Latest from GIFC

Sunday, 22 February 2009

Crisis presents ‘golden opportunity’ for Islamic finance

FEB 16 – The global economic crisis has handed the proponents of Islamic finance a “golden opportunity” to show that it is a better alternative to Western-style capitalism. That, at least, was what Malaysian Deputy Prime Minister Najib Razak told participants at an Islamic economic conference in Kuala Lumpur last month.

Islamic finance, argued Datuk Seri Najib, could become a model for change because it prohibits many of the risky activities that triggered the current crisis. He may have a point.

Islamic banking complies with syariah (Islamic) law by using returns on assets to pay investors instead of interest.

Most Islamic scholars also agree that derivatives and hedge funds are haram (forbidden), as is short-selling and speculation. As a result, argue its supporters, the US$1 trillion (S$1.49 trillion) global Islamic banking industry has emerged largely unscathed in the credit crunch.

Whether this will result in further growth in the industry as Western capitalism declines, however, is another matter entirely. The rapid growth of retail Islamic banking and services in Asia is still limited by a variety of regulatory impediments. Arabic terms such as Mudharabah (profit sharing) and Wahdiah (safekeeping) are also unfamiliar to most Asians, including many Muslims.

Some believe that all this is about to change. Celent, a Boston-based financial research and consulting firm, released a report last month on the Islamic banking industry in the Asia-Pacific region that suggested that the global financial crisis had made the Asia-Pacific region seem far more attractive to Middle Eastern investors than the West.

With assets valued at US$43 billion by the end of 2007, Malaysia already has the third biggest Islamic banking market in the world after Iran and Saudi Arabia. Investors from Saudi Arabia, United Arab Emirates, Bahrain and Qatar, said the Celent study, were beginning to channel their funds to developing countries like China, India, and Indonesia. The report identified Pakistan, Bangladesh, and Indonesia as having particularly good potential for growth.

Interestingly, non-Muslim majority nations in the region have already begun to recognise the potential significance of Islamic financial instruments. Singapore, for example, launched its first Islamic bond programme last month.

Similar plans to sell Islamic debt have been announced by Thailand and Japan. The Hong Kong government has also expressed an interest in promoting the territory as an Islamic finance hub. And financial institutions in South Korea have reportedly been lobbying the government to adopt the necessary legal and regulatory framework to enable Islamic financial transactions in the country.

But to suggest that Islamic banking is set to grow strongly despite the global financial crisis may be stretching things a little too far. Last year’s credit crunch hit Islamic bonds much harder than other forms of debt as sharply lower international oil prices deprived oil-rich Middle Eastern investors of cash.

According to rating agency S&P, corporate and government sales of sukuk (syariah compliant bonds) reached US$30.8 billion in 2007, but plunged 56 per cent last year to just US$13.6 billion. By comparison, conventional international bonds and emerging-market debt dropped 5 per cent and 15 per cent, respectively

Not surprisingly, Indonesia delayed its first sukuk sale twice last year.

Targeting mostly local investors, it eventually issued the bonds in January. Japan is also holding back on its plans, while Thailand has yet to set a date. As in the case of Singapore, the Indonesian move is probably best seen as an indication of the fact that the sukuk market is still active rather than ready for a resurgence.

That said, the fact that many governments are trying to spend their way out of the current economic downturn suggests that interest in Islamic finance will remain strong for some time. This is because tight global credit markets are forcing cash-strapped regional governments to seek out alternative sources of funding.

The new global order that emerges from the current economic downturn is unlikely to involve the wholesale replacement of Western financial systems with Islamic ones. But historical watersheds such as the one we are now entering do tend to be accompanied by important systemic changes.

If the new dispensation to emerge from the current crisis involves fresh ways of discouraging speculation and attempts to tie the global financial system more closely to the real economy, Najib may perhaps regard himself as at least partly vindicated. – The Straits Times

Tuesday, 17 February 2009

Saudi body pushes for Islamic finance norms


DUBAI: A Saudi Arabian Islamic finance body aims to set up a committee of senior Islamic scholars in the kingdom by 2010 to help standardise Islamic banking edicts in the Gulf oil producer, an official said yesterday.
The Islamic International Foundation for Economics & Finance is in the early talks with Sharia scholars and hoped to “institutionalise” Islamic rulings within a year, said Yousef Abdullah al-Zamil, the foundation’s assitant secretary general.
“The problem is that in Saudi Arabia there is not a system in place for banks, the banks have different views and there is not even a division for Islamic finance at the central bank,” he said.
Saudi Arabia, the largest Arab economy, is home to Al-Rajhi Bank, the Gulf region’s biggest bank complying with Islamic law, or Shariah.
Islamic law bans usury, usually understood to cover all forms of lending at fixed interest, and imposes restrictions on various other forms of lending.
A select group of Islamic scholars oversee the fast-growing niche market, but a lack of standardisation on what financial contracts are acceptable is one of the biggest complaints among bankers in the $1tn industry.
Islamic law is open to diverse interpretations, resulting in some financing structures that are gaining widespread approval. For instance, Islamic bonds, the industry’s hottest product, came under the spotlight last year after a top standards body said almost all do not comply with Islamic law. – Reuters
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Why Islamic Banking Is Successful?

Professor Rodney Wilson

The collapse of leading Wall Street institutions, notably Lehman Brothers, and the subsequent global financial crisis and economic recession, are encouraging economists world-wide to consider alternative financial solutions.

Attention has been focused on Islamic banking and finance as an alternative model. What lessons can be learnt, and how resilient have Islamic banks been during the current crisis?
Islamic Banking Principles And Sub-prime Lending
The religious teaching underpinning Islamic finance is concerned with justice in financial contracts to ensure that none of the parties is being exploited.
Riba( interest or usury) is one source of exploitation, especially, as in the case of sub-prime lending, the highest rates were charged to lower earners. Such discriminatory charging by conventional banks was justified as being a reflection of the risks involved.
Those on lower incomes, with poorer prospects of finding new employment in the event of redundancy, were less likely to be able to service their interest payments.
Islamic housing finance involves risk sharing between the bank and the client, rather than transferring all the risk to the latter.
Under the most commonly used diminishing musharaka (partnership) contract, the bank and the client form a partnership, with the bank providing up to 90 percent of the purchase price, and the client at least 10 percent.
Over a period of usually 10 to 25 years, the client buys out the ownership share of the bank which makes its profit from the rent paid by the client for the share the bank owns.
In the event of a rental or repayments default, the bank may advance the clients an interest-free loan (qard hassan in Arabic) to enable them to continue their payments during the recession in anticipation that they will pay in full when the economy rebounds.
The client retains their home rather than being faced with eviction— like the victims of the sub-prime crisis.
Of course Islamic banks have to appraise credit risk, and indeed are more cautious about who they should finance than conventional banks.
The banks in the United States charged high arrangement fees for sub-prime borrowers which were used to pay bonuses for those signing up new clients.
As the mortgages were sold on to Freddie Mac and Fanny Mae, the arrangers were unconcerned that the sub-prime borrowers might be unable to meet their financial obligations.
Indeed, gifts were provided to entice the feckless to sign up, and the mortgages often exceeded the value of the property.
The banks in other words became mere booking agents, with no long term commitment to their clients.
The Islamic Banking Record
In contrast to conventional banks, no Islamic bank has failed and has needed government recapitalization which ultimately becomes a burden on hard pressed taxpayers.
All Islamic banks comply with the Basel II capital adequacy requirements and the Islamic Financial Services Board (IFSB)- the body which advises regulators with respect to Islamic finance- has produced detailed guidelines on compliance. The IFSB has an on-going relationship with the Bank for International Settlements-the institution which developed the Basel standards- and is certain to be consulted as Basel III guidelines are drafted for capital adequacy which are likely to be implemented globally in the coming decade.
The soundness of Islamic banks is accounted for by the fact that they use a classical banking model, with financing derived from deposits, rather than being funded by borrowings from wholesale markets.
Consequently when the credit crunch came and borrowing from wholesale markets was halted, Islamic banks were not exposed. However, Islamic banks are not immune from the effects of the global recession, and the fall in oil prices will inevitably have a negative impact on 2008 results of Gulf-based Islamic banks. The situation will become clearer from February once the audited financial statements start to appear.
Two Islamic housing financial institutions, Amlak and Tamweel are being merged, as both have faced problems given their exposure to the Dubai property market.
In Iran where all financial operations have been shariah-based since the Law on Usury Free Banking was introduced in 1983, banks have been relatively insulated from the financial crisis, ironically because United States sanctions meant they could not deal with institutions such as Lehman Brothers which were trying to place large amounts of toxic debt with Middle Eastern banks.
The sanctions therefore proved to be a blessing in disguise for Iran— although the Islamic banks there have been adversely affected recently by the fall in gas prices.
Nevertheless being state owned, institutions such as Bank Melli, the largest Islamic bank in the world, are well placed to ride out the global financial storm. With assets of over $50 billion, and 2007 profits exceeding $540 million, it has more than adequate resources to cope.
Islamic Financial Stability
Islamic banks enjoy a built-in stabilizer to help them cope with economic downturns, as instead of paying interest to depositors, those with investment mudaraba accounts share in the banks profits.
Thus, if profitability declines in an economic downturn, depositors receive lower returns, but if profits rise they enjoy higher returns.
This profit sharing reduces risk for the banks and means they are less likely to become insolvent. However as the banks build up a profit equalization reserve, which can be used to finance pay-outs during difficult years, depositors benefit from some protection of their returns during economic downturns.
The last year has been difficult, if not disastrous, for equity investors, given the fall in stock market prices globally.
Investors in equities screened for shariah compliance have also suffered, but less than their conventional counterparts, because they have not invested in the shares of riba-based banks which have fared especially badly during the global financial turmoil.
Investors seeking Shariah compliance have portfolios which are more heavily weighted in sectors such as healthcare or utilities where revenue streams are maintained even during cyclical down-turns.
Prospects for Islamic Finance
Islamic banking provides a viable alternative to conventional banking and is less cycle prone. The spread of Islamic finance into western markets demonstrates that it now being treated seriously by regulators and finance ministries.
There are already five wholly Islamic banks in London, and the first Islamic bank will open in France in 2009. According to the conservative estimates of the Banker in October 2008, Islamic financial assets globally exceed $500 billion, a figure that could easily double over the coming decade.
The experience of Islamic banking in the United Kingdom has been extremely positive. Islamic Bank of Britain has been operating as a retail bank for over four years, and has attracted over 40,000 customers. HSBC Amanah, the Islamic finance subsidiary of HSBC, has been operating for ten years in London, focusing mainly on institutional clients and business finance.
Alburaq, the Islamic finance subsidiary of Arab Banking Corporation, has become the market leader for shariah compliant home finance in the United Kingdom.
None of these institutions has been affected by the global financial crisis, and their resilience bodes well for the future.
Sukuk Are Real Assets

In addition to banking, Islamic sukuk security issuance has enormous potential. Unlike conventional bonds and notes, sukuk are backed by real assets, which provides assurance to investors.
Although global sukuk markets were adversely affected by the global recession in 2008, longer term prospects look promising, with the United Kingdom authorities promoting London as an international centre for sukuk issuance to rival Bahrain, Dubai and Kuala Lumpur.
The Malaysian ringgit sukuk market has been largely unaffected by the global turmoil in securities markets, and issuers such as the Saudi Arabia Basic Industries Corporation, one of the world’s largest petrochemical producers, view sukuk as a desirable instruments to raise funding for plant expansion.
There can be no doubt that Islamic finance has an exciting future, and the quest for a financial system based on moral values rather than greed and fear, is bound to enhance its position in the global system.

(Islam Online)
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Alfalah Consulting-Kuala Lumpur: www.alfalahconsulting.com 
Islamic Consultant & Trainer: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com


Friday, 13 February 2009

Islamic banking in Pakistan

by Saifullah

Banking sector is considered to be one of the important and essential pillars of nation's economy. Present banking system, which is based on the principles of interest, is highly criticised, as it could not offer the appropriate benefits to society. Thus this system is undesirable for lacking to serve human beings and any society. Particularly for Muslims this system is a threat as it operates against the principles and teachings of Islam. Muslim world is one of the major areas where Muslims are struggling and looking for improvement in this field of life. In this regard the elimination of interest from the financial sector is considered to be a major breakthrough. Muslim scholars and many other economists of the world who understand the negative impacts of interest are trying to promote the concept of interest-free banking system as taught by teaching of Islam. By prohibiting interest, Islam has endeavoured to do away with a hideous form of tyranny and injustice prevalent in human society. The institution of interest is a great challenge to all those who are trying to reconstruct the Islamic way of life in modern times. Efforts have been made to develop Islamic banking system and many of the banks operate on the basis of Islamic principles. Yet due to non-availability of the monetary system and Riba-free investment opportunities the Islamic banking system is not free of critics and considered dependent on interest-based system. -Islamic banking system faces a number of challenges. Among the agitating issues the foremost one is that they have not yet been successful in devising an interest-free mechanism to place their funds on a short-term basis. They face the same problem in financing consumer loans and government deficits. Second, the risk involved in profit sharing seems to be so high that most of the banks have resorted to those techniques of financing which bring them a fixed assured return. As a result, there is a lot of genuine criticism that these banks have not abolished interest but have in fact only changed the nomenclature of their transactions. Islamic finance has failed to capture the interest of western writers and it has been developed in isolation from its western counterpart. This deficiency can be rectified by reference to support for prohibition of interest in western literature, in the capitalist economies and evidence on attitudes towards Islamic finance. In Islam, interest is prohibited because the interest on the loan is an augmentation of capital without effort and a false creation of value. The increase of income must result from investment, labour and other activities. There are many arguments about prohibition of interest in Islam. The first argument is that interest rates have no moral foundation. The second is that abstinence from consumption is not a justification of rewards. The third reason is that there is no risk to justify the supplement payment for capital lending if loan is guaranteed. The creditor/debtor relationship is redefined in Islam with the creditor or provider of the funds becoming a partner in the project, assumes the risk activity with the entrepreneur and shares profit at a pre-agreed proportion. It is fairer for the creditor and debtor that they have a share of profits and losses. The creation of incremental wealth justifies the share of profit between the borrower and the lender of money but not fixed return. The banking system of Islamic countries based on Islamic economic principles is fast developing. This system is important due to growth of investment amount in Islamic banks and the consideration given to the system by the Government. Islamic banking is growing rapidly not only in Pakistan but also throughout the world. Islamic banking has a great potential to grow in future in Pakistan and State Bank is committed to the development of this industry. Pakistan has provided a supportive policy and regulatory framework for Islamic banking due to which investors of international repute are coming to establish new Islamic banks in country. The State Bank has set up a dedicated Islamic banking department for the promotion and regulation of this industry. SBP impresses upon the heads of Islamic banks to meet the growing challenges in the development of Islamic banking. The SBP has clarified to the industry there is a level playing field for Islamic Banks and has agreed to look at approaches to develop Islamic interbank market. Steps for Islamization of banking and financial system of Pakistan were started in 1977-78. Pakistan was among the three countries in the world that had been trying to implement interest-free banking at comprehensive/National level. We know that it is a mammoth task; the switchover plan was implemented in phases. Islamic banks face a number of challenges. First, they have not yet been successful in devising an interest-free mechanism to place their funds on a short-term basis. They face the same problems in financing consumer loans and government deficits. Second, the risk involved in profit-sharing seems to be so high that most of the banks have resorted to those techniques of financing which bring them fixed assured return. As a result, there is a lot of genuine criticism that these banks have not established interest but have in fact only changed the nomenclature of their transactions. Of course, it has to be kept in mind that these issues are at their elementary level of discussion. Much work has to be undertaken in terms of procedures, infrastructure and allowing a new framework to develop and mature. The new banking system of Islamic countries based on Islamic economic principles is fast developing. This system is important due to growth of investment amount in Islamic banks and the consideration given to the system by Governments. The developments have encouraged many studies on the Islamic banking system. However, little importance is given to application of modern finance theories to Islamic banks. Islamic economic principles are characterized by the application of managerial techniques and models advanced in the conventional financial framework. Islamic banks operate on a set of principles based on the Islamic law (Shariat). These principles are different from those of conventional banks. Instead of charging a fixed interest rate, Islamic banks use profit sharing principles (PLS) through its two varieties: Musharaka and Mudaraba. Key findings of relating Islamic banking are listed as under: 1. There is a shortage of short-term liquidity management tools and lack of capital markets in the interest-free industry. This hinders the fast growth of the sector. 2. Public appreciate efforts of the State Bank of Pakistan in promoting interest-free banking and wants the government of Pakistan to further facilitate this industry. 3. The current efforts by the government are not sufficient for the industry. Government should take further steps in promoting interest-free banking. 4. Interest-free banking industry has made a promising start with a lot of room for improvement and development. This sector has a great potential of further growth. 5. Results indicate that there is a lack of availability of wide range of interest-free banking products in Pakistan. 6. All the stakeholders of interest-free banking industry in Pakistan prefer interest-free banking to conventional banking system. 7. Interest-free banking requires time to challenge conventional banking in terms of market share and industry volume. 8. To eliminate interest from society, overall economy of Pakistan should be shifted to an interest-free base. 9. Conventional banking system can be converted into interest-free banking system. 10. The two parallel banking systems should run simultaneously and interest-free banking should further be facilitated. 11. People of Pakistan are not satisfied with the Islamic nature of products being offered by the interest-free banking industry and their true compliance with Shariah rules. Interest-free banking is not a new concept anymore. There are financial institutions in the world, which are operating without charging any interest. Even in Pakistan such institutions are in action. However there are hurdles and hindrances, which need to be removed to accelerate the growth of this industry in Pakistan and the world over. While many important issues were highlighted in this paper, it is strongly felt that it would be very helpful for the Islamic banking sector to address the following issues: 1. Planned and scheduled approach: A methodical and market driven approach towards the development of interest-free banking industry involving all the key constituents (including banks, regulators, securities & exchange commission, the Central Board of Revenue, and the Government of Pakistan) should be adopted. This should also facilitate in articulating the short- and long-term growth targets and the expected roles for these targets of this sector. Such a blueprint, publicly available and developed by participation of all stakeholders would be of immense help in growth of the industry. 2. Shariah compliant product range: The interest-free industry should expand its product line to create opportunities for Islamic banks in new markets. There are 12 Islamic modes of financing approved by the State Bank of Pakistan but only a few are functional so far. Innovative steps should be taken to introduce new products based on all the approved modes and consequently identifying new sources for profitable growth of this sector. 3. Capital Market Institutions: In addition to the creation of traditional consumer and commercial banks, efforts should also be made to encourage the creation of other Islamic finance institutions (e.g., investment banks, securities and market firms) and help interest-free banks mange their liquidity in a professional manner. 4. Innovation in Islamic liquidity management: Due to liquidity problems, interest-free banking sector faces a significant strategic and operational disadvantage. A creative focus is required to find ways and needs of Islamic liquidity management. Adopting an integrated Islamic capital market approach might be the right way through which cross border marketability of sukuks and other asset-backed securities. Similarly, integration of conventional and interest-free capital markets as carried out in Arab states would also help in this regards. 5. Partnership with world and institutions: Close relations with other Islamic states of the world should be established to promote this concept and learn from each other's experiences. Also, it would be highly beneficial for Islamic banking sector in Pakistan to maintain close relationship with IDB and IDB-sponsored infrastructure institutions to ensure that we are able to build upon the learning of these infrastructure institutions and, to the extent possible, work with these institutions in developing this sector. 6. Socio-economic factors: The conversion of economy of Pakistan to an interest-free base would have a catalytic effect on the growth of interest-free banking. In this case, both economy and banking would boost each other up resulting in a greater momentum towards growth. Honesty, trust-worthiness, simplicity, truthfulness spirit of sacrifice (Islamic brotherhood) in few important and required traits that should prevail in a society that wants to eliminate the evil of interest. Islamic principles of interest are concerned with issues of fairness and justice rather that of efficiency narrowly defined. These principles focus on the necessity of sharing risk in a fair and stable society, and upon problems of exploitation in markets where power is asymmetric; this is the real Riba Issue. There is a wide scope for interest-free banking system as modern banking system has failed to fill up the income gap and bring socio-economic equability among people, society and even countries and nations. Muslim world is about 25% of world's told population occupying nearly 20% of total area. They own 40% of oil and gas resources; hence there exist a big market for interest-free banking. There is a problem in terms of the lack of Islamically compliant short-term liquidity instruments. There needs to be a truly global-sized liquid inter-bank market where institutions can park their liquidity reserves. Highly ethical, well-regulated and beneficial Islamic financial architecture is possible. Indeed, working in this field with more transparency, with effective corporate governance and with better interaction with relevant international, regional and national institutions, will definitely help all (those) who want to contribute to the welfare of their community as well as to the welfare of the world as a whole. If proper attention and honest efforts are made there is no doubt that an interest-free banking system would increase savings which will result in more investment, more economic growth and above all equal distribution of wealth in Pakistan.

(The Frontier Post)

Thursday, 12 February 2009

Islamic finance sector has room to grow

by Aziz Tayyebi

ISLAMIC banking has, to a large extent, been shielded from the credit crisis which has devastated conventional banking and finance.
As such, many proponents of Islamic banking, such as Deputy Prime Minister and Finance Minister Datuk Seri Najib Tun Razak, have said the principles of Islamic finance could provide concrete and realistic measures to tackle the financial crisis.
However, the Islamic finance industry still has some way to go before it can be a serious alternative to conventional finance and banking. While Islamic finance is growing at a rate of 5%–10% per year, it still only constitutes a small proportion of the global financial services sector, with a market valued at between US$500mil and US$1bil.
For Islamic finance to take a greater share and to expand in other jurisdictions, it needs to focus on a number of key issues and challenges, such as enhanced risk management and product development, syariah standardisation and human capital development. Critically, many risk management tools, such as complex derivatives, are not available to Islamic institutions.
Therefore, the product development pipeline needs to keep pace with demand to produce other viable risk management methods, while ensuring that the principles of Islamic finance, which have served syariah-compliant institutions so well prior to the credit crisis, are maintained.
Differences of opinion from syariah scholars on whether certain practices or products are syariah compliant continue to impede the pace of progress. At the same time, a common set of standards and closer links between regulators and standard setters such as Accounting and Auditing Organisation for Islamic Financial Institutions, the Islamic Financial Services Board and other national regulators are crucial, especially as Islamic finance looks to expand its conventional borders.
Finally, the nuances of Islamic jurisprudence and its assimilation with conventional banking require a great deal of expertise.
To overcome the current dearth of expertise, investment in training and formal qualifications will be vital to attract and maintain the right level and number of professionals to allow the industry to develop.
The industry needs to develop more talent, either by training graduates from scratch or attracting experienced bankers from conventional banking over to join Islamic finance. If these challenges could be addressed, the Islamic banking platform could be a viable complement and a source of guidance for conventional banking. Indeed, many Islamic banking’s fundamental principles protected the industry from the excesses of the credit crunch, and offer valuable lessons.
Notably, Islamic financial institutions are able to make ‘loans’, such as for financing home purchase and could, in theory, have been exposed to subprime mortgage problems. However, their inherently conservative risk management limits not only their ability to lend as a percentage of their own assets, but also the granting of excessive interest rates which enabled unqualified borrowers to take out such loans.
The sharing of risk between lender and borrower, another pivotal tenet of Islamic finance, provides a clear incentive for lending institutions such as banks to take a more active role in the performance of the investment, as well as ensuring any deals that are entered into are sound.
The nature of capital as solely being a medium of exchange (i.e. having no intrinsic value) is central to the prohibition of interest, which forms the central tenet of Islamic banking and finance. However, other important principles include the prohibition of contractual risk, advocating sharing of risk and return and asset-backed finance. These have all helped to buffer the Islamic finance industry from the worst of the credit crisis. In general, the prohibition of contractual risk forbids the selling of goods or services that the seller is not in a position to deliver – or the making of a contract which is conditional on an unknown event. In other words, you cannot sell something you do not own, thereby ruling out the bulk of high-risk and highly-complex derivatives instruments that were the downfall of financial institutions during the credit crunch.
Also, the price and nature of the goods being transacted are defined in detail and agreed upon by both parties, thereby avoiding a sale that may represent a gamble. Thus, sales on margin or conventional “short selling” are prohibited – a move which regulators in the US and other markets initiated for periods in 2008, in order to stabilise the markets.
In hindsight, conventional banking could take a cue from Islamic banking on how to integrate finance and ethics in the quest for financial system reform. Fundamentally, the principles of Islamic banking which comply with syariah or Islamic law prohibit many of the high-risk activities that triggered the financial crisis for some of the world’s largest and most well respected banks and financial institutions.
(The Star M'sia)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic Banking - An Interview With Sheikh Nedham Yaqubi (Bahrain)

An Interview with Sheikh Nedham Yaqubi on Islamic banking.  The program will begin at minute 1:15...please wait.

Islamic Bank in Kenya Does Strong Business

Gulf African Bank is the first bank in Kenya to be fully compliant with Sharia, Islamic law. The bank's products and services are based on Islamic principles, especially the ban on charging interest. The bank is gaining popularity among Muslims, said to be 10 percent of Kenya's 37 million people. Non-Muslims like it too. Cathy Majtenyi files this report for VOA from Kenya's capital. --- Alfalah Consulting - KL: www.alfalahconsulting.com  Islamic finance consultant: www.ahmad-sanusi-husain.com  Islamic Investment Malaysia: www.islamic-invest-malaysia.com

UK's First Sharia Compliant MasterCard

The UK’s first Sharia compliant prepaid MasterCard has been launched; it is to combine the security of a card with the ethical financial principles of Sharia finance, and access to finance without any credit or danger of overspending. Learn more ---
Alfalah Consulting - KL: www.alfalahconsulting.com 
Islamic finance consultant: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Wednesday, 11 February 2009

Global financial crisis and economic downturn - discover the solutions from Islamic banking and financial sytem

The following are Islamic banking and finance conferences to be held in Kuala Lumpur, Malaysia in February - May 2009:

23-24 February 2009
Executive OVERVIEW on Islamic Banking and Finance

25-26 February 2009
The Global SUKUK Conference 2009

11-12 March 2009
The Global SYARIAH and LEGAL Aspects of Islamic Finance Conference

13-14 April 2009
The Global Islamic WEALTH MANAGEMENT Conference 2009

5-6 May 2009
Conference on MARKETING & PRODUCT DEVELOPMENT for Islamic Financial Services

Please contact the organiser for more information.

Western companies seen eyeing Islamic bonds (sukuk)

LONDON/MANAMA Feb 10 (Reuters) - Cash-strapped Western companies are considering issuing Islamic bonds to tap Middle Eastern investors but face a challenge in choosing the right instrument, bankers and asset managers said.
Companies, especially in the UK and France, are looking to Islamic compliant investors as alternative sources of finance as the global crisis restricts their usual funding routes.
"There is a lot of interest from corporates to issue sukuk. My feeling is that as liquidity in the West gets scarce, they will look into the Middle East," said London-based Adnan Aziz, head of sharia advisory and structuring at asset manager BMB Group.
British retailer Tesco (TSCO.L) issued its first sukuk -- or Islamic-compliant debt --in 2007 for its Malaysian unit as well as raising conventional debt.
Islamic bonds do not pay interest, which is banned under Islamic law or Sharia, and are structured as profit-sharing or rental agreements, underpinned by physical assets such as real estate or commodities.
"We have discussions with clients, conventional issuers in Europe and we pitch both solutions, (bonds and sukuk) that is going to be a trend going forward," said Vikrant Bhansali, who works for French bank Societe Generale (SOGN.PA) in London.
"In today's world the corporate sector is interested in the right price, the format is not as important," he said.
MARKET STILL DOWN
The sukuk market has suffered from the global credit crisis. Sukuk issuance fell in 2008 to $20 billion, the International Financial Services London estimated, down from $42 billion in 2007. In 2002, sukuk issuance made its modest first steps with an overall volume of $1 billion.
"But not all is lost," said Aziz, adding Middle East investors are keen to put their money into Western companies and spread their risk away from domestic investments.
"Investors also understand the opportunities available in the Middle East are relatively limited and may look outside the region," he said.
The sharia-compliant market's ethical principles may also appeal to risk-averse investors who will increasingly want to put their money in safe instruments they can understand.
There are about ten different forms of sukuk and companies vying for Islamic cash must pay particular attention to the form of sukuk structure they use, bankers say.
The broadly used ijara form, based on a lease and buy-back of an asset, is expected to remain the most popular type at least in the first part of this year.
"In the next six to 12 months, if there are going to be issuance, it could be Ijara. People will prefer to replicate in 2009 rather than innovate, the emphasis will be to get things done rather than do things in a fancy (way)," said Societe Generale's Bhansali.
Ijara sukuk give investors ownership of well-defined assets tied to a lease contract, whose rental is the return payable to sukuk holders.
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Indonesia reports strong demand for first retail sukuk


JAKARTA, Feb 10 (Reuters) - An Indonesian finance ministry official on Tuesday reported strong demand for the country's first retail sharia-compliant bonds, or sukuk, as investors expect more interest rate cuts.

"So far demand has been quite strong," Dahlan Siamat, the finance ministry's senior official in charge of sharia debt, told Reuters. He declined to elaborate.

Standard Chartered said in a research note this week that about 57 percent of the 1.7 trillion rupiah ($144.4 million) target amount, or 969 billion rupiah, had been sold.

Proceeds from the bond issue will help plug the state budget deficit, which is forecast at 2.5 percent of GDP this year.

"Early indications of the interest level in Indonesia's first domestic sukuk offering are encouraging with sales reported at 57 percent of the 1.7 trillion issuance target," Standard Chartered said in the report.

"As this is the inaugural offering, demand for this asset class is untested and a successful placement will, at the margin, take some pressure off the Finance Ministry's issuance pipeline for the year."

The one-month offering period for the sukuk ends on Feb. 20, with 13 selling agents appointed to sell the bonds.

Indonesia, the world's most-populous Muslim country, has recently accelerated its efforts to develop its Islamic financial market so it can tap a wider investor base.

The three-year sukuk has a 12 percent coupon, while one-year bank deposits yield between 6.75 and 10 percent. For details on the sukuk please double click on [ID:nJAK392542].

The finance ministry has declined to reveal its target for the retail sukuk issue. The ministry sold 4.7 trillion rupiah worth of 7-year and 10-year sukuk to institutional investors in August 2008, falling short of its target of 5 trillion rupiah because of inflation concerns.

Inflation has eased in recent months, mainly because the government has cut subsidised fuel prices three times since the beginning of December.

Trimegah Securities (TRIM.JK), one of the selling agents, said demand for the sukuk had been strong. Under the current scheme, the finance ministry sets certain sales target for the selling agents.

"We had on Friday already exceeded the target given to us. We are seeking approval from the finance ministry to raise the target," Trimegah debt director Desimon said.

"The return is quite attractive, the maturity is not too long and BI (Bank Indonesia) rate is likely to fall further," Desimon said, referring to the benchmark overnight rate BIPG.

Indonesia's central bank cut its key interest rate by 50 basis points to 8.25 percent in February, the third cut in three months, and indicated it may cut rates again to support economic growth.

Sukuk comply with sharia, or Islamic law, which bans charging interest. Investors are instead paid income derived from assets such as rent from property or commercial transactions such as trade in goods and services. ($1 = 11,770 rupiah)

Attend Global Sukuk Conference in Kuala Lumpur (February 2009)

Monday, 9 February 2009

Islamic Banking and Finance Conferences in Kuala Lumpur, Malaysia


The following are Islamic banking and finance conferences to be held in Kuala Lumpur, Malaysia in February - May 2009:

23-24 February 2009
Executive OVERVIEW on Islamic Banking and Finance

25-26 February 2009
The Global SUKUK Conference 2009

11-12 March 2009
The Global SYARIAH and LEGAL Aspects of Islamic Finance Conference

13-14 April 2009
The Global Islamic WEALTH MANAGEMENT Conference 2009

5-6 May 2009
Conference on MARKETING & PRODUCT DEVELOPMENT for Islamic Finance Services

Please contact the organiser for more information.
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Alfalah Consulting-Kuala Lumpur: www.alfalahconsulting.com 
Islamic Consultant & Trainer: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic Economics Thought

Islamic Economic Thinking
It is the task of the scholars to refer to the Islamic sources to obtain Islamic norms on economic issues and to find out solutions consistent with these norms. This has happened throughout Islamic history according to the need of the time and space, and has produced a rich heritage of Islamic literature covering all aspects of human life including economic issues and other matters having implications for economic behavior.
Economic issues have been addressed from different perspectives by various authors in the context of different disciplines and in response to the needs of respective times in the Islamic history. Five different dimensions of analysis may broadly be identified.
First, discussions related to economic matters in the discipline of Tafsir (exegesis), which is the explanation of the divine book Al-Qur'an. The Qur'anic verses related to economics have been explained by mufassirin (personalities doing exegesis) as an integral part of the Qur'anic code of human life. A good number of books of Tafsir is available containing discussions on relevant economic matters. For instance, discussions on the prohibition of interest,1 encouragement of economic activities for human welfare,2 and so on.
Second, discussions of economic issues in the discipline of Fiqh (Islamic jurisprudence). The legal aspects of economic problems, along with other Shari'ah matters, have been analyzed by the great jurists of Islam in the books of Fiqh. For example, the legal aspects of mudarabah and musharakah have been dealt with in this discipline in some great detail.3
Third, the great Islamic personalities discussed economic matters in the context of ethical system of Islam for moral development. This analysis is different from the juristic analysis of economic matters in that the latter presents the legal status and limits while the former emphasizes the real spirit of Islam over and above legal limits, guiding man towards the most desirable economic behavior of human beings. The works of ulama, sufis, Islamic philosophers and Islamic reformers (mujaddidin) come under this category.
Fourth, a number of good pieces of work, related to economics, was written by some great scholars of Islam in response to the needs of their time while holding important government offices. The works in this category fall mainly under public finance, in particular, public revenues including land tax, public expenditure, and so on.5
Finally, some Islamic scholars and philosophers did also provide objective analyses of their economies. For instance, Ibn Khaldun and Ibn Taimiyyah even discussed the influence of demand and supply factors on prices, which is a microeconomic problem. These analyses of economic issues fall under three broad categories:
  1. ideal economic norms and values,
  2. legal status and limits in economic issues,
  3. Historical application and analysis.

Now the question which needs addressing is the following: What is the role of these analyses in the development of the discipline of Islamic economics? Clearly the basic sources of the Islamic code of life are the Qur'an and the Sunnah, which is true in the case of economics as well. The ideal Islamic economic norms and values have been given in these basic sources which have been explained by Islamic scholars (mufassirin and other 'ulama), while the legal status and limits have been deliberated upon in fiqh al- mu'amalat. The ideal phenomenon implies what is optimum in economic as well as other problems, while the legal boundaries present the acceptable limits which cannot be exceeded in the Islamic framework of a discipline. This explains the role of the first two categories of economic analyses in the heritage of Islamic literature, namely, the ideal economic norms and values, and the legal limits laid down in fiqh al-mu'amalat.
In essence, the achievement of the ideal conditions requires optimization, subject to the constraints set by fiqh al-mu'amalat. The application of the Islamic order in the historical context may involve solutions to the peculiarities of time and space from an Islamic perspective which may not necessarily be fully applicable elsewhere. It is, therefore, more appropriate to refer to the above first two categories of analyses, instead of the historical one. The latter may be referred to for additional insight, as and when necessary.
This explains the roles of the above three categories of Islamic analyses in the development of Islamic economics. In newly emerging economic issues, needing fiqhi rulings, the following Islamic sources will have to be used: ijma' al.'ulama (consensus of the 'ulama), qiyas (analogy), followed by maslahah 'ammah (public interest) and 'urf (custom)6 which have been applied in the discipline of Fiqh. The Islamic rulings derived by the ijma' al-'ulama are those on which qualified jurists have reached consensus of opinions.7 The qiyas is to derive ruling in the Shari'ah, if the basis ('illah) of the ruling seems to be common in both. There is a large body of Islamic laws and rulings from these two secondary sources: ijma' and qiyas.
The maslahah method of deriving Islamic ruling is to make laws to protect public interest, provided it is not contrary to the spirit and objective of the Shari'ah. This method may be applied in cases where neither textual law is available nor qiyas is possible. This method was invoked by the Maliki school of jurisprudence, and endorsed by the Hanafi school.s Finally, the 'urf is a custom, generally accepted, on which there exists no textual or analogical ruling, and the custom does not contradict Shari'ah. Although the use of terminologies is different, this has been accepted as a basis of law in the four schools of Islamic jurisprudence. Some of the existing Islamic laws fall under the categories of maslahah and 'urf.
The hierarchical legal status of these sources of Islamic laws is in the following order: the Qur'an, the Sunnah, the ijma' al.'ulama, the qiyas, the maslahah, and the 'urf. That is, if the law is given directly in 'the Qur'an, one cannot sort to the Sunnah, except for the detailed explanation of the Qur'anic verse(s). Similarly, if the matter can be resolved from the Sunnah, one cannot move to sources next to it, and so on.
As indicated above, development of Islamic economics as a discipline would involve application of these sources of Islamic ruling to contemporary issues having no reference in the Qur'an and Sunnah. This calls for adequate knowledge of the usul al-fiqh (the principles of jurisprudence) and the qawa'id al-fiqhiyyah (the rules of jurisprudence) which explain the methodology of deriving Islamic ruling on any problem, economic or non-economic.
It is obvious from the above that Islamic economics is based on the revealed norms for human welfare. On the other hand, the capitalist and the socialist economic systems are founded on materialistic philosophies, the methods being directed by human reasoning, without any revealed guidance. It is often observed that human reasoning is influenced by analytical minds of the researchers concerned, which in turn, are constrained by customs, environments and social value systems. Thus, human reasoning varies in time and space, a proper thing here becomes improper there, and an unfair matter of yesterday becomes fair today. Similarly, theories based on human reasoning make about-turns, a valid theory of one period becomes invalid with the passage of time, and vice versa.
Islamic economics is founded on the revealed philosophy of life. In fact, economic philosophy of Islam is derived from the philosophy of life itself, since economic aspect is only a dimension of the composite human life in the Islamic philosophy, rather than economics being the central focus of all activities. Thus, the Islamic economic philosophy is based on several fundamentals. First, tawhid, a comprehensive concept, implying complete submission of oneself to the one and unique being, who is the creator, sustainer, owner of everything, all-knowing, all-wise, and the most powerful. Second, risalah, an institution of prophethood, which brings the revealed guidance in all dimensions of human life from Allah in the form of the Kitab, and demonstrates its application through practice which is recorded in the form of Sunnah. Third, akhirah, the hereafter for accountability, and for getting the outcome of all deeds including economic activities, in an eternal life. Fourth, economic and non-economic well-being for leading a good life and discharging socio-Islamic obligations in this world and for achieving the home of hereafter. Among these, the last provides a framework for economic achievements, and the first and the third require all economic activities to be in conformity with the Islamic norms and values, which have been revealed through the institution of the risalah. Any research in Islamic economics has to be based on these philosophical foundations.
Economic Ideas in Muslim Writings of History
As indicated earlier, some Islamic scholars of history provided objective analyses of economic problems of their time when economics had not emerged as yet as an independent discipline, while some others discussed economic matters from an Islamic perspective, having implications for modem economic thinking. As is well-known, economics emerged as a formal discipline not more than three centuries ago. A quick look at the family tree of conventional economics shows its beginning with the Merchantilists in the 17th and 18th centuries, and the Physiocrats in the 18th century (Quesnay, 1758). Economics as a formal discipline finds its origin in Adam Smith (1776), developed further by the classical economists in the late 18th and early 19th centuries (Malthus 1778, Ricardo 1817) and neoclassical economists of the mid-and-late 19th centuries (Mill 1848, Walras and Marshall 1890). It was further advanced in the 20th century by Keynes (1936) and other economists including the rational expectations and Post-Keynesian schools. This is in the tradition of mainstream conventional economics. The radical stream takes its shape in the late 19th and early 20th centuries (Marx 1867, Lenin 1914), followed by the minority of the radical school in the contemporary world.
These facts indicate that the seeds of conventional economic ideas do not date backwards beyond the 17th century. However, economic analyses in the writings of Islamic scholars can be traced, as mentioned above, even many centuries before this date. Still, it is surprising to note, the seeds of some modem economic analyses can be observed in these Muslim writings. The history of conventional economic thought gives credit for such ideas to the western writers who wrote centuries after their analyses by Muslim scholars. As Udovitch concluded, "Some of the institutions, practices and concepts already fully developed in the Islamic legal sources of the late 8th century did not emerge in Europe until several centuries later. A few random examples of economic discussions in the heritage of Muslim writings are presented below.
Economic System: Laissez Faire and State Intervention
Ibn al-Qayyim (1292-1350 AD) recognizes private ownership and the freedom of economic activities, but within the norms and values of Islam. Although private property is recognized, the government may intervene in it for public interest, even to take away privately owned property or asset if the public interest so demands. However, this has to be duly compensated. Similarly, Ibn Taimiyyah (1263-1328 AD) recognizes private ownership, which may be curtailed by the government, if necessary. In some circumstances, it may be allowed to intervene up to the point of suspending and abrogating ownership rights altogether.
Ibn Taimiyyah also recognizes free entry and exit, and adequate information in the operation of market. He argues for controlling monopolistic elements from the market. According to him, prices should be determined by free market forces as long as market prices are not artificially increased, which will necessitate fixation of prices by the government.
That is, Ibn Taimiyyah favors a free economy conditioned by public interest and determined by Islamic norms. Ibn Taimiyyah attaches higher importance to social interest as compared to private interest, although he chooses a middle course between total freedom and total control.
Many of the early writers have expressed the need for the state supervision of economic activities to make sure that these conform to the Shari'ah norms and do not violate public interest.12 The institution of hisbah has been suggested to carry out this function. They analyzed the rationale, nature, functions and activities of the institution. This is a unique institution for the supervision of economic activities of the economic agents including the producers and traders. In the contemporary world, some of the functions of the hisbah institution have been divided into different ministries and departments, while some others seem to be non-existent
Price Theory
The price theory in the microeconomic analysis is implicit in the writings of Ibn Taimiyyah. In his detailed discussion on price control, Ibn Taimiyyah has analyzed how prices are determined in the market by the interplay of demand and supply forces. According to him, prices could increase due to the shortage of supply of the commodity in question and also because of higher income of the people. The former gives the concept of the leftward shift in supply curve with a resulting increase in prices, while an upward shift in the demand curve due to rise in income (or the income effect) is reflected in the latter. The ideas of movement along and shift in demand and supply curves are thus implicit in the analysis of Ibn Taimiyyah.
Ibn Taimiyyah had also discussed the issue of market structure. He discussed monopoly and monopolization practices by limiting supply of goods and services. He argued strongly against monopolistic practices, which amounts to favor a competitive market structure to ensure fair prices for the people.
Ibn Taimiyyah presented a concept of "equivalent price", defined as the price determined by the market forces in a competitive market structure without coercion, fraud, monopolistic behavior, hoarding and other corrupt practices, a price which is satisfactorily acceptable to both the transacting parties. Any other price, which exists due to market imperfections, will affect human welfare, and hence calls for government intervention and, if necessary, price control.
In Ibn al-Qayyim's analysis, determination of prices should also be left to the market forces, that is the demand and supply forces, as long as imperfections, distortions and monopolistic behavior do not affect public interest. Otherwise, he recommends government intervention for fixing market prices.
Ibn al-Qayyim and Ibn Taimiyyah treat both commodity and factor markets similarly in the context of pricing
Monetary Economics
Some early Muslim thinkers addressed the issues of money and monetary economics. For example, IbnMiskawaih's (d. 1030AD) discussion of exchange incorporates the function of money as the medium of exchange. He also subscribes to gold standard.
Al-Ghazali (1058-1111 AD) discussed money and its functions. He analysed two im'portant functions of money: medium of exchange and standard of value. An important observation of his is that these functions of money get disrupted when people demand money for money's sake.
It is interesting to note that the idea contained in what is known in the contemporary literature as the Gresham's law was discussed explicitly in the work of Taqiuddin Ahmad al-Maqrizi in the 14th century. The law simply says that the bad money drives away the good money from the market, since people tend to use bad money for transactions and save the good money, and thus the good money disappears from the market. Al-Maqrizi found this happening in Egypt and analysed the phenomenon. Ibn Taimiyyah (1263-1328 AD) also discussed the same law. The credit for this contribution in the western literature goes to Thomas Gresham, an author of the nineteenth century.
Al-Maqrizi also argued for gold standard, more specifically the gold and the silver bullion, although he perceived the eventual. need for the use of other money. He also related money supply with inflation rate (rise in prices), an idea which was refined later and explained by a theory known as the Quantity Theory of Money. The history of conventional economic thought relates these ideas on the monetary economics to the classical economists, centuries after al-Maqrizi.
As it has been analysed even in some of the contemporary conventional literature, interest is the root of many evils including economic fluctuations leading to inflation and depression, income inequality and so on. The Islamic economics is unique in its total prohibition from the monetary system. Besides its prohibition in the basic Islamic sources, many Islamic scholars analysed various kinds of interest, explicit and disguised (see, for example, Ibn al-Qayyim), and their prohibitions, although serious analysis of its socio-economic implications is a more recent phenomenon.
Public Finance
It has two major dimensions: public revenues and public expenditure. The early Muslim writers dealt with both of them. Some of them analysed the taxation source of public revenue and its related issues. For example, Abu Yusuf(731-798 AD) argued for a proportional tax in agriculture, instead of a fixed levy on land, on the ground that the former was likely to yield larger revenue and facilitate expansion of land area under cultivation. He argued for following the principles of justice and equity in taxation.
In public expenditure, Abu Yusuf provided guidelines for developmental expenditure including irrigation projects, transport system (bridges) and so on. In this context, he emphasised the Islamic moral code of behaviour of the government while dealing with public money. According to him, this is a trust from Allah which will be accounted for, and hence the government should behave accordingly.
Abu 'Ubaid (d. 838 AD), Mawardi (d. 1058 AD) and many others discussed the sources of government revenues, norms of their collection and the Islamic values in their expenditure.
Abu Bakr al-Tartusi (450- -AH) provided the concept of the abilityto pay in the principle of taxation, that tax should be imposed only on the surplus income after meeting all the basic needs, since those who do not have surplus are not able to pay taxes. Explicit in this is the idea of minimum taxable income such that any income below this is exempted from tax; and implicit in this is the seed of the ability to pay approach in the principle of taxation. Abu Bakr al-Tartusi also emphasised the need for justice and benevolence in the collection of taxes, without resort to oppression, injustice and injury to the taxpayers. In public borrowing, al-Ghazali (1058--1111 AD) saw its permissibility when other regular sources of revenues of the state are not adequate to meet expenditure on defence, etcetera.
Ibn Khaldun (1332-1404 AD) provided positive analysis of the effect of tax on work efforts. According to him, work efforts will be affected by high taxes resulting in a decrease in production and population (due to emigration), which will eventually decrease tax revenue by decreasing the tax base. He argued for demand management policy in the form of 10weI: taxes and higher government expenditure during recession, which idea is conventionally believed to come out of Keynes' General Theory in about mid-20th century.
Al-Maqrizi (1364-1442 AD) analysed the problem of tax burden. If tax is not efficiently handled, tax burden may be shifted to consumers, whereas it is supposed to be borne by the producers and businessmen from the profit income. A consequence is the fall in demand for. the goods concerned because of their higher tax adjusted prices, which in turn affects the suppliers and the economy as a whole.
In public expenditure, al- Tartusi emphasised development and provision of physical infrastructure and public goods (and also subsidising the basic needs for human welfare). Al-Maqrizi analysed budget, budget preparation including the collection of necessary background data and discussion on other budget matters, which pertain to the functions of diwan (council). He also discussed the issues related to its implementation, supervision and control by the institutions like Diwan al-Muhasabah and diwan for investigation
Economic Development
As against the sufis, most of the Islamic writers emphasised the economic achievements, within the Islamic norms, for human welfare in this world and in the hereafter. The advantage of wealth (or economic development) is that it enables one to lead a good Islamic life performing all Islamic obligations including hajj, jihad, zakah (Ibn al-Qayyim), and it leads to national strength, stability and national defence (al-Tartusi). Al-Tartusi indicated to a phenomenon which the contemporary world has been facing; economic backwardness leads to political instability, poor national defence, politico-economic dominance of the super power; and, on the other hand, economic power leads to political strength, control, dominance and external security of a nation. The intellectual mind of al- Tartusi could clearly perceive this phenomenon and hence advised the Muslims to achieve economic progress within the Islamic values.
Ibn al-Qayyim put a lot of emphasis on agricultural development. In view of the fact that there exist people who own land but do not or cannot cultivate it, and there are others who are able and willing to cultivate land but .do not have it. Ibn al-Qayyim supports the arrangement of sharecropping in the agricultural sector. According to him, it is fair that some provide land and others cultivate it, and they share in output on an agreed basis. There is, however, a debate among the jurists whether sharecropping is allowed or not. According to the recent economists of the third world, sharecropping is not a good arrangement of land use in the agricultural sector.
Ibn Taimiyyah (1263-1328 AD) emphasised that everybody must be guaranteed a minimum standard of living in order to be able to perform his obligations to his family, fellow people as well as duties to the Creator. He assigned a religious status to economic activities leading to economic development by stating that agricultural, industrial and commercial activities that are necessary for satisfying basic needs of the people are fard kifayah.14 One of his most important economic contributions is to emphasise the government's responsibility to guarantee fulfilment of basic needs to everybody.
In economic development, the basic needs approach is a recent development. Ibn Hazm, however, raised the issue of basic needs in the 11th century (994-1064 AD). According to him, basic needs consist of food, drink, clothing and shelter. Ibn Hazm assigns to the government the responsibility to guarantee basic needs of the poor. He also emphasized the role of the rich in this matter.
Shah Wali Allah (1703-1762 AD) analyses the adverse effect of high inequality in the distribution of income. To him, income concentration leads to production of luxuries in the society which causes a socially undesirable product mix, increasing sufferings of the poor.
Social Security System
The social security system is built in the Islamic economic system to help the poor, needy, unemployed, orphans, handicapped, and so on. The fund is developed by both involuntary (zakah) and voluntary contributions of the better-off members of the society. This has been provided in the basic IsIamic sources, the Qur'an and the Sunnah. In addition to detailed juristic discussion in Kitab al-Fiqh (book on jurisprudence), some Islamic scholars have also analysed the institution of zakah, its rationale, and so on, which is a system unique to Islam.
Besides, some Islamic thinkers categorically emphasised use of public funds for this purpose (al-Tartusi). It should be noted here that this emphasis is not limited to the use of zakah fund, but rather it is for using government treasury to provide financial assistance in an organised way to those who need it. This may be considered as the basic concept of the social security system whereby the zakah is a sub-set of this system, such that the size of this fund will be higher than, or at least equal to, the zakah revenues.
Some of the contemporary countries have introduced different degrees: of social security system, based on the ideological orientation of the political leadership, which does not have any floor concept from macro perspective as is implicit in al-Tartusi's writings. Except for this difference, the idea of contemporary social security system is explicitly noticeable in al-Tartusi's contributions
Division of Labour
In the contemporary literature on the history of economic thought credit for the analysis of the importance of division of labour goes to Adam Smith, an 18th century economist. The matter was discussed by al-Ghazali (1058-1111 AD) and others. According to them, the multiplicity and diversity of human beings necessitates co-operation and division of labour. In a more objective way, al-Ghazali discussed the need for division of labour using the example of a needle factory, analogous to Adam Smith's example of a pin factory about seven centuries later. Similarly, Ibn Khaldun, (1332-1404 AD) analyses that an individual can hardly produce even his i own food alone, which, according to him, requires six to ten different kinds of services, needing their division among different people and eventual exchange in the society -to him, the division of labour will lead to specialisation, a concept later attributed to Adam Smith.
These are only some random examples of economic ideas in early Muslim writings. This perhaps makes it clear that the more one refers to these writings, the more one will be able to appreciate the contributions of Muslims in the field of economics. This seems to be evident from Charles Issawi's appreciation of Ibn Khaldun (1332-1404 AD). "Unlike some Mercantilists, he (Ibn Khaldun) realises that production, rather than trade, is the source of wealth. He realises, too, that gold and silver, far from constituting wealth, as was widely believed in Europe and elsewhere until the seventeenth and eighteenth centuries, are mere metals, like iron, prized because the relative stability of their prices makes of them good media of exchange and stores of value. Before Locke and Hume, he sees that each country gets the gold it needs through foreign trade and that gold-producing countries are not necessarily the wealthiest. ..He understands, though not very clearly, the influence of supply and demand factors on prices, including wages; he states that the value of a commodity is mainly derived from the labour embodied in it; he realises that prices are interdependent, so that a rise or fall in the price of one commodity tends to communicate itself to others. ..He clearly understands the function of trade and declares it and most other services, such as medicine, teaching, and even singing, as productive, in this showing himself more clear sighted than Adam Smith. ..Before Durkheim, Ibn Khaldun hinted that division of labour reinforces social solidarity. Like Marx, he understood the enormous influence exerted by economic factors on political and social life. ..Even his views on Public Finance remind one of those of contemporary advocates of state expenditure designed to promote economic activity.
But if Ibn Khaldun's views on "pure economics" fully earn him the title of "Pioneer Economist", his views on "social economics" are even more advanced. More clearly than many modem economists, he saw the interrelation of political, social, economic and demographic factors".15
Contemporary Phenomenon of Islamic Economics
Knowledge in all its branches has been enriched by the contributions of Muslim scholarship all through the heyday of Islamic history so much so that their Islamic centers used to be the focal points of knowledge seekers even from the West. As is expected, however, research efforts like many other things have been seriously 9isturbed by the colonialization effects with the downfall of Islamic era a few centuries ago, when the West took over the engine of research and knowledge. Economics as a formal discipline is a child of this colonial era and the West continued from where the Muslims left, and developed the field known as Economics. Muslims lagged naturally behind in the formal development of the field of economics in this period.--With the end of the colonial era, the Muslim scholarship is gaining its lost momentum as is evidenced in the production of well-researched works by Muslims in almost all disciplines. Economics has not been left aside.
One can see the wealth of growing literature in Islamic economics, with more initial emphasis on the Islamic economic system, as compared to the capitalist and socialist systems, and on Islamic banking in order to save the humanity from one of the most damaging evils, the interest (riba). Many considered the concept of Islamic banking to be a utopian idea. The contemporary Islamic economists and Islamic bankers have, however, demonstrated its viability in both theory and application. Islamic banks are presently functioning successfully in Muslim and some non-Muslim countries alike. Besides, the institution of zakah has partially been introduced in some of the Muslim countries. These institutions could not yet, however, produce all the beneficial effects as expected and desired, because these are operating in the interest-polluted alien environment. How fast can a bicycle run if the spare part of a car is fixed into it? There is a need to throw the broken bike and to get a powerful car, which used to be once ours. Then one can see how fast it can run.
Research in Islamic economics has now been extended to other areas as well, for example, microeconomics, macroeconomics, fiscal economics, monetary economics, and economic development and so on. This research is not, however, free from problems. First, there is a lack of "integrated" background preparation for research: the Shari'ah experts lack in the knowledge of economics, while the economists lack in Shari'ah.16 Second, there is a need to go ahead with a clear-cut Islamic economic worldview, rather than a partial view, which is yet to come through. Third, there is a lack of support for research activities. Finally, the centers of learning geared towards Islamic economics are limited, which are conducive for its development. Development of Islamic economics would need co-operation from all concerned including educationists, researchers, policy makers, and political leaders of the Muslim world.
It should be emphasized here that an adequate amount of background preparation is important to be able to conduct Islamic scientific research in the field of economics. The background preparation includes analytical skill of economics, and the knowledge of relevant Islamic sources and the methodology of deriving Islamic rulings from the Islamic sources. The latter will help set the Islamic constraints in the optimization functions, or the basic framework of analysis, while the former will provide analytical skill in the contemporary context.
It is encouraging to note that efforts are being made at different levels, although often not as effectively and adequately, to address the issues and. problems that deserve attention. The success in this matter at a desirable speed will depend on all-out efforts by and all sorts of supports from all concerned.
(Iqtisad Al Islami)
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Alfalah Consulting - KL: www.alfalahconsulting.com 
Islamic finance consultant: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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