islamic banking alongside traditional financial institutions.” Implicit in this view is the acceptance of the fact that interest is involved in the current operation of the traditional institutions. The central bank’s numerous explicit references to “interest” and interest rates” in its reviews and annual reports acknowledge the existence of interest in banking operations. It appears from the government and the central bank’s statements and actions that they implicitly believe (or hope) that the FSC will allow “traditional financial institutions” to continue functioning. It is not clear, however, whether these institutions will be able to revert to their original existence as truly conventional banks paying and accepting interest and forsaking the present unwieldy and burdensome trappings of an “interest-free” system. References Agence France Presse. “Islamic Banking Booms in Pakistan.” January 30, 2005. Anonymous. “Islamic Finance: Provenance and Prospects.” International Financial Law Review. May 1, 2004. Ayub, Muhammad. Islamic Banking and Finance: Theory and Practice. Karachi, Pakistan: State Bank of Pakistan, 2002. BBC News (World Edition). “Pakistan Reverses Islamic Banking Law.” June 24, 2002. http://news.bbc.co.uk/2/hi/business/2062679.stm Bokhari, Farhad. “Still Taking an Interest.” The Banker. (February 2000). Vol. 150, no. 888, pp 56-57. Bokhari, Farhad. “The Outlook for Islamic Banking.” The Banker. (May 2005). Gieraths, Christine. “Pakistan: Main Participants and financial Products of the Islamization Process.” Islamic Financial Markets. Ed. Rodney Wilson. New York: Routledge, 1990. 171196. Government of Pakistan, Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding. October 16, 2002. http://www.imf.org/External/NP/LOI/2002/pak/03/index.htm Hawser, Anita. “Players Vie for a Prime Slice of a Promising Market.” Global Finance. September 2005. http://web.lexis-nexis.com/universe/ Hume, James. “Islamic Finance: Provenance and Prospects.” International Financial Law Review. (May 2004). Vol. 23 no. 5, pp. 48-50. Husain, Ishrat. “Evolution of Islamic Banking.” Posted on December 2, 2004 on http://www.meezanbank.com. IMF and World Bank. “Technical Note: Condition of the Banking System.” Financial Sector Assessment Program: Pakistan. October 2004. IMF Country Report No. 05/157. (May 2005). Institute of Policy Studies. Elimination of Riba from the Economy. Islamabad, Pakistan: IPS, 1994. Makhdoom, Tipu Salman. Correspondents’ Reports. Jurist. (2000). http://jurist.law.pitt.edu/world/pakcor1.htm Nomani, Farid. “The Problem of Interest and Islamic Banking in a Comparative Perspective: The Case of Egypt, Iran, and Pakistan.” Review of Middle East Economics and Finance. (April 2003). Vol. 1, no. 1, pp. 37-70. Pakistan Press International. “Islamic Banking System Being Opted in 70 Countries.” February 26. 2004. http://web.lexis-nexis.com/universe/ Raja, Salman Akram. “Islamization of Laws in Pakistan.” South Asian Journal. (OctoberDecember 2003.) Ray, Nicholas Dylan. Arab Islamic Banking and the Revival of Islamic Law. London: Graham and Trotman Limited, 1993. Shah, Syed Ahmad Hassan and Wasti, Aarij. “Shariat Appellate Court Remands Riba Judgment, Gives New Life to Modern Banking in Pakistan.” Middle East Executive Reports. (January 2002). Vol. 25 no. 1. Shariat Appellate Bench, Supreme Court of Pakistan, June 24, 2002. http://www.scp.com.pk State Bank of Pakistan. “State Bank’s Shariah Board Approves Essentials and Model Agreements for Islamic Modes of Finance.” Press Release. April 15, 2005. Islamic Banking Department. State Bank of Pakistan. IBD Circular No. 2 of 2004. Islamic Banking Department. State Bank of Pakistan. Strategic Plan 2005-10. http://www.sbp.gov.pk The Council of Islamic Ideology, Report of the Council of Islamic Ideology on the Elimination of Interest from the Economy. Islamabad: 1980. Thomson, Judith. “Developing Financial Law in Conformity with Islamic Principles: Strict Interpretation, Formalism or Innovation?” Deakin Law Review. (1999/2000). Vol. 4, no. 2. pp. 77-91. Yousefi, Mahmood. “The Autonomy of the Central Bank Interest-Free Banking and Monetary Management in Iran.” Journal of Emerging Markets. Vol. 3, no, 1. Spring 1998. pp. 79-98. Categories: Islamic Banking, Islamic Economy, Islamic Management

Developments of Islamic Banking in Pakistan & Malaysia: An Analytical Review August 22, 2010 isa7695 Leave a comment 2 Votes Abstract This study compares Islamic banking operations currently practiced in Pakistan and Malaysia. Both countries started Islamic banking in early 1980’s but employed entirely different approaches. Pakistan attempted to convert the entire financial system in accordance with Islamic law at once at national level. Malaysia adopted the gradual application approach. It allowed Islamic and conventional banking systems to operate and to compete for deposits on parallel basis. This study examines the Pakistani and Malaysian approaches towards the implementation of Islamic banking in their respective countries. It recognizes lack of commitment and long term planning problems in case of Pakistan. Introduction Islamic banking system has emerged as a competitive and a viable substitute for the conventional banking system during the last three decades. It is especially true for Muslim world where presently Islamic banking strides at two separate fronts. At one side, efforts are also underway to covert the entire financial systems in accordance to Islamic laws (Shariah). At the other side, separate Islamic banks are allowed to operate in parallel to conventional interest based banks. Pakistan and Malaysia are the two good examples of above mentioned approaches. Both countries adopted different tracks for the same ultimate destination of developing full fledge viable Islamic financial system and produced quite interesting results. The Government of Pakistan tried to covert the entire financial system to an interest free system through presidential orders at a national level. However, the overnight practice of islamization didn’t achieve the required success. Most of the efforts have either been reversed or further developments have been stopped. Malaysia opted for the alternative gradual way of developing and implementing Islamic banking system. Starting with one Islamic bank it later allowed conventional financial institutions to offer and participate in Islamic banking products and services through their existing staff and branches. The country is now actively involved in designing new Islamic financial instruments for capital and money market transactions. This study provides the comparative analysis of implementing two opposite Islamic banking approaches, one in Pakistan and other in Malaysia along with their acquired results. Origin of Islamic banking in Pakistan The process of islamization the financial system of Pakistan is coincided with the globally resurgence of Islamic banking in the late seventies. Pakistan was among the three countries in the world that has been trying to implement Islamic banking at national level. This process started with presidential order to the local Council of Islamic Ideology (CII) on September 29, 1977. The council was asked to prepare the blueprint of interest free economic system. The council included panelists of bankers and economists who submitted their report in February 1980, highlighting various ways and sufficient details for eliminating the interest from the financial system of Pakistan. This report was a landmark in the efforts for Islamizing the banking system in Pakistan. Origin of Islamic banking in Malaysia In Malaysia, the roots of Islamic banking go back to 1963 when the government established Tabung Haji or Pilgrims Management and Fund Board. The institution was established to invest the savings of the local Muslims in interest free places, who intend to perform pilgrim (Hajj). Tabung Haji utilizes Mudarabah (profit and loss sharing), Musharikah (joint venture) and Ijara (leasing) modes of financing for investment under the guidance of National Fatawah Committee of Malaysia. The first call for separate Islamic bank was made in 1980, in a seminar held in the National University of Malaysia. The participants passed a resolution requesting the government to pass a special law to setup an Islamic bank in the country. Responding to the request, the government set up a National Steering Committee in 1981 to study legal, religious and operational aspects of setting up an Islamic bank. The committee established the blue print of a modern Islamic banking system in 1983, which later enabled the government to establish an Islamic bank and to issue non-interest bearing investment certificates. Initiatives Taken in Pakistan The Islamic banking movement in Pakistan was a nationwide and comprehensive. As it was a mammoth task, the switch-over plan was implemented in phases. The process was started by transforming the operations of specialized financial institutions like National Investment Trust (NIT), Investment Corporation of Pakistan (ICP), and House Building Finance Corporation (HBFC) to the system conforming to the Islamic principles with effect from July 1, 1979. Separate Interest-free counters started operating in all the nationalized commercial banks, and one foreign bank from January 1, 1981, to mobilize deposits on profit and loss sharing basis. As from July 1, 1985, all commercial banking operations were made ‘interestfree’. From that date, no bank in Pakistan, including foreign banks, was allowed to accept any interest-bearing deposits. All existing deposits in banks were treated to be on the basis of profit and loss sharing. However, foreign currency deposits/loans were continued to govern on interest basis. The government meanwhile also passed Mudarabah Companies Act 1984, enabled financial institutions or business groups to setup special Mudaraba Companies in a country. Initiative Taken in Malaysia The establishment of Bank Islam Malaysia Berhad (BIMB) in July 1983 marked a milestone for the development of the Islamic financial system in Malaysia. BIMB carries out banking business similar to other commercial banks, but along the principles of Islamic laws (Shariah). The bank offers deposit-taking products such as current and savings deposit under the concept of Wadiah (guaranteed custody) and investment deposits under the concept of Mudarabah (profit-sharing). The bank grants finance facilities such as working capital financing under Murabaha (cost-plus financing), house financing under Bai’ Bithaman Ajil (deferred payment sale), leasing under Ijara (leasing) and project financing under Musharikah (joint venture). BIMB has grown tremendously since its inception. It was listed on the Main Board of the Kuala Lumpur Stock Exchange on 17 January 1992. At the end of 2003, the bank has a network of 82 branches throughout the country and staff of 1,200 employees. Development of Islamic banking in Pakistan The change management with regard to the introduction of new system is always a sophisticated job requiring long term planning and commitments. This is particularly true in case of present day financial system wherein the interests of the stakeholders are embedded and considered important ingredient. Only a well thought out plan with committed and continue efforts could lead to success. Unfortunately the economics managers in Pakistan lost the desired path of success. Currently, there is hardly any transaction deal in inter-banks , intara-banks or the government related financial activities which can be called as Islamic. In the beginning of islamization process the banks expressed some anxiety to adjust them to the new system and tried to develop methods to eliminate the interest form their transactions. But the issuance of BCD circular No.13 of June 1984 allowed banks to provide finance on mark-up and on buy-back agreement basis. The technique of buy-back agreements are nothing but disguised forms of interest. With the help of new terminology the financial institutes retained the conventional methods of interest bearing finance. The Islamic modes of finances such as musharikah, mudarabah, ijara, ijara wa iktina, were not adopted in majority of the cases. The aggressively established Mudaraba Companies also failed to continue their existence; most of them are either in losses or are in the process of agglomerated with other financial institutions. The present day financial system is largely based on ‘mark-up’ technique with or without buy-back arrangement. This procedure was, however, declared un-Islamic by the Federal Shariat Court in November 1991. Appeals were made to the Shariat Appellate Bench of the Supreme Court of Pakistan (the apex court). The Supreme Court delivered its judgment on December 23, 1999 rejecting the appeals and directing that laws involving interest would cease to have effect finally by June 30, 2001. In the judgment, the Court concluded that the present financial system had to be subjected to radical changes to bring it into conformity with Islamic laws (Shariah). It also directed the government to set up, within specified time frame, a commission and task forces for the transformation of financial system, to achieve the objective. The Court also indicated some measures related to the infrastructure and legal framework, which needed to be taken in order to have an economy conforming to the injunctions of Islam. The Commission for Transformation of Financial System (CTFS) set-up in the State Bank of Pakistan submitted its report in August 2001 that mainly comprised the recommendation given in the two Interim reports submitted earlier in October 2000 and May 2001. Currently, a task force is working in the Ministry of Finance to suggest the ways to eliminate interest from government operations. Another task force has been set-up in the Ministry of Law to suggest amendments in legal framework to implement the Supreme Court’s Judgment. Development of Islamic banking in Malaysia The long-term objective of the Central Bank of Malaysia was to create an Islamic banking system operate parallel to the conventional banking system. A single Islamic bank (BIMB) did not represent the whole financial system. It required large number of pro-active players, wide range of products and innovative instruments, and a vibrant Islamic money market. Realizing the situation, the Central Bank introduced Interest Free Banking Scheme (now replaced with Islamic banking scheme (IBS) in March 1993. The scheme allowed conventional banking institutions to offer Islamic banking products and services using their existing infrastructure, including staff and branches. Since then, the numbers of IBS banking institutions have increased to 36 till the end of 2003, comprising 14 commercial banks (of which 4 are foreign banks), 10 finance companies, 5 merchant banks and 7 discount houses. The Central bank of Malaysia in its annual report (1993, page no 57) stated: “With the implementation of the interest free banking scheme, Malaysia has emerged as the first country to implement a dual banking system, whereby an Islamic banking system functions on a parallel basis with the conventional banking system”. The aspiration to establish a comprehensive Islamic financial system has created a spill-over effect to the non-bank Islamic financial intermediaries which also started to offer Islamic financial products and services under Islamic banking scheme. Such institutions include the Takaful Companies, the savings institutions (i.e. Bank Simpanan Nasional & Bank Rakyat) and the developmental financial institutions (i.e. Bank Pembangunan dan Infrastruktur Malaysia and Bank Pertanian. In October 1996, the Central Bank issued a model financial statement for the IBS banks requiring them to disclose their Islamic banking operations (balance sheet and profit and loss account) as an additional item under the Notes to the Accounts. The Central Bank also setup a National Shariah Advisory Council on Islamic Banking and Takaful (NSAC) on 1 May 1997. The council considers as the highest Shariah authority on Islamic banking and Takaful businesses in Malaysia. On 1 October 1999, the Central Bank issued license for second Islamic bank, Bank Muamalat Malaysia Berhad. The country also introduced Islamic debt securities market has made its debut in 1990 with the issuance of RM 125 million Islamic bonds. Islamic Inter-bank Money Market (IIMM) on 4 January 1994 to link institutions and Islamic investment based instruments. Since then, both the markets provide variety of securities ranging from two to five years medium terms Islamic bonds to short-term commercial papers one to twelve months. Present scenario of Islamic Banking System in Pakistan Pakistan after the gap of twenty years has now decided to shift towards interest free economy in a gradual and phased manner without causing any further disruptions . Some extracts from the affidavit submitted by the Deputy Governor of the State Bank of Pakistan (SBP) in the Supreme Court of Pakistan reflected the future policy of the Bank for the time being. “That having taken a series of steps to promote Islamic banking………. and considering all other practical problems associated with the complete transformation of the financial system, discussed herein, it is State Bank of Pakistan’s considered judgment that the parallel approach will be in the best interest of the country. This means that Islamic banking is introduced as a parallel system, of which beginning has already been made; it is provided a level playing field vis-à-vis the existing conventional banks, and its further growth and development is supported by Government and State Bank of Pakistan through appropriate actions. The approach will eliminate the risk of any major cost/damage to the economy, give a fair chance to Islamic banks to develop alongside the conventional banks, and will provide a choice to the people of Pakistan, and the foreigners doing businesses in/with Pakistan, to use either of the two systems” . State Bank of Pakistan issued detailed criteria in December 2001 for the establishment of full-fledged Islamic commercial banks in the private sector. Newly established Islamic bank can be listed on the stock exchange provided minimum of 50 percent of total shares must be offered to the general public. At least 15 percent of total paid-up capital should be subscribed personally by sponsor directors. Islamic bank are also required to maintain a minimum capital adequacy ratio of 8 percent based on risk weighted assets. Meezan Bank Limited (MBL) received the first Islamic commercial banking license from SBP in January 2002. At the end of 2003, MBL has a small net-work of 10 branches with total deposits of US $ 130 million. In January, 2003 the State Bank issued detail instructions upon setting up subsidiaries and stand-alone Islamic banking branches by existing commercial banks. Accordingly six existing commercial banks including one foreign bank are allowed to open separate Islamic banking branches. Out of which eight branches of four banks have already started their operations since June 2004. Islamic banks are also allowed to maintain statutory liquidity requirements (SLR) and special cash reserve (SCR) deposits in current account with the State Bank to the maximum extent of 40% of SLR and SCR for other banks in order to avoid interest. Some developments have also been witnessed in the capital market with regard to Islamization. During the last few years, numbers of companies have issued Term Finance Certificates (TFC) to raise redeemable capital on the basis of Musharika. The payments of profit of or sharing of loss with the TFC holders are linked to the operating profit/loss of the TFC issuing companies. Therefore, the investors assume the risk of sustaining losses proportionate to their principal amount in case of operating losses incurred by the company. In September 2002, Securities and Exchange Commission of Pakistan (SECP) also allowed the Mudaraba companies to float Musharikah based TFC’s. Another significant development during the year 2003 is the permission to set up ‘SME Modaraba’ with the participation of about 20 Modarabah companies to undertake SME businesses in the smaller towns and distant areas. SME Modaraba will resolve the problem of the individual Modarabah companies which do not have a big branch network to reach out to the prospective clientele. Present scenario of Islamic Banking System in Malaysia Today, Malaysia has a full-fledged Islamic financial system operating parallel to conventional financial system. In terms of products and services, there are more than 40 different Islamic financial products currently available in a country. However, differentiating fixed assets and overhead expenses are problematic in case of IBS banks. Usually, an IBS bank consists of a team overseeing Islamic banking transactions. Product development, marketing and other policy issues are conducted at the respective headquarters. At the branch level, there is no delineation over Islamic and conventional transactions. Each branch officer is expected to deal with both systems. Islamic and conventional transactions share the share computers and automated teller machines (ATMs) facilities. To some extent, overhead expenses on wages/salaries, office equipment and furniture etc. can be accounted for at the bank’s headquarter, but not at the branch level. The same applies to security systems, land and office premises as these cannot be divided into the Islamic and conventional individual components (Rosley, 2003). Overall Islamic banking industry in Malaysia has continued to register strong expansion during 2003 to account for 9.7% of the total assets of the banking system (8.9% in 2002), 10.4% of total deposits (10.2% in 2002) and 10.3% of total financing (8.1% in 2002). The improved performance was characterized by strong growth in financing activities for the purchase of transport vehicles and residential property. The thrust of Islamic financial policy in 2004 will continue to be directed at further strengthening the fundamental essential for progressive Islamic banking industry. The Central Bank is focusing on strengthening the institutional infrastructure, enhancing the regulatory framework, strengthening the Shariah and legal infrastructure as well as enhancing intellectual capital development and consumer education. In 2003, the Central Bank of Malaysia brought forward liberalization in Islamic banking to allow three fullfledged foreign Islamic banks to be set-up in Malaysia. Conclusion Islamic banking has proved vital potential as a competitive and better substitute against conventional banking system in many countries of the world. Currently, two different approaches are experienced towards the development of Islamic banking. First way experienced by Pakistan, Iran and Sudan is to implement Islamic banking on a country wide and on a comprehensive basis. Second, way is to setup individual Islamic banks in parallel to the conventional interest based banks. Pakistan and Malaysia can be assumed as the two leaders of Islamic Finance. Both countries selected different tracks to achieve the same goals of developing full fledge Islamic banking but gained different results. The Governments of Pakistan has tried to employ Islamic banking system at once at national level. The overnight exercise of islamization didn’t produce the required results due to lack of required support and continue efforts to eliminate the interest (Riba) from the economy. Most of the Islamization efforts either had been reversed or at least, further progress was stopped. Since 2001, the Central Bank of Pakistan has started adopting the gradual policies of implementing Islamic banking which Malaysia has adopted twenty years back. AlMeezan Bank in Pakistan (fully Islamic and independent commercial bank) and full fledge separate Islamic banking branches from few commercial banks are healthy indicators for positive expectations. Malaysia employed the gradual approach of implementing Islamic banking. Although, the country is facing problems in segregating Islamic and conventional banking fixed assets and overheads expenses but, no doubt, it has successfully developed viable Islamic financial system. After developing Islamic banking infrastructure and Islamic instruments for financial investments and liquidity management, the country is actively progressing towards the development of Islamic capital market. Malaysia is now also inviting the international players to experience its new dual banking system. References Ahmad, A (1997),” Towards an Islamic Financial Market, A Study of Islamic Banking and Finance in Malaysia” Research Paper No 45, Islamic Research and Training Institute, Islamic Development Bank, Jeddah. Rosley, S A (2003), “Performance of Islamic and Mainstream Banks in Malaysia” International Journal of Social Economics, Vol 30 – 12, PP 1249 – 1265. The Central Bank of Malaysia, (1993-2003),”The Central Bank of Malaysia, Annual Reports”, Kuala Lumpur, Malaysia. , (1999), “The Central Bank and the Financial System in Malaysia: A Decade of Change (1989 – 1999)” the Central Bank of Malaysia Publication. The Bank Islam Malaysia Berhad, (1994-2003),”The Central Bank of Malaysia, Annual Reports”, Kuala Lumpur, Malaysia. State Bank of Pakistan, (1999-2003),”State Bank of Pakistan, Annual Reports”, Karachi, Pakistan. 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