Islam has always been a source of direction towards the modern business ethics

Sep 15 - 21, 2003


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 the other.


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.


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 include:

*IFIs see themselves as having a social responsibility and therefore are not as profit oriented as Riba-based banks.

*Some financial instruments used by IFIs are different from those used in Riba-based banks for example, Murabaha.

*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 banks.


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 financial stability.


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.