KEKUATAN SISTEM KEWANGAN ISLAM

Prestasi industri perbankan Islam terus bertambah kukuh pada tahun 2005. Pada akhir tahun itu, aset berlandaskan Islam mencatat pertumbuhan kukuh sebanyak 17.7% kepada RM111.8 bilion dan jumlah itu mencakupi 11.3% daripada jumlah aset keseluruhan sistem perbankan. Bahagian pasaran deposit dan pembiayaan berlandaskan Islam juga meningkat masing-masing kepada 11.7% dan 12.1% daripada jumlah industri.

Liberalisasi industri perbankan Islam menyaksikan pembukaan bank Islam asing yang pertama yang dilesenkan di bawah Akta Bank Islam 1983, pada bulan Ogos 2005. Berikutan liberalisasi peraturan pentadbiran pertukaran asing pada tahun 2004, pasaran kewangan Islam menunjukkan kedalaman yang lebih nyata pada tahun 2005 dengan instrumen kewangan berlandaskan Syariah dalam didominasi ringgit terus diterbitkan oleh agensi asing dalam pasaran bon dalam negeri. Perkembangan ini bukan sahaja meningkatkan keyakinan dalam pasaran modal dalam negeri tetapi turut menyumbang kepada kedalaman dan peluasan pasaran.

Sistem kewangan Islam di Malaysia menunjukkan kemajuan yang ketara dalam persekitaran yang semakin liberal dan berdaya saing sejajar dengan peningkatan integrasi antarabangsa sistem kewangan Islam Malaysia. Kapasiti dan keupayaan keinstitusian peserta perbankan Islam serta infrastruktur kewangan dan rangka kerja penyeliaan terus diperkukuh untuk mencapai objektif seperti yang terkandung dalam fasa kedua PISK. Liberalisasi industri perbankan Islam menyaksikan pembukaan bank Islam asing yang pertama yang dilesenkan di bawah Akta Bank Islam 1983, pada bulan Ogos 2005.

Selain itu, subsidiari Islam bagi tiga kumpulan perbankan domestik telah memulakan operasi dengan memanfaatkan sepenuhnya kefleksibelan beroperasi yang diberikan oleh lesen perbankan Islam. Berikutan liberalisasi peraturan pentadbiran pertukaran asing pada tahun 2004, pasaran kewangan Islam menunjukkan kedalaman yang lebih nyata pada tahun 2005 dengan instrumen kewangan berlandaskan Syariah dalam didominasi ringgit terus diterbitkan oleh agensi asing dalam pasaran bon dalam negeri. Perkembangan ini bukan sahaja meningkatkan keyakinan dalam pasaran modal dalam negeri tetapi turut menyumbang kepada kedalaman dan peluasan pasaran.

Bank Negara

Bank Negara Malaysia terus memantau pelaksanaan rangka kerja tadbir urus Syariah berikutan pengeluaran GPS1, berkuat kuasa pada 1 April 2005. Dalam membangunkan dan menggalakkan dinamisme dan penyatuan Syariah di peringkat antarabangsa, Bank Negara Malaysia melaksanakan dua inisiatif penting pada tahun 2005. Inisiatif pertama ialah Dialog Cendekiawan Syariah yang berlangsung pada 22 – 23 Jun 2005, di Kuala Lumpur dan inisiatif kedua ialah penubuhan Dana Cendekiawan Syariah dalam Kewangan Islam berjumlah RM200 juta.

Bersempena Mesyuarat Lembaga Gabenor-Gabenor Bank Pembangunan Islam ke-30, yang diadakan di Malaysia, seminar mengenai Pelan Induk Ke - 10Tahun Industri Perkhidmatan Kewangan Islam telah berlangsung pada 22 Jun 2005 untuk menggariskan hala tuju industri perkhidmatan kewangan Islam sedunia. Ia menyediakan platform untuk membincang dan menyediakan asas bagi pembangunan pelan induk yang akan menggariskan rangka tindakan dan arah tuju strategik bagi pembangunan berterusan industri perkhidmatan kewangan Islam sejagat.

Pusat Kewangan Islam Antarabangsa

Berikutan pembangunan sistem kewangan Islam yang komprehensif serta semakin liberal dan bersepadu dengan sistem kewangan antarabangsa, Malaysia berada pada kedudukan terbaik untuk muncul sebagai pusat kewangan Islam antarabangsa. Inisiatif tertumpu untuk mengukuhkan kekuatan Malaysia dalam organisasi, penerbitan dan jual beli instrumen pasaran modal dan perbendaharaan Islam, pengurusan dana dan kekayaan Islam, pasaran perkhidmatan kewangan Islam luar pesisir serta aktiviti takaful dan takaful semula.

Pelbagai insentif diambil untuk menjadikan Malaysia sebagai pusat kecemerlangan pendidikan, latihan, khidmat runding dan penyelidikan dalam perbankan dan kewangan Islam serta menjadi institusi perbankan Islam domestik yang berkembang ke luar. Hala tuju dasar adalah untuk mempertingkat daya tahan, kecekapan dan kapasiti institusi kewangan Islam domestik dan infrastruktur kewangan Islam bagi mempertingkatkan kemantapan dan kestabilan sistem kewangan Islam.

Institusi Kewangan Pembangunan (IKP)

Jumlah pinjaman terkumpul institusi kewangan pembangunan (IKP) berkembang 25.8% kepada RM47.5 bilion pada akhir tahun 2005 (akhir tahun 2004: RM37.7 bilion). Pertumbuhan pinjaman didorong terutamanya oleh pertumbuhan dalam pembiayaan bagi kredit penggunaan dan pinjaman yang diberi untuk projek infrastruktur. Sementara itu, pemberian kemudahan jaminan dan insurans kredit meningkat 12.4% kepada RM4.8 bilion pada akhir tahun 2005 (akhir tahun 2004: RM4.3 bilion), disebabkan sebahagian besarnya oleh kenaikan dalam jaminan yang disediakan oleh Credit Guarantee Corporation Malaysi a Berhad (CGC).

Pada tahun 2005, dasar tertumpu pada dua bidang umum, iaitu memperkukuh kapasiti dan keupayaan IKP dan menambah baik rangka kerja kehematan untuk mengukuhkan operasi IKP. Tahun 2005 menyaksikan pencapaian penting dalam usaha untuk memperkukuhkan lagi IKP. Usaha rasionalisasi yang melibatkan empat buah IKP telah disempurnakan pada tahun 2005 dan membawa kepada penubuhan Bank Perusahaan Kecil & Sederhana Malaysia Berhad (SME Bank) dan penggabungan Export-Import Bank of Malaysia Berhad (EXIM Bank) dengan Malaysia Export Credit Insurance Berhad.

Sementara itu, Bank Pembangunan dan Infrastruktur Malaysia Berhad telah distrukturkan semula dan diberi nama baru, iaitu Bank Pembangunan Malaysia Berhad untuk mencerminkan tumpuan barunya. Usaha rasionalisasi itu merupakan inisiatif penting untuk menjajarkan semula aktiviti IKP ke arah mempertingkatkan tumpuan strategik dan perniagaan mereka. Di samping itu, pelan tindakan yang khusus telah dirangka untuk SME Bank, Bank Pertanian Malaysia dan EXIM Bank untuk mempertingkatkan kecekapan dalam memberikan khidmat nasihat kepada PKS.

Sebagai sebahagian daripada usaha untuk meningkatkan prestasi Bank Pertanian Malaysia dalam melaksanakan peranan yang di mandat, inisiatif untuk memperkukuh peranannya dalam mempertingkatkan akses kepada pembiayaan bagi sektor pertanian dan industri berasaskan pertanian juga diperkenalkan. Bagi memastikan operasi IKP dilaksanakan secara berhemat, efektif dan efisien, Bank Negara Malaysia menumpukan usahanya untuk mempertingkatkan standard tadbir urus korporat, pengurusan risiko dan kecekapan operasi IKP.

UNTUNG ATAS ANGIN YANG HARAM

Bismillahirrahmanirrahim...
kalimah mulia pembuka bicara, mengubat hati luka, merawat jiwa lara.

Alhamdulillah...
lafaz kesyukuran setinggi-tingginya buat Tuhan Semesta Alam, walau tak terzahir pada lisan, tetap bergema di ruang hati yang dalam. Selawat dan salam buat qudwah hasanah sepanjang zaman, Nabi Muhammad S.A.W, para Sahabat R.A, tabi'in, tabi' tabi'in. Doa kesejahteraan dipanjatkan buat para pejuang Islam yang sudah kembali kerahmatullah dan yang masih melata di bumi ALLAH ini.

Assalamu'alaikum W.B.T kawan-kawan, adik-adik Klang High School (KHS) moga anda semua dalam sihat-sihat sahaja dan terus bersemangat untuk mengejar cita dan cinta kerana ALLAH S.W.T.

Menyingkap keunggulan peribadi dua Umar (Umar al-Khattab dan Umar Abdul Aziz) dalam mentadbir kerajaan dan menguruskan ekonomi negara amat patut dicontohi umat Islam pada sepanjang zaman, penulisan kali ini bukan hendak bercerita tentang bagaimana tokoh-tokoh ini melaksanakan kerja mereka, tetapi lebih kepada pembukaan minda mereka yang sedia ada celik ataupun yang masih ketiduran, suka mengambil untung atas angin walaupun atas niat kebajikan dan kemaslahatan.

"Dan janganlah sebahagian kamu memakan harta sebahagian yang lain dengan jalan yang batil, dan (janganlah) kamu membawa urusan harta itu kepada hakim, supaya kamu memakan sebahagian harta benda orang lain dengan (jalan berbuat) dosa, padahal kamu mengetahui". (Surah al-Baqarah ayat 188)

"Suatu hari Rasulullah S.A.W malalui di hadapan seorang lelaki yang sedang menjual makanan (bijian). Baginda amat mengaguminya, kemudian memasukkan tangan ke dalam tempat makanan itu, apabila dilihatnya makanan itu nampak basah, maka bertanyalah Baginda: 'apa yang dilakukan oleh pemilik makanan ini?' Dia menjawab : 'Kena hujan'. Kemudin Rasulullah S.A.W bersabda: 'Mengapa kamu tidak meletakkan yang basah itu di atas supaya orang lain mengetahuinya?' Barang siapa menipu, bukanlah mereka dari golongan kami (Islam)." (Riwayat Muslim)

Berdasakan ayat al-Quran dan Hadith di atas, izhar dinyatakan dan tiada apa yang perlu diungkaikan lagi, bagi mereka yang berpegang teguh pada Prinsip Islam, pastinya pengajaran ini diamalkan dalam segenap aspek kehidupan, namun sealiti kini merupakan ironi yang patut diperbetulkan supaya keindahan Islam terzahir pada hijab-hijab mata manusia supaya mereka dapat melihat apa sebenarnya keindahan Islam (posting kali ini lebih pada hal etika Muamalah). Disertakan bersama beberapa contoh realiti yang mungkin kita sendiri pernah melakukannya namun tidak pernah kita ambil pusing. Kerana apa? Mungkin kerana kita menganggap tindakan kita betul dan tepat atas niat memperoleh lebihan dana untuk tujuan kebajikan. Apa yang penting 'NIAT TIDAK MENGHALALKAN CARA'.

MENCIPTA "QUOTATION" SENDIRI.
individu atau organisasi yang dipertanggungjawabkan atau diberi kuasa untuk memilih kontraktor mereka, namun quotation itu diubah malah dicipta sendiri untuk dijadikan bukti semata-mata ingin mengambil lebihan wang tajaan atau peruntukan.

MENAIKKAN HARGA
individu atau organisasi mencari barangan mentah untuk sebarang tujuan, Apabila barangan mentah sudah diperolehi misalannya pada harga RM1200 namun penyataan pada bukti pembelian (resit) dinaikkan kepada RM1500 atau (apa-apa sahaja nilai yang melebihi asal walaupun 1 sen) lalu lebihan tadi diambilnya.

TUNTUTAN PALSU
individu atau organisasi berpakat dengan pembekal untuk meletakkan sebut harga yang tinggi namun pembelian pada harga yang lebih rendah berbeza dari jumlah tertera dan membuat tuntutan kepada syarikatnya atau penajanya dengan harga tinggi.

RESIT CIPTAAN
individu atau organisasi membeli barangan untuk kegunaan individu atau organisasi dari sebuah kedai, bagi meraih keuntungan, pihak tidak bertanggungjawab telah mencipta resit sendiri beserta cop palsu.

Semua contoh di atas telah disepakati oleh para ulama' hukumnya HARAM kerana menglibatkan diri dalam penipuan dan memakan harta secara batil walaupun untuk tujuan kebaikan kerana wang yang haram tiada keberkatan padanya lebih-lebih lagi disumbangkan pada hal-hal kebajikan dan seterusnya menjadi darah daging yang akan menjadi bahan bakar di neraka ALLAH S.W.T. Konsep muamalah yang cacat ini tidak jauh beza dengan konsep 'money laundering', yang jelas HARAM di sisi syara'.

Maka apa 'stand' kita dalam mempertahankan penyataan terhadap mumalat cacat yang telah kita amalkan itu? 'Yang halal itu jelas dan yang haram itu juga jelas'. Kembalikan suatu pada yang hak kerana meletakkan suatu bukan pada tempatnya bermakna zalim. bukankah kita ini sebaik-baik manusia yang dilahirkan kedunia, menyeru kepada kebajikan dan mencegah kemungkaran, dan beriman kepada ALLAH S.W.T.

jadilah individu atau organisasi yang berkat, setiap masa mestilah komited dengan kejujuran kerana kejujuran membuka pintu berkat. Tidak memanfaatkan peluang untuk memanipulasi serta tidak lalai beribadah. mudah mudahan kita sentiasa BERJALAN di bawah lembayung rahmat-Nya, MELIHAT dan menyusuri sirah tokoh Islam, supaya kita mudah menghadam dan MENTAFSIR serterusnya mengamalkannya untuk menaikkan Islam seluruhnya.

"seorang pemuda yang bermusafir dalam perjalanan yang jauh, hal rambutnya kusut masai, mukanya berdebu di mana dia mengangkat tangan ke langit, "Wahai Tuhanku, wahai Tuhanku..." sedangkan makanannya haram, minumannya haram dan pakaiannya haram. Dan dia dibesarkan dengan memakan makanan haram, maka bagaimana Kami mahu memakbulkan doanya?" (Riwayat Muslim)

Sekian dahulu, renung-renungkan dan selamat beramal...

p/s: Dipetik dan diolah daripada Untung atas angin yang HARAM karya Ustaz Zaharuddin Abd Rahman (majalah solusi keluaran jun)

CORPORATE GOVERNANCE IN ISLAMIC BANKS

Introduction

CORPORATE governance in banking has been analyzed almost exclusively in the context of conventional banking markets. For example, there has recently been some discussion of the role 'market discipline' exerted by bank shareholders and depositors in constraining the risk taking behavior of bank management. At the same time, there is growing interest in, and analysis of, banks as stockholders in companies themselves playing a central role in corporate governance, especially in Germany and other countries with universal banking structures of the traditional type.

By contrast, little is written on governance structures in Islamic banking, despite the rapid growth of Islamic banks since the mid 1970s and their increasing presence on world financial markets. There are now over 180 financial institutions world-wide which adhere to Islamic banking and financing principles. These banks operate in 45 countries encompassing most of the Muslim world, along with Europe, North America and various offshore locations. Islamic financing increasingly is a market segment of interest of Western banks, and the latest addition to the list of Islamic banks in October 1996 in the City Islamic Investment Bank, Bahrain a wholly owned subsidiary of Citicorp.

Islamic banking represents a radical departure from conventional banking, and from the viewpoint of corporate governance, it embodies a number of interesting features since equity participation, risk and profit-and-loss sharing arrangements from the basis of Islamic financing. Because of the bank on interest (riba), an Islamic bank cannot charge any fixed return in advance, but rather participates in the yield resulting from the use of funds. The depositors also share in the profits according to predetermined ratio, and are rewarded with profit returns for assuming risk. Unlike a conventional bank which is basically a borrower and lender of funds, an Islamic bank is essentially a partner with its depositors, on the one side, and also a partner with entrepreneurs, on the other side, when employing depositors' funds in productive direct investment.

These financial arrangements imply quite different stockholder relationships, and by corollary governance structures, from the conventional model since depositors have a direct financial stake in the bank's investment and equity participations. In addition, the Islamic bank is subject to an additional layer of governance since the suitability of its investment and financing must be in strict conformity with Islamic law and the expectations of the Muslim community. For this purpose, Islamic banks employ an individual sharia Advisor and/or Board.

My examination of corporate governance in Islamic banking begins with the comparing governance structures in the Islamic bank and will continues with the principles of Islamic banking. This study compares the Islamic banking, financial model and its implications for governance structures. The study intends to give a small picture on the principles of Islamic banking.

THE ISLAMIC BANK

Governance structures are quite different from these under Islamic banking because the institution must obey a different set of rules - those of the Holy Qur'an - and meet the expectations of Muslim community by providing Islamically-acceptable financing modes. These profit-and-loss sharing methods, in turn, imply different relationships than under interest-based borrowing and lending.

Figure 1 sets out the key stockholders in an Islamic bank. There are two major difference from the conventional framework. First, and foremost, an Islamic organization must serve God. It must develop a distinctive corporate culture, the main purpose of which is to create a collective morality and spirituality which, when combined with the production of goods and services, sustains the growth and advancement of the Islamic way of life. To quote janachi (1995):

'Islamic banks have a major responsibility to shoulder ....all the staff of such banks and customers dealing with them must be reformed Islamically and act within the framework of an Islamic formula, so that any person approaching an Islamic bank should be given the impression that he is entering a sacred place to perform a religious ritual, that is the use and employment of capital for what is acceptable and satisfactory to God.' (p.42).

There are equivalent obligations upon employees:

'The staff in an Islamic bank should, throughout their lives, be conducting in the Islamic way, whether at work or at leisure.' (p.28).

Further, obligations also extend to the Islamic community:

'Muslims who truly believe in their religion have a duty to prove, through their efforts in backing and supporting Islamic banks and financial institutions, that the Islamic economic system is an integral part of Islam and is indeed for all times ... through making legitimate and Halal profits.' (p.29).

Second, interest-free banking is based on the Islamic legal concepts of shirkah (partnership) and mudaraba (profit-sharing). An Islamic bank is conceived as financial intermediary mobilizing savings from the public on a mudaraba basis and advancing capital to entrepreneurs on the same basis. A two-tiered profit-and-loss sharing arrangement operates under the following rules:

1. The bank receives funds from the public on the basis of unrestricted mudaraba. There are no restrictions imposed on the bank concerning the kind of activity, duration, and location of the enterprise, but the funds cannot be applied to activities which are forbidden by Islam

2. The bank has the right to aggregate and pool the profit from different investments, and share the net profit (after deducting administrative costs, capital depreciation and Islamic tax) with depositors according to a specified formula. In the event of losses, the depositors lose a proportional share or the entire amount of their funds. The return to the financier has to be strictly maintained as a share of profits.

3. The bank applies the restricted from of mudaraba when funds are provided to entrepreneurs. The bank has the right to determine the kind of activities, the duration, and location of the projects and monitor the investments. However, these restrictions may not be formulated in a way which harms the performance of the entrepreneur, and the bank cannot interfere with the management of the investment. Loan covenants and other such constraints usual in conventional commercial bank lending are allowed.

4. The bank cannot require any guarantee such as security and collateral from the entrepreneur in order to insure its capital against the possibility of an eventual loss.

5. The liability of the financier is limited to the capital provided. On the other hand, the liability of the entrepreneur is also restricted, but in this case solely to labor and effort employed. Nevertheless, if negligence or mismanagement can be proven, the entrepreneur may be liable for the financial loss and be obliged to remunerate financier accordingly.

6. The entrepreneur shares the profit with bank according to previously agreed division. Until the investment yields a profit, the bank is able to pay a salary to the entrepreneur based on the ruling market salary.Many of the same restrictions apply to musharaka financing, except that in this instance the losses are borne proportionately to the capital amounts contributed. Thus under these two Islamic modes of financing, the project is managed by the client and not by the bank, even though the bank shares the risk. Certain major decisions such as changes in the existing lines of business and the disposition of profits may be subject to the bank's consent. The bank, as a partner, has the right to full access to the books and records, and can exercise monitoring and follow-up supervision. Nevertheless, the directors and management of the company retain independence in conducing the affairs of the company.

These conditions give the finance many of the characteristics of non-voting equity capital. From the viewpoint of the entrepreneur, there are no fixed annual payments needed to service the debt as under interest financing, while the financing does not increase the firm's risk in the way that other borrowings do through increased leverage. Conversely, from the bank's viewpoint, the returns come from profits - much like dividends - and the bank cannot take action to foreclose on the debt should profits no eventuate.

GOVERNANCE STRUCTURES

These structures are depicted in Figure 2 which sketches the conceptual framework of corporate governance for Islamic bank. Central to such a framework is the Sharia Supervisory Board (SSB) and the internal controls which support it. The SSB is vital for two reasons. First, those who deal with an Islamic bank require assurance that it is transacting with Islamic law. Should the SSB report that the management of the bank has violated the sharia, it would quickly lose the confidence of the majority of its investors and clients. Second, some Islamic scholars argue that strict adherence to Islamic religious principles will act as a counter to the incentive problems outlined above. The argument is that the Islamic moral code will prevent Muslims from behaving in ways which are ethically unsound, so minimizing the transaction costs arising from incentive issues. In effect, Islamic religious ideology acts as its own incentive mechanism to reduce the inefficiency that arises from asymmetric information and moral hazard.

Such matters are obviously basic to the successful operation of Islamic modes of finance, and they are assessed in the next section when I examine Principles of Islamic Banking.

PRINCIPLES OF ISLAMIC BANKING

1. An Islamic bank is based on the Islamic faith and must stay within the limits of Islamic Law or the sharia in all of its actions and deeds. The original meaning of the Arabic word sharia was 'the way to the source of life' and it is now used to refer to legal system in keeping with the code of behavior called for by the Holly Qur'an (Koran). Four rules govern investment behavior:
2. the absence of interest-based (riba) transactions;
3. the avoidance of economic activities involving speculation (Gharar);
4. the introduction of an Islamic tax, zakat; the discouragement of the production of goods and services which contradict the value pattern of Islamic (haram)

Riba

Perhaps the most far reaching of these is the prohibition of interest (riba). The payment of riba and the taking as occurs in a conventional banking system is explicitly prohibited by the Holy Qur'an, and thus investors must be compensated by other means. Technically, riba refers to the addition in the amount of the principal of a loan according to the time for which it is loaned and the amount of the loan. While earlier there was a debate as to whether riba relates to interest or usury, there now appears to be consensus of opinion among Islamic scholars that the term extends to all forms of interest.

In banning riba, Islamic seeks to establish a society based upon fairness and justice (Qur'an 2.239). A loan provides the lender with a fixed return irrespective of the outcome of the borrower's venture. It is much fairer to have a sharing of the profits and losses. Fairness in this context has two dimensions: the supplier of capital possesses a right to reward, but this reward should be commensurate with the risk and effort involved and thus be governed by the return on the individual project for which funds are supplied.

Hence, what is forbidden in Islamic is a predetermined return. The sharing of profit is legitimate and that practice has provided the foundation for Islamic banking.

Gharar

Another feature condemned by Islamic is economic transactions involving elements of speculation, Gharar. Buying goods or shares at low and selling them for higher price in the future is considered to be illicit. Similarly an immediate sale in order to a void a loss in the future is condemned. The reason is that speculators generate their private gains at the expense of society at large.

Zakat

A mechanism for the redistribution of income and wealth is inherent is Islam, so that every Muslim is guaranteed a fair standard of living, nisab. An Islamic tax, Zakat (a term derived from the Arabic zaka, meaning "pure") is the most important instrument for the redistribution of wealth. This tax is a compulsory levy, one of the five basic tenets of Islam and the generally accepted amount of the zakat is one fortieth (2.5 per cent) of Muslim's annual income in cash or kind from all forms of assessed wealth exceeding nisab.

Every Islamic bank has to establish a zakat fund for collecting the tax and distributing it exclusively to the poor directly or through other religious institutions. This tax is imposed on the initial capital of the bank, on the reserves, and on the profits as described in the Handbook of Islamic Banking.

Haram

A strict code of 'ethical investment' operates. Hence it is forbidden for Islamic banks to finance activities or items forbidden in Islam, haram, such as trade of alcoholic beverage and pork meat.

Furthermore, as the fulfillment or materials needs assures a religious freedom for Muslims, Islamic banks are required to give priority to the production of essential goods which satisfy the needs of the majority of the Muslim community, while the production and marketing of luxury activities, israf wa traf is considered as unacceptable from a religious viewpoint.

In order to ensure that the practices and activities of Islamic banks do not contradict the Islamic ethical standards, Islamic banks are expected to establish a Sharia Supervisory Board, consisting of Muslim jurisprudence, who act as advisers to the banks.

PROFIT-SHARING ARRANGEMENTS

Although the restriction against the use of interest might seem to be a binding constraint upon expansion, Islamic banks and financial institutions have in fact grown rapidly. Table 1 sets out the number of banks, paid up capital, total deposits and total assets of these Islamic banks, classified by region. It shows that the total assets of these reporting banks amounted to US $155 billion in 1994, with employment in excess of 220,000 (data supplied by the International Association of Islamic Banks).

If the paying and receiving of interest is prohibited, how do Islamic banks operator It is necessary to distinguish between the expressions 'rate of interest' and 'rate of return'. Whereas Islam clearly forbids the former, it not only permits, but rather encourages, trade. In the interest-free system sought by adherents to Muslim principles, people are able to earn a return on their money only by subjecting themselves to the risk involved in profit sharing. As the use of interest rates in financial transactions is prevented, Islamic banks are expected to undertake operations only on the basis of Profit and Loss Sharing (PLS) arrangements or other acceptable modes of financing. Mudaraba and musharaka are the two profit-sharing arrangements preferred under Islamic law.

Mudaraba

A mudaraba can be defined as contract between at least two parties whereby one party, the financier (sahib al-mal), entrusts funds to another party, the entrepreneur (mudarib), to undertake an activity or venture. This type of contract is in contrast with musharaka. In arrangements based on musharaks there is also profit-sharing, but all parties have the right to participate in managerial decisions. In mudaraba, the financier is not allowed a role in management of the enterprise. Consequently, mudaraba represents a PLS contract where the return to lenders is a specified share in the profit/loss outcome of the project in which they have a stake, but no voice.

In interest lending, the loan is not contingent on the profit or loss outcome, and is usually secured, so that the debtor has to repay the borrowed capital plus the fixed interest amount regardless of the resulting yield of the capital.

Under mudaraba, the yield is not guaranteed in profit-sharing and financial losses are borne completely by the lender. The entrepreneur as such losses only the time and effort invested in the enterprise. This distribution effectively treats human capital with equally financial capital.

Musharaka

Under musharaka, the entrepreneur adds some of his own to that supplied by the investors, so exposing himself to the risk of capital loss. Profits and losses are shared according to pre-fixed proportions, but these proportions need not coincide with the ratio of financing input. The bank sometimes participates in the execution of the projects in which it has subscribed, perhaps by providing managerial expertise. Figure 3 illustrates the elements. Mudaraba and musharaka constitute, at least in principle if not always in practice, the twin pillars of Islamic banking. The two methods conform fully with Islamic principles, in that under both arrangements lenders share in the profits and losses of the enterprises for which funds are provided and shirkah (partnership) is involved. The musharaka principle in invoked in the equity structure of Islamic banks and is similar to the modern concepts of partnership and joint stock ownership.

TWO-TIERED MUDARABA

For banking operations, the mudaraba concept has been extended to include three parties: the depositors as financiers, the bank as an intermediary, and the entrepreneur who requires funds. The bank acts as an entrepreneur when it receives funds from depositors, and as financier when it provides the funds to entrepreneurs. In other words, the bank operates a two-tier mudaraba system in which it acts both as the mudarib on the saving side of the equation and as the rubbul-mal (owner of capital) on the investment portfolio side. Insofar as the depositors are concerned, an Islamic bank acts as a mudarib which manages the funds of the depositors to generate profits subject to the rules of mudaraba. The bank may in turn use the depositors' funds on a mudaraba basis in addition to other lawful (but less preferable) modes of financing, including mark up or deferred sales, lease purchase and beneficence loans. The funding and investment avenues are now listed.

SOURCES OF FUNDS

Besides their own capital and equity, Islamic banks rely on two main sources of funds, a) transaction deposits, which are risk free but yield no return and, b) investment deposits, which carry the risks of capital loss for the promise of variable. In all, there are four main types of accounts:

Current accounts

Current accounts are based on the principle of al-wadiah, whereby the depositors are guaranteed repayment of their funds. At the same time, the depositor does not receive remuneration for depositing funds in a current account, because the guaranteed funds will not be used for PLS ventures. Rather, the funds accumulating in these accounts can only be used to balance the liquidity needs of the bank and for short-term transactions on the bank's responsibility.

Savings accounts

Savings accounts also operate under the al-wadiah principle. Savings accounts differ from current deposits in that they earn the depositors income: depending upon financial results, the Islamic bank may decide to pay a premium, hiba, at its discretion, to the holders of savings accounts.

Investment accounts

An investment account operates under the mudaraba al-mutlaqa principle, in which the mudarib (active partner) must have absolute freedom in the management of the investment of the subscribed capital. The conditions of this account differ from those of the savings accounts by virtue of: a) a higher fixed minimum amount, b) a longer duration of deposits, and c) most importantly, the depositor may lose some of or all his funds in the event of the bank making losses.

Special investment accounts

Special investment accounts also operate under the mudaraba principle, and usually are directed towards larger investors and institutions. The difference between these accounts and the investment account is that the special investment account is related to a specified project, and the investor has the choice to invest directly in a preferred project carried out by the bank.

USES OF FUNDS

The mudaraba and musharaka modes, referred to earlier, are supposedly the main conduits for the outflow of funds from banks. In practice, however, other important methods applied by Islamic banks include:

Murabaha (mark up). The most commonly used mode of financing seems to be the 'mark-up' device. in a murabaha transactions, the bank finances the purchase of a good or assets by buying it on behalf of its client and adding a mark-up before reselling it to the client on a 'cost-plus' basis profit contract. Figure 4 illustrates the sequence.

Bai' muajjal (deferred payment). Islamic banks have also been resorting to purchase and resale of properties on a deferred payment basis. It is considered lawful in fiqh (jurisprudence) to charge a higher price for a good if payments are to be made at a later date. According to fiqh this does not amount to charging interest, since it is not a lending transaction but a trading one.

Bai'salam ( prepaid purchase). This method is really the opposite of the murabaha. There the bank gives the commodity first, and receives the money later. Here the bank pays the money first and receives the commodity later, and is normally used to finance agricultural products.

Istisnaa (manufacturing). This is a contract to acquire goods on behalf of a third party where the price is paid to the manufacturer in advance and the goods produced and delivered at a later date. Ijara and ijara wa iqtina (leasing). Under this mode, the banks buy the equipment or machinery and lease it out to their clients who may opt to buy the items eventually, in which case the monthly payments will consist of two components, i.e. rental for the use of the equipment and installment towards the purchases price.

Qard hasan (beneficence loans). This is the zero return type of loan that the Holly Qura'n urges Muslims to make available to those who need them. The borrower is obliged to repay only the principal amount of the loan, but is permitted to add a margin at his own discretion.

Islamic securities. Islamic financial institutions often maintain an international Islamic equity portfolio where the underlying assets comprise ordinary shares in well run businesses, the productive activities of which exclude those on the prohibited list (alcohol, pork, armaments) and financial service based on interest income.

p/s: Pick from Iqtisad al-Islami written by M. Naseer Sulaeiman

SEVEN MISCONCEPTION ABOUT INSURANCE AND TAKAFUL

Seven Misconceptions About Insurance and Takaful

What you should know...

Misconception no 1:
Risk Protection (insurance) is against Tawakkul - total dependence upon Allah (swt).
No human actions change the Will of Allah (swt) for our destiny. Whether a person has insurance/Takaful or not has no effect on future events. However, we are instructed to take precautions and then fully trust and depend upon Almighty Allah (swt): in Hadith narrated by Anas bin Malik when an Arab Bedouin asked Prophet Muhmmad (PBUH), "Shall I leave my camel untied and seek Allah's protection on it, or should I tie it?" The Holy Prophet replied, "Tie your camel and then depend upon Allah (swt)." {as quoted by Sunan Al Tarmizi, 1981,}.

Misconception No. 2:
All Risk Protection (insurance) is Haram-prohibited
Fiqh Council of World Muslim League (1398/1978) resolution and Fiqh Council of Organization of Islamic Conference (1405/1985) in Jeddah resolved that, "..conventional insurance as presently practiced is Haram." And that, "..cooperative insurance (Takaful) is permissible and fully consistent with Shariah principles." Hence, conventional insurance is prohibited for Muslims because it contains elements of Riba, Al Maisir, and Al Gharar. By contrast, Takaful provides risk protection in accordance with Sharia using principles of Ta'awun (mutual assistance), brotherhood, piety and ethical operations.


Misconception No. 3:
All Insurance is a form of Gambling of Wagering, which is forbidden in Islam
Risk or uncertainty can be divided into: Pure Risk and Speculative Risk. Pure Risk involves the possibility of Loss or No Loss. For example, damage to property due to fire. Pure Risks are the subject of insurance risk protection and Takaful. On the other hand, Speculative Risks involves the possibility of Loss, No Loss or Gain. For example, venturing into a new business, or gambling on horse race. Speculative Risks that include a potential gain or profit cannot be insured.


Takaful schemes use the principle of indemnification to compensate for the loss that occurs to a Takaful Participant. Takaful insures only Pure Risks and claims pay in the event of Loss to cover repairs, damage, replacement of property, or an agreed fixed sum. In Takaful Taawuni (assurance), the compensation equals each participant's accumulated savings plus investment profit added to a sum covered taken from the Takaful general pool.

Misconception No. 4:
All Insurance seeks to maximize profits which takes benefits away from policyholders
Most conventional insurance companies are stock companies that seek to maximize profits. Since the interests of shareholders conflicts with policyholders, by raising prices, denying claims, etc. these insurers can boost profits for shareholders. Takaful operators, by contrast, are mutual or cooperative entities. The goal of Takaful is community well-being and self-sustaining operations - not high profits. Under the Takaful Mudarabah Model, surplus (or "profits") is shared fairly between shareholders and policyholders. Under the Takaful Wakalah Model, surplus is owned by the policyholders and may be reduced by a performance fee incentive for the operator before distribution to the policyholders.


Misconception No. 5:
All Takaful operators are the Same
Alhumdilallah , in Islam there is unity in diversity. Over the centuries, several Takaful Models have evolved which are approved by Islamic scholars. While they all share the fundamental goals of cooperative risk sharing, these models differ slightly in legal structure and organizational operations. Takaful Models usually are described by the Islamic contracts used; namely Hebbah or 100% Tabarru (Sudan), or al Mudarabah {Bahrain/Malaysia}, or Al Wakalah {Saudi Arabia}.


Misconception No. 6:
Insurance shemes are a modern day invention
Actually, social arrangements for pooling of risks existed may centuries ago. The Takaful system evolved from ancient methods of risk protection in Arabia 14 centuries ago called : (a) daman Khtr-altariq-surety for traders; (b) a'qila - payment to family of murdered victim by accused relatives (c) hilf - confederation for mutual assistance. The year 1706 marked the emergence in United Kingdom of the first "perpetual assurance scheme". The first insurance company in America (1740s) founded by Ben Franklin was a merchant's cooperative. However, in modern times many of these old cooperatives have "demutualized" and converted into stock companies to pursue higher profits.


Misconception No. 7:
"I don't need Insurance/Takaful."
A Takaful scheme gives us an opportunity to practice the virtues of Islam, including self-purification. Surah Al Maidah (V.2) says: "Help one another in furthering virtue and Taqwa (God-consciousness), and do not help one another in evil and transgression." In Hadith by Ahmad and Abu Daud: "Whosoever fulfils the intention of his brother, Allah will fulfil his intentions." And "Always help those who helps his brother."


The first Constitution in Medinah (622 CE) arranged by Prophet Muhammad (PBUH) contained three aspects directly related to risk protection: social insurance for the Jews, Ansar and Christians; Article 3 concerning 'wergild' or 'blood money' and provision for Fidyah (ransom) and Aqila. We should follow his example to meet our needs and social obligations.

A Takaful scheme provides us the self-discipline for savings and the habits of sound financial planning to take care of ourselves and the needs of our children and families. Hadith by Sahih Al-Bukhari, as narrated by Amir bin Saad bin Abi Waqqas, describes Prophet Muhammad (PBUH) as saying: "verily, it is better for you to leave your offspring (heirs) wealthy than to leave them poor asking others for help" and "..The one who looks after and works for a widow and for a poor person is like a warrior fighting for Allah's cause.." Also, from Sahih Muslim Hadith No. 59, as narrated by Abu Huraira, has the Holy Prophet (PBUH) saying: "Whosoever removes a wordly hardship from a believer, Allah (swt) will remove from him one of the hardships of the day of Judgment."

Takaful operations can provide an effective method to accumulate the savings of individuals for the collective good of the community. In many Muslim communities lacking capital resources, a Takaful can become an engine for economic growth and development by channeling its funds into Sharia approved investments sponsored by the local business community.

p/s: Fowarded from http://takaful-islamic-insurance-malaysia.blogspot.com written by Dr. Omar Clark; Senior Advisor - Strategic Mergers & Acquistitions Unicorn Investment Bank.

The "Islamic" Economic System: Common Confusions

Along the lines that what is called interest in modern economics is synonymous to what is called riba in the Qur'an. And that the Islamic system of economics is an interest-free system that avoids riba in financial dealings on all levels, and thus guarantees prosperity and growth because it avoids sin and injustice, and so on. The very fact of "comprehensive" picture of "the Islamic theory of economy" reveals, with all due respect, a common confusion between what is divine and what is human, between what should be according to the scripture and what should be left to our human free thinking, and between what is constant and what is variable in the Islamic way of life. Although Islam is a comprehensive way of life, it is NOT meant to define and precisely prescribe each and every detail of this life.

Thus, Islam has rulings and guidelines that are concerned with politics, courts, family, health, the economy, and so on. However, talking about "Islamic" politics, for example, does not mean that Islam has a cut-and-dry (let alone "divine") detailed system of governance (such as a monarchy with a consultation council, a democratic republic in a multi-party style, a federal government with a constitution, a simple direct democracy, or any other specific system of governance). Nor does "Islamic politics" mean that you must or must not have a constitution, you must or must not have a supreme court, or you must wage war or call for peace with certain countries or groups.

The Islamic system of politics is a system of values, and the exact details are simply left to us humans to decide. Examples of these Islamic political values, as mentioned in the Qur'an, are justice, consultation, and unity. Consultation (Arabic shura) could take a public and direct form (as the Prophet [peace be upon him] did in various occasions), or could take a form in which only a specific group of people are consulted (as the Prophet also did on various occasions). This specific group could be chosen according to a leader's personal choice in a certain environment, according to elections in a parliamentary system or a council-based system, or even according to the tribal structure in a certain society.

None of the above ways is morally wrong and all of the above ways are valid as long as the values of justice, unity, consultation, etc., are observed and aimed at. Any system, from the above list or otherwise, that violates these values is not an Islamic system, whether you call it democracy, caliphate, kingdom, or sultanate. Similarly, Islam is a way of life that is concerned with health. The values that form the "Islamic" guidance in this area, according to the Qur'an and Sunnah, are cleanliness, seeking medication, moderation in consumption, high morale, and so on. However, it is not part of the Islamic teaching to prescribe a certain technical method of cleaning one's home or environment, for example. Likewise, it is not part of the mission of Muhammad to teach us certain medication or medical procedures (even though it was indeed part of his mission to teach us certain related prayers, or ruqiyah, and to teach us how moral behavior is good for health, etc.).

I found the hadith of pollinating the palm trees to be of specific significance in this regard.

Talha narrates: I was walking with the Prophet when he passed by some people at the tops of their palm trees. He asked: "What are they doing?" They answered: "Pollinating the male into the female." He replied: "I do not think that this will be of benefit."When they were told about what the Prophet said, they stopped what they were doing. Later, when the trees shed down their fruits prematurely, the Prophet was told about that. He said: "If it is good for them they should do it. I was just speculating. So pardon me. But if I tell you something about God, then take it because I would never lie about God." Another narrator said that the Prophet added, "You know your worldly affairs better than I." (Muslim)

This hadith shows a matter that the Prophet is instructing us to deal with according to human experience rather than revelation. Thus, human empirical experience is meant to be the final judging factor for these kinds of tools and means. Similarly, Islam is a way of life that is concerned with the economy (in its micro- and macro-levels, as we say in today's language). However, Islam is not meant to devise specific systems for economy in the sense of a certain system for fiscal policies, risk, banking, and so on. I am not an expert in economics, even though I do have a general knowledge of the subject. I know, however, that there are many economic theories and proposed systems. The best theory, which you could also call "Islamic," is the theory that achieves the most in terms of Islamic economic values and principles.

For example, according to the Qur'an and Sunnah, the value of justice is a principle and basic value. To achieve justice, a group of other values have to be guaranteed. For example, the Qur'an mentions that God requires that *{the wealthy amongst you do not dominate wealth}* as mentioned in Surat Al-Hashr (59:6).

Now, the question of how we can design a certain system of the distribution of wealth in a certain economy is a matter of human legislation rather than divinely revealed legislation. Thus, enforcing certain taxes that aim to diminish the gap between the rich and the poor, giving the needy certain subsidies or benefits, passing laws against monopoly, and so on, are all valid means to achieve these goals. None of them, however, could claim divine origin because they could all be changeable and subject to evolution, enhancement, and development.

The prohibition of usury (Arabic riba) is also an Islamic value that is clearly mentioned in the Qur'an. Usury is clear: someone borrows money from an individual or a bank and returns the money in addition to a fixed percentage or amount after a certain period of time. However, 'interest rate' as we know it in today's modern economies cannot be accurately equated with usury or riba. Sometimes interest is related to borrowing and sometimes related to mere investment. This investment is sometimes done in lawful goods (land, gold, etc) and sometimes done in prohibited goods (liquor, etc). Interest rates may be fixed or unfixed, but in the case of riba, it is supposed to be fixed. Yet, an interest that you get on your credit is not defined only based on the profit that this credit brings, but it is rather tied to a large number of economic and even political factors.

Thus, I think that the area of Islam and economy is an area that requires a lot of research that addresses current economic theories and realities, rather than addressing the economic theories and realities of past eras! Having said that, I would also point to a growing number of literature in the area of Islam and economy, in which various writers and researchers present their own views of how an economic system could meet the moral requirements of Islam. All these writings are useful and much needed. However, none of them should claim the status of "the" Islamic theory of economy. Nevertheless, each of these attempts is "an" Islamic theory of economy that could change — in fact should change — with the change of time and the development of human life on earth.