Islamic Paradigm: Financial intermediation is aimed
at addressing concerns of depositors and meeting the needs of end
users of funds in the frame work of permissible forms of transactions
in the Shariah.
Traditional Paradigm: Financial intermediation is
carried out on the basis of interest based lender-borrower
relationships between depositors and banks on one hand and end-user on
In the traditional banking scenario, the
relationship between banks and its depositors is that of Borrowers and
Lenders. The Islamic laws modifies this relationship between the two
as partners or lessors.
Traditional banking system demands interest based
deposits such as time deposits or investment deposits, while the
Islamic system offers Modaraba and Musharaka deposits. The Modaraba
deposits are entered into business contributed only by the depositor,
where the bank only delivers its expertise. In the case of Musharika
the funds are employed both by bank and the customer.
In traditional banking system, the borrower of
funds is being financed through a fixed rate of interest, which he has
to repay whether his business suffers losses. The Islamic system
promotes the financing on basis of partnership where the profits and
losses are shared on agreed basis. The borrower is not restricted to
repay its debts, if his business conditions are not very healthy. The
borrower suffers no compounding of interest.
'Ijara' Islamic form of leasing refers the bank to
purchase the asset itself and then offer it on rent to its customer.
The financial flows are tied to real flows. The claims of banks and
obligations of banks client are time invariant. In modern form of
leasing business the asset is being directly transferred to the
customer and the bank makes the payment to the seller itself and
charges a fixed sum of interest on the amount paid to the seller.
There is a dichotomy between financing. The use of funds and claims of
banks and obligations of bank's clients are adjustable.
Islam has always been a source of direction towards
the modern business ethics and our Holy Prophet (P.B.U.H) has been the
role model of executing business on the proper course himself. The
methods and practices adopted by our Prophet are clearly the
instructions set for any Muslim country where such laws are being
implemented. Apart from being a Prophet of Islam, he was very popular
among the other religions by the name of 'Sadiq' and 'Ameen', Arabic
words meaning fair custodian. The religion of Islam provides a great
sum of flexibility in respect of Business practices. Islam has soft
corners for businesses that have gone into financial crises due to
economic environment and other inevitable circumstances but on the
other hand there is strict punishment for willful and deliberate
defaulters. In short, I can conclude that irrespective of the
technological developments or other revolutions, the business ethics
would continue to remain the same and would be source of direction for
the businesses practices of our country to be successful.
GROWTH OF ISLAMIC BANKS
I believe that if Islamic Banks were to require
depositors to take a loss, this was portrayed as an ongoing, albeit
exceptional, risk that deposits would have to face, then the bank
would suffer a run on deposits. Investors in mutual funds accept the
possibility of negative asset values and even real losses on
encashment. Bank depositors expect a greater degree of security.
The process and methodology of bank analysis is the
same for banks worldwide, but the specific issues driving their
creditworthiness may differ from place to place and time to time. This
is not a question of Islamic banks versus Riba (interest-related)
banks, or developed market banks versus emerging market banks. I
recognize and respect the individuality and diversity of all banks and
banking systems in the world, including Islamic Banks.
I would suggest that the key features of an Islamic
financial institution (IFI) that a Western analyst must recognize
*IFIs see themselves as having a social
responsibility and therefore are not as profit oriented as Riba-based
*Some financial instruments used by IFIs are
different from those used in Riba-based banks — for example,
*Islamic finance takes a different approach to
capital. Islamic financial theory does not draw such a strong
distinction between deposits and capital as do Riba-based banks.
Islamic banks sometime argue that their capital is protected by the
fact that deposits share losses alongside shareholders. In contrast,
the capital of a Riba-bank must absorb the full force of losses, with
deposits being compromised only after capital funds have been
exhausted. This would lead some Islamic bankers to reject the Western
concept of capital as the cushion against loss. This is a complex and
difficult issues, with a huge difference between theory and practice.
Nevertheless, for a credit analyst, the notion that the claims of
depositors might be treated on a par with the claims of shareholders
is a very important issues.
*IFIs are sometimes subject to different regulatory
regimes from Riba-based bans operation in the same market. This is not
always so, but sometimes the prudential ratios imposed by banking
supervision institutions. (Kuwait is an example).
*It is worth highlighting one important way in
which Islamic banks are not different to Riba-based banks, even though
they may appear to be. In theory, the returns that Islamic banks give
to their deposits reflect the overall level of profitability of the
bank. So, if the bank has a particularly good year, one would expect
to see deposit rates being particularly high, and if the bank has a
difficult year, they would below. This does not happen in practice.
*If one looks at the annual reports of Islamic
banks to see how much they pay depositors, one finds that they are
paying about the same as the Riba-banks in the same systems. Even in
systems that are wholly based on Islamic finance, such as Pakistan,
returns to depositors are in line with what macroeconomic fundamentals
and the economic priorities of the Pakistani government would suggest,
rather than what the performance of the banking system would suggest.
*The point is that if Islamic banks were to pay
their depositors below market rates of return in a difficult year,
some of those depositors would leave the bank and go elsewhere. So
Islamic banks have to keep up with market rates of return — which
are driven by events in the Riba-based economy.
*There are some elements of Islamic finance that
make IFIs more creditworthy than Riba-based banks, and other elements
that make them less creditworthy. But we do not believe that IFIs are
inherently more or less creditworthy than Riba-based institutions. Put
another way, we do not believe it is possible to say that IFIs in
their capacity as IFIs are more or less creditworthy than Riba-based
I would like to conclude that like any other normal
issue of change, there are certain merits and demerits associated to
it, which have been discussed earlier. We as a whole nation, now have
to take a step forward in initiating this Islamic Banking system with
the hope that it would enable our country to achieve improved level of
Wireless technology enables customers to do their
banking from, well, just about anywhere.
The last few years have brought us ABMs, telephone
banking, PC banking and Internet banking. Now there's wireless
banking. Liberated from the constraints of fixed wire connections,
wireless banking offers the ultimate in customer mobility. You'll bank
from your patio, from the ball game or the back seat of a cab.
Customers will be able to conduct their banking
from an emerging array of devices. The obvious ones are cell phones,
laptop computers and personal digital assistants, such as the small
palm devices that do, literally, fit into the palm of your hand.
Customers will also be able to bank from small wireless pagers, such
as the RIM pager, or using boxes sitting on top of their TV sets. And
that doesn't exhaust the possibilities. Devices are getting faster —
and cuter. Conceptually at least, one day we may be banking via our
kitchen appliances-a refrigerator or smart microwave oven — or
computer/wireless devices stitched into our clothing.
Consider some of the latest innovations. Very soon
customers will be able to talk (literally talk) to a bank's computer
to access accounts, pay bills and so on. And coming to a cell phone
(Palm Pilot, pager, etc.) near you: bill presentment by wireless.
How this latest iteration of banking technology
will finally shake down is as yet uncertain. Clearly, though, wireless
opens up enormous business possibilities — not only for banks and
their brokerage affiliates but for device manufacturers, software
developers and technology infrastructure suppliers.
For some financial institutions, wireless banking
will link into electronic retailing. Banks will become the entry
points for Internet access, albeit of a stripped-down variety suitable
for display on minuscule screens. As well as conducting banking or
brokerage transactions via cell phone, Palm Pilot or other device,
users will be able to access weather reports and horoscopes, buy
airline and theatre tickets, books, records — and have flowers
delivered for a spouse's birthday.