1PRINCIPLES AND PRACTICE OF ISLAMIC BANKING (MIFB 6023) ASSIGNMENT 1 Prepared by Mohamed Ibrahim Ismail Matric Number: A1111477M04 Prepared for: Dr. Ahmad Fauzi bin Idris
2 Question 2Allah SWT has forbidden usury/riba onto the Muslim Ummah. Currently the traditional bankingsystem is practicing usury in their banking operations. Would you agree if all conventional banksin Malaysia do not at all give neither take riba can consider it as Islamic bank?DiscussThe answer to this question is in the next three pages, please turn over
3In 1983 the Malaysian parliament passed IBA ACT 1983 (now replaced by BAFIA ACT 1989)stating that: “any company which carries on Islamic banking business and hold a valid license,and all the offices and branches in Malaysia of such a bank shall be deemed to be a bank”1, butthis definition to me is not comprehensive. The fact that conventional banks do not give or takeany form of usury (riba) does not make a bank Islamic but instead we should say, bilateraltrading between Conventional banks and Muslim Ummah, in this case Muslim Customers, ispermissible as long as the products are halal, free from excessive gharar and all games of chanceand do not involve taking or giving usury (riba).However, it is not only riba what makes contracts confront with the Shariah Principles but toconform to Shariah principles business transactions must not contain excessive gharar(transactions with extreme uncertainty and ignorance, gambling, speculations). Anotherimportant aspect is the consideration of the permissibility (lawfulness/ being halal) of thecommodities and dealings. Things such as pork, alcohol, pornography and all other prohibitedcommodities/goods must be avoided in Islamic business transactions.Even though, the above conditions must be fulfilled for a certain bank to be considered Islamic,the attribute of an Islamic bank cannot be given if the objectives of the institutions are notaccording to the Shariah.Ibrahim Warde a scholar in the University of Edinburgh defines Islamic financial institutions(including banks) as: “Islamic financial institutions are those that are based, in their objectivesand operations, on Koranic principles. They are thus set apart from ‘conventional’ institutions,which have no such preoccupations.2”This definition goes beyond riba free banking and takes into account transactions which may ormay not be involved in riba.Another important issue which should be considered is moral and ethical values and socialresponsibility. A conventional bank may not be involved in any form of riba in its transactionsbut it is purely driven by profit maximization and lacks moral values and social responsibility.On the other hand, a true Islamic bank is established on shariah basis and thus apart from profit1 Assoc.Prof.Dr. Ahmad Fauzi bin Idris, chapter Two, Regulatory Frame, Class notes2 Ibrahim Warde, Islamic finance in the global economy, Edinburgh, 2000, p.5.
4making, strives to ensure justice, promotes economic development, social welfare throughspecific business practices and through Zakat and channels resources from the rich to the poor.An Islamic bank avoids all forms of exploitation and, unlike a riba-free conventional bankattempts to reduce the gap between the haves and have-nots.In a real world situation, conventional banks, even though all their transactions are not involvedin riba, would ultimately be regulated by conventional laws (man-made) which do not takejustice in all its forms into account. Therefore one should realize the defining difference betweenriba-free conventional banks and Islamic banks. Conventional banks solely aim at profitmaximization within a specific regulatory framework whereas Islamic banks are guided byreligiously-inspired goals.However, one should not mix the permissibility of trading with conventional banks if thetransactions fulfil the requirement of shariah principles and labelling it with Islamic name. Inother words a bank cannot become Islamic by offering halal and interest (riba) free products.In essence, the point that I categorically reject is associating interest-free /riba-free conventionalbanks with Islam. Because the term Islamic is an attribute of Islam which covers not only tradingand financing but the objectives, or the intent as well as issues of morality and submission toAllah. Attributes such as Islamic go beyond banking and financial activities and extend to thesystem of belief and performance of a wide range of activities. An issue which many people mayoverlook is that an Islamic bank represents the Muslim Ummah and its success and failure willdirectly or indirectly affect the Muslims. For example if a conventional bank is given the nameIslamic just because of riba-free transactions, non-Muslim customers may blame Islam becauseof fraudulent acts and exploitations made by that bank without differentiating Islamic bank fromIslam.In the process of promoting Islamic banking system, banks which are not based on Al-Quran andSunnah both in their objectives and operations, should be given other names such as interest-freebanks, riba-free banks, shariah-complaint banks, halal-product offering banks or any other nametailored for them and that suits them other than Islamic banks.
5To sum up, based on this reasonable analysis and logically convincing evidences, I hope oneshould fully understand why conventional banks should not be called Islamic even if they arenot taking or giving riba in all their business transactions and financing modes.
6 Question 3Based on legal frameworks and Shariah principles, would you agree that the possibility ofstandardization or harmonization of all Islamic banks products throughout the world in itsmeanings and operations could happens in real life?DiscussThe answer to this question is in the next 2 pages, please turn over
7Standardization or harmonization is discussed at a great length in various issues ranging fromreligious harmonization to product harmonization such as the products offered by Islamic banks.Harmonization among other things, is aimed at finding reasonable and attainable solutions tohuman differences and disagreements either in their system of believes, worldly matters orbusiness and economic activities, but the important question is, what is the basis of thesedisagreements. The answer to this question lies in the Al-Quran Al-karim. Allah says (SWT):“And if your Lord had (so) decided, He would indeed have made mankind one nation; and theydo not cease differing (among themselves)3”The above verse clearly depicts that the reason why humans differ is due to the creation of Allahand the nature of people is created in such a way that they always have different views, thinking,preferences and the like. The focal point of this difference is due to their different minds.Apart from human nature, there are other factors which lead to disagreements such differences inculture and customs, situational and environmental differences and variations in political set-up.Standardizing and harmonizing Islamic banking products through the world is not realistic andcannot materialize or happen in real life but arguments for this matter if any are based onidealism. The path towards harmonization of Islamic banking products is fraught withinterpretations of the fiqh and pluralism of the fatwahs.The rulings and interpretations from various schools of Islamic Jurisprudence are the primesources that will always engineer the products of Islamic banks. The fuqaha (Muslim scholars ofIslamic jurisprudence) use of a range of methods such as interpretation of revealed sources(itjihad), choice (ikhtiyar) necessity (darura) and artifice (hiyal) in the process of decisionmaking or issuing legal judgments (fatwahs). The selection of one technique over another to get3 Surah Hud: 118
8more favorable decision, according to the circumstances affects the type of product that a certainbank has to offer to its customers.4The adherence to specific Islamic school of thought (madhab) such as Hanafi school or Shafi’ischool also affects product standardization. For example the followers of Shafi’i would favor toadopt Bai inah in line with the view of Shafi’i and the followers of Hanbali school consider it tobe a way of manipulating prohibited riba to portray it as halal or permissible. Such differences inthe schools of fiqh would finally lead to the development of controversial products and this willmake harmonization and standardization difficult.Many Islamic economic specialists talk about the concept of convergence, standardization andharmonization at the international conferences and economic forums but their theories andsuggestions are far from practicality and confront the human nature of having opposing viewsand objectives.In conclusion, the differences in culture, environment, situation and circumstance, political sep-up, ,variations in the interpretation of Shariah sources among the fuqaha, different schools ofIslamic thought(madhab) and the great western influence on the Muslim World makestandardization and harmonization of the products across the Islamic banks unattainable andalmost impossible.4 See also Verandos, A. (2005) Islamic Banking and Finance in South-East Asia its Development and Future, P.95
9ReferencesAyub, M. (2007), Understanding Islamic Finance, London, WileyEl-Gamal, M. (2006), Islamic Finance Law, economics and Practice, Cambridge, Cambridge UniversityPressFauzi, A. (2011), Class notes, Chapter 2, Regulatory FrameworkMahmud, M. (2008), Towards Understanding the Ever-Glorious Qur’an, fifth Edition, Cairo,Dar An-Nashr Liljami’atVerandos, A. (2005) Islamic Banking and Finance in South-East Asia its Development andFuture, Singapore, World Scientific PublishingWarde, I. (2000), Islamic finance in the global economy, Edinburgh, Edinburgh University PressAbdulaziz , I.(2000) Qawaa’id al-ahkam fi masalihil-anam, Jeddah, Dar-al-Bashir
10Appendix 1darura overriding necessityfatwahs/fatwas authoritative guidance, legal opinions from a juristfiqh Islamic Jurisprudencefuqaha Muslim scholars of Islamic jurisprudencehila legal artifice, deviceikhtiyar choiceitjihad reasoning and interpretation of the sources of law, which is the Quranand Sunnahmadhab one of the schools of Islamic thought (plural madahib)riba interest, usury as forbidden in the QuranAppendix 2BAFIA Banking Financial Institutions ActIBA Islamic Banking Act