Global Impact of Islamic Financial Systems in the Arab World

Dr. Julius B. Bertillo

Professor, College of Business Administration
Arab Open University-Bahrain Branch
Email: jbbertillo@yahoo.com.ph

Dr. Josefina B. Salando, CPA
Professor, College of Business Administration
The Kingdom University-Manama, Bahrain
Email: johsalando27@yahoo.com

Dr. Florabel O. Nieva
Asst. Professor, College of Business Administration
Effat University-Jeddah, KSA
Email: drnieva@live.com




ABSTRACT


This paper aims to highlight the global financial systems in the Arab world
specifically on the Islamic finance systems; principles and prohibitions; traditions and
practices; and challenges and opportunities in the Arab world. It is globally known that
Islamic Finance was embraced by the Muslims in the Arab world for the purpose of
lending money as their start-up capital and other personal interest. The general concept
of Islamic Finance according to Shariah prohibits the fixed or acceptance of specific
interest or fees which is called Riba or usury. This is contrary to the Islamic principles of
the Muslims called Haraam or forbidden. This ideology was used by the Islamic banking
institutions, financial institutions, and non-profit organizations within the Muslim
community. It is presumed that in Islam religion forbids lending out money with an
interest rate. In the Islamic rules on transactions (Fiqh al-Muamalat) was created to
avoid problems. Therefore, to avoid the prohibition are simply by sharing of profit and
loss (Mudharabah), safekeeping (Wadiah), a joint venture (Musharakah), cost plus
(Murabahah), and leasing (ljar). In the context of Islamic Financial Systems in the Arab
countries is based on the elements of Shariah Law. This means that Shariah Law
originates from the teachings of the Qurn (sacred text of Islam) by Prophet
Muhammad. The Islamic finance is based on Shariah which is often translated to Islamic
law. According to Silva (2006) interpreted that Shariah provides guidelines for aspects of
Muslim life, including religion, politics, economics, banking, business, and legal
philosophy. Hence, this study is based on published research papers but does not include
empirical investigation.


Keywords: Islamic Financial Systems, Islamic Finance, Shariah Law, Islam

1. Introduction

Islamic finance is based on Shariah, an Arabic term that often is translated to Islamic
law. Shariah provides guidelines for aspects of Muslim life, including religion, politics,
economics, banking, business, and law (Silva, 2006). The Islamic financial system is a set of
rules and laws, collectively referred to as Shariah, governing economic, social, political, and
cultural aspects of Islamic societies. Sharia originates from the rules dictated by the Qurn
(central religious text of Islam) and its practices, and explanations rendered which is commonly
known as Sunnah of the Prophet Muhammad (Iqbal, 1997). According to Ilias (2010), the
Islamic finance is founded on principles of Shariah, or Islamic law. He further explained that
the major financial principles of Shariah are a ban on interest, a ban on contractual uncertainty,
adherence to risk-sharing and profit-sharing, promotion of ethical investments that enhance
society, and asset-backing. The Islamic finance historically has been concentrated in Muslim-
majority areas of the Middle East and Asia, but has expanded globally to countries with smaller
Muslim populations. A number of European and other states are going to reform their tax, legal,
and regulatory frameworks to attract Islamic investments. There is a small but growing market
for Islamic finance in the United States, he added. It is known publicly that Islamic banking will
flourish and can coexist with conventional Western banking in our society. There are several
reasons for the increase of Islamic banking in the world including Australia. It is ensured that
Islamic banking is ripe-free from the Muslim community. They lost half their equity in the
company. The Islamic financial institution operates successfully in Islamic and non-Islamic
economies globally. This has been demonstrated in the Australian context. Currently, Islamic
banking has been adopted in more than 50 countries many of which are Western. These are the
Muslim countries follow the Sharia Islamiiah in many areas of life (e.g. Bahrain, Bangladesh,
Brunei, Iran, Malaysia, Pakistan, Saudi Arabia, and Sudan. In this aspect, there is an emerging
concern of other Islamic societies about the relationship between religion and banking, finance
and insurance practices and, in particular, the issue of what is the proper Islamic financial and
business practice. This has led to an increase in Islamic banking in the Arab world. (Mirza and
Halabi, 2003)

Molyneux and Iqbal (2005) highlighted the financial systems in the Arab world which is
primarily bank-based. The capital markets are relatively underdeveloped. The country has
traditionally played a major role in the banking and financial sector. The financial systems of the
Gulf Cooperation Council (GCC) countries, namely: Saudi Arabia, United Arab Emirates,
Bahrain, Kuwait, Oman and Qatar. It covers the development of individual GCC countries
banking systems and financial markets; an analysis of the performance of Gulf banks; and briefly
outlines recent moves to create a GCC economic and financial union. This further discussed that
in general these countries have gone through various financial reforms aimed at beefing up their
financial arrangements. The commercial banks still dominate GCC financial systems and
banking industries are extremely concentrated. It is said that Gulf banking systems show
favorable improvement in terms of their asset quality, capital adequacy, and profitability in
1990s. In this approach, the Islamic finance systems spread across the Middle East and beyond
are more than 200 Islamic financial institutions, such as: banks, mutual funds, mortgage
companies, insurance companies. This means the entire parallel economy in which Allah, has the
final say. Industry growth has an average range from 10% to 15% a year. Conventional banks
like Citibank and HSBC have opened Islamic "windows" in the Gulf region. The industry's
market share is still modest about 10% according to use (2002). The Islamic scholars believed
that the financial system is superior on several counts that lead to more prudent lending and
encouraging the financiers to invest directly in an entrepreneur's venture.

Moreover, some Muslim countries trumpet the potential role of the Islamic system of
financial intermediation in contributing to GDP growth and financial stability because of an
ethics-based ban on speculative activities at regional or national platforms and their proactive
leadership in global Islamic finance, it is as if they are metamorphosed into tongue-tied
apparatchiks living in denial when it comes to the World Bank Group/International Monetary
Fund (IMF) annual meetings. In 2011 annual meetings held in Washington, it is was mentioned
that there is a strange unreality about politicians from the member countries of the Islamic
Development Bank Group (IDB) when at Islamic finance conferences they blast the causes of the
global financial crisis unsecured speculation based on greed, indebtedness, lack of adequate
regulation and low savings and eulogize the Islamic financial system with its emphasis on
transactions backed by real assets and therefore its connectivity to the productive economy and
its proscription on usury and uncertainty through deception. But, when it comes to international
platforms especially in the West, which as the current US and UK economic and euro zone
sovereign debt crisis show is in desperate need of reform, it is as if a potential Islamic economic
or financial solution becomes anathema and there is a double standard at work: Islamic finance
at home, but riba finance at the international level. This especially since the World Bank
already formally recognized Islamic finance and has designated it as a priority area for its
financial sector program. (Noor Islamic Bank Social Media, 2011)

The International Monetary Fund (IMF) shows that Islamic banking seems to be a
complement to conventional banks, rather than a substitute (Imam and Kpodar, 2010). These are
the major principles of Shariah that are applicable to finance and differ from conventional
finance as stated by Shayerah Ilias, an analyst in the International Trade and Finance (ITF) of the
Congressional Research Service. These are: (1) Ban on interest (riba) refers to conventional
forms of finance that distinguish between acceptable interest and usurious interest (i.e., excessive
rates of interest). In contrast, under Islamic law, interest is considered to be usurious and is
prohibited. Some questions, how lenders profit from financial transactions under Islamic law.
Like for example, in a real estate setting, Shariah-Compliant Financing (SCF) takes the form of
leasing, as opposed to loans. Instead of loaning money to a prospective purchaser, the bank
obtains the property and leases it to the shore-compliant investor, who pays rent instead of
interest; (2) Ban on uncertainty refers to uncertainty in contractual terms and conditions are
prohibited, unless all of the terms and conditions of the risk are clearly understood by all parties
to a financial transaction; (3) Risk-sharing and Profit-sharing refers to the parties involved in a
financial transaction must share both the associated risks and profits. In other words, earnings of
profits or returns from assets are permitted as long as the business risks are shared with the
lender and the borrower (Jobst, 2007); (4) Ethical investments refer to investment in industries
that are prohibited by the Qurn, such as alcohol, pornography, gambling, and pork based
products, is discouraged; and (5) Asset-backing refers to financial transaction being tied to a
tangible, identifiable underlying asset, such as real estate or commodities. Under Shariah,
money is not considered an asset class because it is not tangible and may not earn a return
(NBAR-IFO, 2008).

These major principles of Shariah mentioned above are important specifically the
employees working in Islamic banking, financial institutions, non-profit organizations, business
professionals, educators of the Islamic Finance System, students, general public (Muslim
community), and future researchers. Considerably, it is all important that standardization of
Islamic finance in the Arab world must be continuously and strictly implemented based on
Islamic tradition or practices. It is assumed that Shariah is open to interpretation and some
Islamic scholars are not in complete agreement regarding what constitutes Shariah-Compliant
Financing (SCF). Standardization also may be challenging because the maturity of Islamic
finance markets varies from country to country, with some markets well-established and others
that are more nascent (Sing and Richter, 2010). Ultimately, the lack of concurrent viewpoints
makes it difficult to standardize Islamic financing. According to Assif (2005), the bank officials
said that competitive pricing makes their Muslim-friendly mortgages which operate more like
leases than loans and competitive with traditional interest-based financing. It is all part of a trend
in which financial products that comply with the set of Koranic laws that govern a Muslim's
daily life, or Shariah, are evolving from a novelty into a normal part of doing business in much
of the developing world. "Islamic banking is not only for conservative or radical Muslims. It is
mainstream business now, according to Ross Mohamad Din, Director of HSBC Amanah
Malaysia, the bank's Islamic division. This means that the banks also want a bigger piece of it.
(BusinessWeek, 2005).

2. Literature Review

This section introduces the discussion of the related literature and issues relevant to the
present inquiry. It also provides the discussion on the synthesis of the art for clearer
understanding of the Islamic Financial Systems in the Arab world.

Global Islamic Finance Report (GIFR). The Global Islamic Finance Report 2011,
publicized that the global Islamic finance industry over the last 40 years. Ensuring continuity and
expansion will call for further domestic and global regulatory changes, expediting development
and consolidating growth. The key findings from the study indicate that the Islamic finance
industry is valued at $1.14 trillion and is rising at a rate of 10%. The industry is gradually
building the depth, quality and quantity of its product portfolio and entering into new, previously
unfounded fields in the financial markets. There are newfangled Shari'a compliant derivatives,
innovations in asset and wealth management, improvements in efficiency of banking and the
creation of products which satisfy regulatory requirements. The GIFR 2011 contains an overview
of the Islamic finance industry in 55 countries, providing a snapshot of the state of the industry in
2010 and focuses upon political, legislative and financial developments within the Islamic
finance space. Certain areas such as the UK, once a keen proponent of Islamic finance, have over
the years shown less commitment. On the other hand, other countries like Australia and France
are seeking to bring in Islamic finance products and services into the country by undertaking a
series of tax and legislative changes. According to Professor Humayon Dar, Editor-in-Chief of
GIFR 2011, comments, in the aftermath of the global financial crisis there is a pressing demand
for an alternative financial paradigm, one that is imbued with a sense of social responsibility
whilst maintaining a profit maximization objective. Islamic finance presents such an option.
Since its inception 40 years ago, Islamic finance has grown and is still growing at a precipitous
rate. More Muslim and non-Muslim countries are adopting Islamic finance services highlighting
a bright future for this once niche industry." (Zawya, 2011).

Ali and Syed (2010) investigate the perceptions of the Islamic finance industry and
impacts on the industry by studying representations in mainstream media, and by surveying
Islamic finance industry professionals and Islamic finance media professionals globally. Their
results revealed that relatively few articles linked Islamic finance with terrorism, and few (12
percent) maintained a negative tone. This further revealed that Islamic finance professionals
brought closer scrutiny of the industry, which increased misconceptions but also led to growth
and awareness. Nonetheless, the majority of Islamic finance media professionals perceived a
negative impact, and 70 percent of them are critical of how the industry handled media attention.
The study finds that despite some negative media coverage of Islamic finance the growth of the
industry was not significantly affected, and the outlook for future development is
overwhelmingly positive.

Hanif and Iqbal (2010) evaluated the suitability of the existing business environment in
Pakistan for application of Sharia based financing. The results of the survey revealed that Islamic
financial instruments are categorized objectively as Sharia compliant and Sharia based. Sharia
compliant instruments are used by Islamic Financial Institutions (IFIs) aggressively and the share
of Sharia based financial instruments are even less than 3% A in investment portfolios of IFIs
working in Pakistan. This further revealed that in opinion survey of finance professionals,
Islamic bankers, entrepreneurs and academicians is conducted through questionnaires.
Nevertheless, the findings suggest a number of hurdles (e.g. The dominance of conventional
banking, earnings manipulation by firms, higher taxes, weaker auditing, lack of trust and
confidence in the abilities of Musharaka partners, riskiness of Musharaka and inability of
conventional financial reporting framework to ensure transparency) are there in the way of the
popularity of Musharaka financing. Increased awareness, new product development, capacity
building of IFIs, reforms in the financial reporting framework and strengthening the audit
institution, may help in the implementation of Musharaka financing.

Zaki and Sattar (2011) studied the hedging of risks in Islamic finance has gained more
importance in recent era because of the financial crisis faced by conventional finance. He
believed that Islamic finance is turning to be an alternative to the orthodox economic system but
the nature and risks faced by Islamic financial institutions have alarming concerns for Islamic
finance and its functioning. This paper aims at suggesting policies and procedures for risk
mitigation in Islamic finance by proposing a regulatory model which highlights different pre
requisite policies mandate for effective risk management. The policies and procedures are
highlighted as the variables of the study , including, policies for prudent financing, investing and
lending activities, separation of Shariah advisory board of management for the mitigation of
Shariah non Compliance, effective information system, policies for mitigating risks. The
regulatory framework of this paper leads to purported results which provide bases for stability
and effective risk mitigation of Islamic banks.

Ismail and Tohirin (2010) discussed the Islamic laws which are relevant to finance.
More specifically, it encompasses the types of contracts as a basis for the distinctive Islamic
financial products. The current institutional framework of financial institutions seems to be
incompatible with the nature of these Islamic contracts. This is a conceptual paper describing the
connection between finance and economic growth in the present of Islamic contracts, which hold
various types of contract of partnership, buy-sale contract, to a contract of usufructs. The nature
of Islamic contract is to avoid riba (i.e. Interest system), because it is unjust and prohibited,
meanwhile under conventional system they rely very much on the interest system. Therefore, it
can be concluded that the distinctive character of Islamic contracts applied by Islamic banking
and finance relies mostly on the profit and loss sharing mechanism which contains the
cooperative spirit, in the contracts which is called mudharabah (profit-sharing), musharakah
(partnership). The growth of equity partnership instruments in the financial system necessitates a
different lot of regulation and institutions in order to achieve Islamic goals through
economic/financial activities. This means that that the current framework of financial institutions
does not correspond with the nature of Islamic contracts. This further suggests that a new
framework for financial institutions is necessary in order to accomplish the maqasid-al-Shariah,
by implementing the true spirit of cooperative through various Islamic contracts. Consequently,
the rules and regulations and other relevant elements also need to adapt. This indicates a possible
different consequence on the connection between finance and growth in the presence of Islamic
contracts, i.e. a more positive relation.

Mouawad (2009) studied the development of Islamic finance in Egypt. He examined the
political and economic dilemma that Islamic finance (IF) poses on some Muslim Governments of
either encouraging or restraining this global phenomenon; in spite of their awareness of the
developmental role that IF plays. Egypt, in this concern represents a peculiar example where
government's policies have apparently determined the performance of Islamic financial
institutions. This further analyses the policies of the Egyptian Government towards Islamic
financial institutions since its inception in 1963 until 2007, with a specific focus on Islamic
banks and Islamic societies. This is followed by a discussion of the current practices of these
establishments in the Egyptian economy. In the end, the paper presents a prospect vision of the
future path of Egypt in the field of IF. The findings revealed that the shares of IF in the Egyptian
economy are modest at local, regional and global levels. Such backward position could be
justified in the light of the governmental policies and their manipulation over the legal, economic
and religious institutions in a way that restrain the operation of Islamic financial institutions. Yet,
the responsibility is not solely the governments; Islamic financial institutions share part of such
retreat due to their practices that divert them from their mission. This concludes that the nature
of the Egyptian Government's attitudes towards IF stems from its tendency to preserve the
constancy of its economic system besides its suspicion to the nature of Islamic financial
institutions and their links with Islamist groups. In addition, Islamic financial institutions suffer
from administrative and legal problems that shape their practices and reveal their divergence
from their Islamic and developmental role that they are supposed to work. Hence, in the final
analysis of this discipline, this offers an insight into the prospective development of IF in Egypt
on both local and external levels.

Ahmed (2010) discussed the global financial crisis and the Islamic finance model which
is competent of playing down the severity and frequency of financial crises, by introducing the
financial system based on sharing in the risk. It links credit expansion to the growth of the real
economy by allowing credit primarily for the purchase of material goods and services which the
seller owns and possesses, and the buyer wishes to accept delivery. It also requires the creditor to
bear the risk of default by prohibiting the sale of debt, thereby ensuring that he evaluates the risk
more carefully. He further explained that it is important for everyone's future to study the current
crisis in order to develop sustainable financial practices and in quest of a new business model
based on sharing the profit and loss. Likewise, the divergence approach is used for exploring
possibilities and constraints of inherited situations by applying critical thinking and analysis
through the published literature in Islamic finance. This is to create new understandings of
international finance and using new banking business model towards better design solutions to
the current global financial crisis and preventing more collapse in the future. The findings
revealed that a new business model for the banking system based on non-interest-based
transactions but profit and loss sharing should be in practice at the financial system.
Consequently, the financial institutions should encourage business and trade activities that
generate fair and legitimate profit. However, in Islamic finance, there is always a close liaison
between financial flow and productivity. This intrinsic property of Islamic finance contributes
towards insulating it from the potential risks resulting from excess leverage and speculative
financial activities which are part of the root cause of the current financial crisis. Hence, this
report is based on published research papers but does not include empirical investigation. This
means that the new business model based on Islamic finance rules will assist in financing
businesses by utilizing alternative methods to the banking systems. The Islamic financial system
with proper checks and controls introduces greater discipline into the economy and links credit
expansion to the growth of the real economy. In conclusion, this report sheds new light on the
relationship between the Islamic finance model and a new business model for the financial
institutions to be practiced in order to think through how to prevent future financial collapses and
make capital markets function more effectively.

Wilson (2009) made a study on the growth of Islamic finance in the GCC. He discussed
the modern Islamic banking originated with the establishment of the Dubai Islamic Bank in
1975. The study assesses the growth of Islamic banking in the GCC since then, an industry
which now encompasses Islamic Takaful (insurance) and Shariah-compliant asset management,
as well as retail and investment banking. An examination is made of the extent to which
government policy, through both legislation and regulation, has facilitated the development of
Islamic finance. Shariah governance systems are evaluated, in particular the workings of the
devolved form of self-establishment of Islamic financial institutions. The deposit facilities
offered by Islamic banks in the GCC are discussed, as well as the financing provided, notably
trade finance, consumer credit and mortgages for real estate, which are the predominant types of
funding by Islamic banks. The issuance and trading of Islamic sukuk securities is also studied, as
well as the role of the regions financial centers.

Hasan (2011) conducted a survey on the current Shariah governance practices with the
aim of promoting greater understanding of some of the important issues and to provide relevant
information in guiding the future evolution of the Shariah governance system. The paper
illustrates the state of Shariah governance practices in Malaysia, GCC countries (Kuwait,
Bahrain, United Arab Emirates, Qatar and Saudi Arabia) and the UK by highlighting five main
components of good corporate governance that consist of independence, competency,
transparency, disclosure and consistency. The availability of secondary data on Shariah
governance practices is very limited; a detailed survey questionnaire is generated for sourcing
primary data from Islamic Financial Institutions (IFIs). The study utilizes a descriptive analysis
approach in extracting and analyzing the data and factual input derived from the questionnaire
feedback. The survey findings confirm that there are significant differences and diverse Shariah
governance practices in the subject countries. This position acknowledges that there are
shortcomings and weaknesses of the existing governance framework which requires further
enhancement and improvement. To him, this sketch is a very useful source of data that may
provide relevant guidelines in guiding the future development of Shariah governance practices
in the IFIs. He assumed that this study provides fresh data and recent information on the actual
Shariah governance practices of IFIs in three jurisdictions.

The above cited related literature and studies, the researchers commends that Shariah law
or Islamic law, Sharia Complaint and Shariah based, policies and procedures for risk mitigation,
the nature of Islamic contract, Shariah Advisory Board (SAB), and the growth of Islamic finance
in the GCC must be given due consideration in the Islamic finance system in the Arab world.
Ali and Syed (2010) investigate the Islamic finance industry and impacts on the industry on
mainstream media. However, Mouawad (2009) studied the development of Islamic finance and
analyzed the political and economic dilemma. Wilson (2009) focused on the development of
Islamic finance. Zawya (2010) believed that more Muslims and non-Muslims countries are
adopting Islamic finance services highlighting a bright future for this once niche industry. On the
other hand, Ismail and Tohirin (2010) discussed the Islamic laws and Hanif and Iqbal (2010)
evaluated the suitability of the existing business environment for application of Sharia based
financing. Hasan (2011) focused on the current Shariah governance practices for future growth
of the Shariah governance system. However, Zaki and Sattar (2011) studied the hedging of risks
in Islamic finance because of the fiscal crisis faced by conventional finance. Ahmed (2010)
discussed the global financial crisis and the Islamic finance model by introducing the financial
system based on sharing in the risk. According to Zaki and Sattar (2011) pointed out that the
recent global crisis has highlighted the intrinsic shortcomings in the formal financial system.


3. Methodology

The researchers decided to use the descriptor type of research method in the conduct of
the study. The descriptive research is used to obtain information concerning the current status of
the phenomena to describe "what exists" with regard to variables or conditions in a situation.
(Key, 1997). The descriptive research tools utilized by the researchers are: online surveys,
interviews with practitioners, observation, and documentary analysis. The researchers would
make use of observations from their experiences in teaching of the Colleges and universities in
the Middle East in order to come up with a personal description to answer the research problem.
The researchers also utilize the qualitative approach in order to verify the general concept of
Islamic Finance Systems, Shariah law, and Islamic principles applied in the Arab countries. The
qualitative research is a form of systematic empirical inquiry into meaning. Systematic refers to
planned, ordered and public, following rules agreed upon by members of the qualitative
research community. Empirical means to type of inquiry which is grounded in the world of
experience. Inquiry means to understand how others make sense of their experience (Shank,
2002). However, according to Denzin and Lincoln (2000) described that qualitative research
involves an interpretive and naturalistic approach. In this study, the researchers studied things in
their natural settings, attempting to make sense of, or to interpret, phenomena in terms of the
meanings people bring to them. Hence, the researchers make use of existing literature in order to
verify their observations and come up with preliminary ideas regarding the research problem.

The present study is an exploratory attempt since it would try to gather information
regarding the global impact of Islamic Financial Systems in the Arab world. The data collected
through both primary and secondary sources. The primary sources of data collected through
online survey and interviewing professional practitioners and Islamic bankers. The respondents
of the study are the employees of the financial institutions, Islamic banking, non-profit
organizations, and commercial organizations in GCC. The interviews were scheduled as formal
and informal both for the exploration of the data, and online survey was conducted to answer the
research problem. The secondary data were collected from documentary-based secondary data
that refer to information collected from previous similar researchers which have also included
primary data and have already been analyzed for their original intent (Saunders et al., 2003).
Secondary data can be collected from diverse sources such as: books, periodicals, government
sources, regional publications, companies annual report, media and commercial sources
(Zikmund, 2003) However, the major portion of the data consisting of secondary sources, were
collected through research journals, internet, magazines, records, and other relevant reading
materials. The citation and literature discussion have been the prominent approach of this
panoramic work. However, in the lights of the literature discussion there were four major areas
of concerned in this study, these are: Islamic finance system, principles and prohibitions,
traditions and practices, challenges and opportunities in the Arab countries were targeted as the
variables of the study. These variables mentioned were analyzed and interpreted based on the
information collected by the researchers.


4. Data Analysis and Discussion

4.1 Islamic Finance Systems. The Islamic financial system is based on equity whereas
the conventional banking system is loan based. Islam is not against the earning of money. In fact,
Islam prohibits earning of money through unfair trading practices and other actions that are
socially harmful in one way or another.

Those who swallow down usury cannot arise except as one whom Shaitan
has prostrated by (his) touch does rise. That is because they say, trading is only
like usury; and Allah has allowed trading and forbidden usury. To whomsoever
then the admonition has come from his Lord, then he desists, he shall have what
has already passed, and his affair is in the hands of Allah; and whoever returns (to
it) - these are the inmates of the fire; they shall abide in it [Sura 2:275].

The practice of riba or usury was so ingrained in the society and continuance of the
practice was so undesirable, that Allah warned the believers that if they did not desist, they
should be prepared for a war against Allah and His Apostle. This warning was heeded by the
Muslim Ummah and for more than a thousand years the economies of Muslim countries were
free from reboot. With the dominance of Western influence and its suzerainty over Muslim
countries, the position changed and an interest-based economy became acceptable. Efforts in
Muslim countries to revert to an interest-free economy was hampered by many obstacles. Islamic
finance rests on the application of Islamic law, or sharia, whose main sources are the Koran and
the sayings of the Prophet Muhammad. Sharia emphasizes justice and partnership. In the world
of finance that translates into a ban on speculation (or gharar) and on the charging of interest
(riba). The idea of a lender levying a straight interest charge, regardless of how the underlying
assets fare in an uncertain world, offends against these principles--though some Muslims dispute
this, arguing that the literature in sharia covering business practices is small and that terms such
as "usury" and "speculation" are subject to interpretation (Economist, 2008).

4.2 Islamic Finance Systems in the Arab world. The findings revealed that highest
weighted mean was 4.57 or Strongly Agree on the ethical principles on which Islamic finance
may bring banks closer to their clients. This means that the ethical rules in Islamic financial
banking institutions must be properly respected by the employees with a true spirit which should
mark every financial service. The Vatican's official newspaper 'L'Osservatore Romano, reported
that the Islamic banking system may help to overcome the global crisis. The Vatican said banks
should consider the ethical rules of Islamic finance to restore confidence amongst their clients at
a time of global economic crisis. On the profit share is distributed to clients instead of interest
earned had a weighted mean of 4.53 or Strongly Agree. This means that profit share, gained
from sukuk, may be an alternative to the interest. The sukuk system could possibly help the
industry sectors and support infrastructure projects through investment. Likewise, onIslam
prohibits earning of money through unfair trading practices and other actions that are socially
harmful in one way or another had a weighted mean of 4.54 or Strongly Agree. The Muslim
knows that riba is emphatically forbidden in Islam. Allaah has condemned the one who does that
and has declared war on him, and spoken of his bad end on the Day of Resurrection. Allah says,
that those who eat rib will not stand (on the Day of Resurrection) except like the standing of a
person beaten by Shaytaan (Satan) leading him to insanity. They say that Trading is only like
Ribaa, whereas Allaah has permitted trading and forbidden Ribaa. So whosoever receives an
admonition from his Lord and stops eating Ribaa, shall not be punished for the past; his case is
for Allaah (to judge); but whoever returns (to Ribaa), such are the dwellers of the Fire they
will abide therein.

Allaah will destroy Ribaa and will give increase for Sadaqaat (deeds of charity,
alms). And Allaah likes not the disbelievers, sinners [al-Baqarah 2:275, 276]

O you who believe! Fear Allaah and give up what remains (due to you) from
Ribaa (from now onward) if you are (really) believers.

And if you do not do it, then consider a notice of war from Allaah and His
Messenger but if you repent, you shall receive your capital sums. Deal not
unjustly (by asking more than your capital sums), and you shall not be dealt with
unjustly (by receiving less than your capital sums) [al-Baraqah 2:278, 279]

The Islamic financial system does not approve of any transaction that includes ribs, rather
the shareeah forbids certain transactions so as to preclude the means that lead to ripe according
to Fataawa al-Lajnah al-Daaimah. Moreover, the findings revealed that the Shariah law (a
religious code for living), reflects the gradual establishment of a parallel Islamic financial and
legal systems had a weighted mean of 4.53 or strongly agree. This means that by adopting an
Islamic Sharia law would help preserve social unity among Muslims in the Arab world. In 2012,
the British government will begin offering Muslim workers Sharia-compliant pensions. The
launching of the funds, which are supposed to be structured around a strict code of ethics and
based on the Muslim Koran and Islamic Shariah law (a religious code for living), reflects the
gradual establishment of a parallel Islamic financial and legal systems in British public life. The
Muslim families in Britain can already acquire Sharia-compliant baby bonds under the British
government's Child Trust Fund scheme. In 2008, Britain's Financial Services Authority (FSA)
authorized the establishment of the country's first Islamic insurance company as well as the
country's first Sharia MasterCard, called the Cordoba Gold MasterCard (Kern, 2011).

This further revealed that the true Islamic financial system is a system that is free of
riba, because it is a system that is derived from the Book of Allah and the Sunnah of His
Messenger (peace and blessings of Allaah be upon him) had a weighted mean of 4.51 or
Strongly Agree. This means the Prophet (peace and blessings of Allaah be upon him) cursed
the one who consumes Ribaa, the one who pays it, the one who writes it down and the two who
witness it, and he said, They are all the same. Narrated by Muslim, 1598, from the hadeeth of
Jaabir (may Allaah be pleased with him). Likewise, the Prophet (peace and blessings of Allaah
be upon him) said: A Dirham of ribs consumed knowingly by a man is worse before Allaah
then committing Zina thirty-six times. Narrated by Ahmad and al-Tabaraani, classed as Saheeh
by al-Albaani in Saheeh al-Jaami, no. 3375. Like for instance, if a loan is riba-based (as in the
case with most banks), implying that the bank will get involvement from him, then it is not
permissible for you to act as a guarantor for the borrower, because by doing so you are helping
the borrower and the bank to engage in riba (usury, interest), which is forbidden by Allaah and
His Messenger, and which the Muslims are unanimously agreed is haraam.

In conclusion, the findings of the study revealed that on Islamic banking system may
help to overcome global crisis and Islamic finance systems proven to be the best system in the
Islamic nation with a weighted mean of 3.52 or agree. On the other hand, the Islamic
finance principles of Islamic or Western banks is a solution for worldwide economic crisis with
a weighted mean of 3.5 or neutral. This means that the Western banks could use tools such as
the Islamic bonds, sukuk as collateral. Sukuk may be used to fund any projects as an
alternative solution. On the hand, Islamic sukuk system is similar to bonus of capitalist system
which is the lowest weighted mean of 3.5 or neutral. It can be observed that in sukuk, money is
invested concrete projects and profit share is distributed to clients instead of interest earned.
Pope Benedict XVI in his speech echoed on crashing financial markets saying that "money
vanishes, it is nothing" and concluded that "the only solid reality is the word of God." The
Osservatore's editor, Giovanni Maria Vian, said that "the great religions have always had a
common attention to the human dimension of the economy as reported by Corriere Della Sera.

4.3 Principles and Prohibitions. Islam has its own financial system which has very
particular characteristics. Islamic finance is the provision of financial services under Islamic law
(or Shariah) principles. Shariah literally meaning way" or "path" is the sacred law of Islam.
Shariah is derived from two primary roots of Islamic law, namely the divine revelations set forth
in the Qur'an, and the sayings and example set by the Islamic Prophet Muhammad (P.B.U.H) in
the Sunnah. Fiqh ("jurisprudence") interprets and extends the application of Sharia to questions
not directly addressed in the primary sources by including secondary sources. These secondary
sources usually include the consensus of the religious scholars embodied in ijma, and analogy
from the Qur'an and Sunnah through keys. Shia jurists replace key analogy with 'aql, intellect or
"reason". All Muslims believe Sharia is God's law, but differ as to what exactly it means.
Modernists, traditionalists and fundamentalists all hold different aspects of Shariah as do
adherents to different schools of Islamic thought and scholarship. Different countries and
cultures have varying interpretations of Shariah as well. Sharia deals with every aspect of
human life including the financial aspects. Shariah law has applied certain rules and rules. These
principles and regulations need to be adhered to make the financial system compatible with
Islam. The fundamental principles of Islamic finance were:

4.3.1 Prohibition of Interest. The prohibition of interest is often considered the
centerpiece of the Islamic banking industry. The insistence on adherence to this formula is
derived both from passages from the Qur'an and teachings of Muhammad. The central Qur'anic
passage on which Islamic finance is based reads:

Those who devour usury will not stand except as stands one whom
Satan by his touch hath driven to madness. That is because they say:
"Trade is like usury," but Allah hath permitted trade and forbidden
usury. Those who after receiving guidance from their Lord, desist, shall
be pardoned for the past; their case is for Allah (to judge); but those who
repeat (the crime) are Companions of the Fire: they will abide therein
(forever). (Robbins 2010)

The Arabic word Riba linguistically means an addition to, or an increase of, a thing over
and above its original size or amount. In the Quran, the term Riba signifies an unlawful and
forced addition to the payback value of money or goods lent from one person to another. Riba
falls under two main categories: Riba A-Nasia, which is interesting on lent money; and Riba Al-
Fadl, which is the exchange of the same commodity but of unequal quality and quantity. Both
types of Interest are harm and unlawful according to Quran and Sunnah. It was unveiled in the
Quran. Those who consume interest cannot stand [on the Day of Resurrection] except as one
stands that is being beaten by Satan into insanity. They say, "Trade is [just] like interest." But
Allah has permitted trade and has forbidden interest. So whoever has received an admonition
from his Lord and desists may have what is past, and his affair rests with Allah . But whoever
returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide
eternally therein. The Prophet Muhammad (P.B.U.H) also declared interest or Riba a sinful
deed. Abdullah Ibn Mas'ud narrated: The Apostle of Allah (P.B.U.H) cursed the one who
accepted usury, the one who paid it, the witness to it, and the one who recorded it. (Sunan of
Abu-Dawood 3327)

4.3.2 Profit and Loss Sharing. Profits sharing principle are based on the Mudarabah
principle, the proprietor of a fund's shares the profits with the working partner but he alone bears
all risks of loss. Like for instance, profits will be shared by the possessor of capital and the
entrepreneur on the basis of contractual agreement whereas losses under normal circumstances
would be written in capital (Kalif and Khan, 2009). This implies that an interest in the
profitability of the joint venture on the part of the creditor (the bank). The emphasis is not on
payment on demand at set time intervals as with an interest-based system but, rather, on
the long-term success of the joint venture. This has considerable implications at the
macroeconomic level. First, working capital would theoretically tend to be greater; and the
second, an economy with an Islamic banking system is less vulnerable to business cycles. With
such an arrangement, the level of risk is spread between the bank and the entrepreneur in
accordance with their respective participation (Akacem and Gilliam, 2002). Moreover, the
interest is prohibited in Islam while earning profit is a very permissible act. In order to make a
profit financier has to see to it that gains made on the original amount are directly related to the
risk undertaken on the investment (Siddiqui 1987). If there is no risk involved, the gains made
represent interest rather than profit. Islam enhances the concept of entrepreneurship. In a
capitalist society entrepreneur who risks losing money, earns a profit while financier is provided
a secure return in the form of interest payment on capital. In this setup entrepreneur earns profit
after payment to land labor and capital while under Islamic financial system financier cannot get
any secure return. For a return on investment he has to take on some entrepreneurial activity. The
profit-and-loss sharing arrangement has its origins in the ancient form of financing used by
Arabs since long before the advent of Islam. After the introduction of Islam, this system was
permitted to continue and was legitimatized as a financial instrument. For this historical reason,
scholars consider profit-and-loss sharing financial instruments to be the most authentic and most
promising form of Islamic contracts (Ariff, 1982).

4.3.3 Risk Sharing. Islam is against all types of exploitations including economic
exploitations. According to Islamic literature Interest is considered to be an unfair and an
exploitative instrument of financing through which lender is assured a secure return without
executing any work or sharing in the risk, while the borrower in spite of all his hard work may
end up in loss. The prohibition of interest is therefore a mechanism to establish justice between
the lender and borrower. The Islamic injunction to refrain from Riba and to share financial risk is
very instrumental to avoid the concentration of wealth and the economic exploitation of the
weak. Islamic finance promotes investment on the basis of profit and loss sharing between the
lender and the borrower. Profit and loss sharing methods ensures economic justice and
responsible financing since both parties share in the reward or failure of the investment and have,
therefore, an interest in ensuring that funds are invested wisely and profitably. Under Islamic
banking, risk is transferred partly to the lender. This forces the lender to know where the money
is spent and how. The bank becomes an active partner whenever it lends money (Akacem and
Gilliam, 2002). The principle of risk sharing can have far-reaching implications. For risks to be
shared borrowers have to be willing to provide much more information about their situation than
conventional banks would normally seek. It will include confirmation that the funds are to be
deployed in permissible activities, as well as transparency in reporting financial data about the
advancement of the business or project for which the money has been borrowed (Iqbal, 2002)

4.3.4 Prohibition of speculative behavior and play. Islam forbids all types of
Gambling, speculative and extremely uncertain behavior. Allah (S.W.T) has revealed in the
Quran. O you who believe, intoxicants, and gambling, and the altars of idols, and the games of
chance are abominations of the devil; you shall avoid them that you may succeed. (Quran 5:90).
Arabic word for uncertainty and deceit is Gharar. The juror is a fairly broad concept that
literally means deceit, risk, fraud, uncertainty or hazard that might lead to destruction or loss.
The Gharar in Islam refers to transactions about objects whose existence or description is not
certain. This may be due to knowledge of the ultimate outcome. For example, the Prophet
(P.B.U.H) has forbidden the purchase of the unborn animal in the mothers womb. Islam seeks
protection from deceit, uncertainty, economic injustice, and ignorance for so it has clearly
forbidden all business transactions, which leads to exploitation and injustice in any form to any
of the parties of a contract. Islam has also categorically and firmly prohibited all forms of
gambling.

4.3.5 Prohibition of unethical use of funds. It is not permissible in Islam to trade and
invest in products and industries declared to Haram and illegitimate in Islam like Alcohol,
Gambling, Narcotics and other socially irresponsible investments. The Muslims rely on Shari'a
law for the proposition that investment in the following things, among others are haraam
(forbidden): the charging of riba (interest), engage in excessively speculative ventures,
contractual uncertainty or ambiguity, traditional insurance protection, and industries that deal in
gaming, pornography, alcohol, tobacco, pork products, and even those that produce media
products such as gossip magazines (Holly, 2010). However, the companies that operate in
immoral industries or companies that have too much borrowing (typically defined as having debt
totaling more than 33% of the firm's stock market value). Such criteria mean that sharia-
compliant investors steer clear of highly leveraged conventional banks, a wise choice in recent
months. The assessment of what is and is not allowed under sharia is made by boards of scholars,
many of whom act as a kind of spiritual rating agency, working closely with attorneys and
bankers to make instruments and structure transactions that fit the needs of the market without
offending the requirements of their faith (Economist, 2008) .

4.4 Principles and Prohibitions. The findings revealed that the highest weighted mean
was 4.55 or Strongly Agree on financial provider must share the risk with the entrepreneur
and not just the profits. This means the provider of financial capital and the entrepreneur share
business risks in return for shares of the profits and losses. In an Islamic financial system
employs the concept of participation in the enterprise, utilizing the funds at risk on a profit-and-
loss-sharing basis. This means that investments with financial institutions are necessarily
speculative. According to Cherokee and Touzani (2008) believed that this can be excluded by
careful investment policy, diversification of risk and prudent management by Islamic financial
institutions. It is possible, that investment in Islamic financial institutions can provide potential
profit in proportion to the risk assumed to meet the differing needs of participants in the
contemporary environment and within the guidelines of the Shariah. The main principles of
Islamic finance, are: (1) The prohibition of Riba which is the taking or receiving of interest; (2)
Risk in any transaction must be shared; (3) The capital provider and the entrepreneur must share
the business risk for a share in the profit; and (4) The prohibition of speculative behavior
(Gharar), which means that gambling (Maysir) and extreme uncertainty is prohibited and
consequently, contractual obligations and disclosure of information are central obligations to
financial business transactions. The findings further revealed that Profits, symbolize successful
entrepreneurship and the creation of wealth had a weighted mean of 4.53 or Strongly Agree.
This prohibition is based on arguments of social justice, equality, and property rights. Islam
encourages the earning of profits but forbids the charging of interest because profits, determined
after the event, symbolize successful entrepreneurship and the creation of additional wealth
whereas interest, determined before the event, is a cost that is accrued irrespective of the
outcome of business operations and may not create wealth if there are job losses.

On the other hand, the concept of profit-and-loss sharing, as a basis of financial
transactions is a progressive one, as it distinguishes good performance from the bad and the
mediocre had a weighted mean of 3.59 or Agree. This means that in Islamic principles do
not allow payment or receipt of Riba (interest) but do allow profit sharing. The concept of profit-
and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good
performance from the bad and the mediocre, and encourages better resource management.
Therefore, the most distinctive element of Islamic banking is the prohibition of interest, whether
"nominal" or "excessive," simple or compound, fixed or floating. Other elements include the
emphasis on equitable contracts, the linking of finance to productivity, the desirability of profit
sharing, and the prohibition of gambling and certain types of uncertainty. These parameters
determine the nature and scope of Islamic banking, as interpreted by the Shari'a scholars that
work with Islamic financial institutions. Islamic banks focus on generating returns on
investments through investment tools that are Sharia most compliant. (Attijari Al Islami, 2011) It
can be added, that civilization and its well-being as well as business prosperity depend on
productivity and people's efforts in all directions in their own interest and profit. When people no
longer do business in order to gain a living and when they cease all gainful activity, the business
of civilization slumps and everything decays [Ibn Khaldun (744-820Hijrah 1332-1406AD).

The findings further revealed that the interest, is a cost that is accrued irrespective of
the outcome of business operations and may not create wealth if there are business losses had a
weighted mean of 3.53 or Agree. This prohibition is based on arguments of social justice,
equality, and property rights. Islam encourages the earning of profits but forbids the charging of
interest, determined ex post, symbolize successful entrepreneurship and creation of additional
wealth, whereas interest, determined ex ante, is a cost that is accrued irrespective of the outcome
of business operations and may not create wealth if there are business losses. Social justice
demands that borrowers and lenders share rewards as well as losses in an equitable manner, and
that the process of wealth accumulation and distribution in the economy be fair and
representative of true productivity. However, on the statement that only business activities that
do not violate the rules of Islamic law qualify for investment, (e.g. Business dealing with
gambling, pornography and casinos would be prohibited)got the lowest weighted mean of 3.25
or Neutral. This means that in Islam not only prohibits dealing in interest but also in liquor,
pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems
unlawful. Islamic banking is a pawn for the exploitation of an Islamic economic order. Islamic
banking, with 15 to 20% growth a year, has emerged as one of the critical pillars of the global
economy. Islamic financial institutions (IFI) are working in over 75 countries, managing between
$500 billion and $1 trillion assets (Cherrak and Touzani, 2008).

4.5 Traditions and Practices. The Islamic finance is also called Shari'ah-compliant
finance, because its financial and commercial affairs conform to Shari'ah (Islamic law). These
financial services abide by two major sources of inspiration: the Qur'an (the sacred book of
Islam), and the Sunna (practices and traditions from the time of the Prophet Muhammad). The
Islamic finance is practiced by Muslims in the Islamic world, but it is also expanding as an
international financing practice in the global securities industry. The Islamic financial market
and its products are aimed at investors who want to comply with the Islamic laws (Sharia) that
govern a Muslim's daily life. The most distinguishing features of Islamic finance are: (1) riba
(interest) is prohibited, (2) profits and losses are shared by the capital provider and the
entrepreneur; * transactions are backed up by the material, not intangible assets; (3) financing for
businesses violating religious precepts (for example, alcohol or gambling) is prohibited. Lastly,
the traditions and practices of the Muslim community by means of giving of alms is one of the
five pillars of Islam and therefore obligatory for all Muslims. Anyone failing to follow the fatwa
"will be disgraced for abusing Islam and its teachings," The Islamic Research Centre of Cairo's
Al-Azhar University, Sunni Islam's highest authority, has issued a fatwa or religious decree
saying it is a sacred duty to pay 20 percent of oil, gas and mineral revenues in the form of alms to
the poor known as zakat. The fatwa is based on a hadith (saying) of the Prophet (Mohammed)
which states that a socket of 20 percent is obligatory on all metals and minerals, solid or liquid,"
research center member and Al-Azhar teacher Mohammed Rafat Osman told AFP. Egypt, whose
constitution states that Islamic sharia law is the chief source of legislation, has not yet
institutionalized zakat, unlike some Gulf countries, such as oil giants Saudi Arabia and Kuwait.

4.6 Challenges and Opportunities. The Islam prohibits the charging and payment of
interest on financial transactions and advocates social justice and equality through the
distribution of wealth within the society (Rammal (2010). He further explained that following
these principles, the Islamic banking and finance sector has experienced rapid global acceptance
since the establishment of the first commercial Islamic bank in 1975. It was revealed that the
annual growth rates of between 15 per cent and 20 per cent, the assets of the Islamic finance
sector are expected to reach the US$2 trillion mark by the year 2015. In a 2009 report, the
development of Islamic Finance in the GCC, published by the Centre for Study of Global
Governance of the London School of Economics: the value of Shariah-compliant assets is
impressive in the GCC. The current size of the global Islamic finance industry is at over $1
trillion (AED3.68 trillion), with GCC has $262.6 billion (AED964.5 billion). It was proven that
Islamic finance in the UAE, has been recording a steady and impressive growth in the last few
years with $73 billion (AED269 billion). Industry experts estimate the worldwide industry size to
go up to $2 trillion (AED7.3 trillion) in five years. However, the Islamic banks in Malaysia
introduce more short-term sharia-compliant products to attract foreign investors. With the
development of the Middle East as a financial powerhouse and the increasing importance of local
sovereign wealth funds to the global investment markets, sharia banking has become big
business. There is already more than $1.2 trillion invested in banks that comply with strict
regulations forbidding them from either making or paying interest. Sharia-compliant banking is
the predominant form of banking in Iran and it constitutes a sizeable portion of the market in
Malaysia and Saudi Arabia (Preston, 2011).

Husain (2011) discussed the global Islamic finance assets are projected to grow to US$1.
6 trillion (RM5.13 billion) in 2012. The Islamic finance industry has experienced a compound
annual growth rate of 19 per cent from 2006 to 2010 and there are more than 10,000 publicly
traded Sarah-Shariah compliant companies in more than over 40 countries. The findings revealed
that Malaysias Islamic banking assets rose 15 percent to 389.3 billion Ringgit ($123 billion) in
the first seven months of 2011, strengthening the countrys position as the global hub for
Shariah-compliant financing, a government report. It was reported that Malaysia has the most
established Shariah regulatory and legal infrastructure in the world. The Islamic capital market
now exceeds $1 trillion and is growing as rapidly as the conventional capital market. The
prospects for Islamic banking and finance are promising. Deposits and investments continue to
rise, partly because of the desire among Muslims for Shariah-compliant investments and partly
because of the prosperity of many in the post-apartheid period. Flushed with liquidity, they are
trying to invest in Islamic Banking and Finance (IBFs), which have demonstrated impressive
growth. Problems remain though; some IBFs are of a teething nature and these obstacles may
be overcome gradually as banks become richer in experience, larger in size, and have access to
economies of scale. Other problems are due to the poor understanding of Islamic banking
principles between clients and inadequately trained employees (Goolam and Shahid, 2008).

4.7 Islamic Finance Systems Model. The Islamic financial system is based on equity
whereas the conventional banking system is loan based. Islam is not against the earning of
money. In fact, Islam prohibits earning of money through unfair trading practices and other
actions that are socially harmful in one way or another. (Lahkani, 1998) Those who swallow
down usury cannot arise except as one whom Shaitan has prostrated by (his) touch does rise.
That is because they say, trading is only like usury; and Allah has allowed trading and forbidden
usury. To whomsoever then the admonition has come from his Lord, then he desists, he shall
have what has already passed, and his affair is in the hands of Allah; and whoever returns (to it) -
these are the inmates of the fire; they shall abide in it [Sura 2:275].

The key concept is justice. Transactions that could be unjust for either the borrower or the
lender are discouraged. For any financial undertaking, the risks must be dealt. To get around the
Korans ban on interest, Islamic banking has relied heavily on what is called murabaha: a loan or
sale in which a markup is added to the transactions cast. So when a Muslim borrower goes to a
bank to buy a car or house, he agrees to a contract in which he pays back the price of the item,
plus a certain amount of profit. The bank is technically a partner, rather than simply a financier.
These methods are considered to fit the spirit of the law because they avoid the exploitation of
the borrower. Using this model, Islamic banks have produced scores of financial products for
Muslims to avoid Western style interest or risk. The result is a parallel system of Islamic
offerings that mirror those available from conventional banks: Islamic mortgages, Islamic car
loans, Islamic credit cards, and Islamic insurance. An injure, or Islamic laws, allow a bank to
buy a car or a house for a customer and then earn a profit by leasing it to them. An Islamic
investor who wants to take up a business can go to a bank and embark on a mudharaba, or
partnership, in which the bank supplies the money and the customer, brings the business skills.
The winnings are shared on a predetermined ratio; losses are borne by the bank. For insurance,
companies offer policies in which a group of subscribers creates a pool of funds that can then be
invested and drawn on in cases of legitimate claims. Unclaimed profits are then distributed
among policyholders (Power, 2009).

The practice of riba i.e. usury was so deep-rooted in society and continuance of the
practice was so undesirable, that Allah warned the believers that if they did not desist, they
should be prepared for a war against Allah and His Apostle. This warning was heeded by the
Muslim Ummah and for more than a thousand years the economies of Muslim countries were
free from reboot. With the dominance of Western influence and its suzerainty over Muslim
countries, the position changed and an interest-based economy became acceptable. Efforts in
Muslim countries to revert to an interest-free economy was hampered by many obstacles. Given
the emphasis on equity rather than debt, Iqbal and Mirakhor have argued that an interest-free
banking would lead to: more varied and numerous investment projects for which funding is
sought; more cautious, selective and possibly more effective project selection by the providers of
funds; and greater involvement of the public in investment and entrepreneurial activities,
particularly as private equity markets develop, than in the traditional fixed interest-based system.
(Akacem and Gilliam, 2002).
Summarily, the response rate was 82 percent out of 150 respondents of professional
practitioners and Islamic bankers employed in the Islamic financial institutions, Islamic banking,
non-profit organizations, and commercial organizations in GCC. Statistically, the respondents in
Saudi Arabia (13.33%), United Arab Emirates (12.00%), Bahrain (16.67%), Kuwait (13.33%),
Oman (14.00%) and Qatar (12.67%) with an aggregate of 82% were the retrieval rate
respectively. The survey was launched April 15, 2011 and ended November 1, 2011. The
researchers assumed that the retrieval rate was statistically fair and substantial. The results of this
study have practical implications in different area of specialization, especially the entrepreneurs,
business professionals, Islamic bankers, faculty, students and future researchers of Islamic
banking and finance.


5. Conclusion and Recommendation

5.1 Conclusion. Based on the findings, the following conclusions are derived:

5.1.1 Islamic finance in the Arab world established financial systems without
interest which worked at a profit and loss sharing basis.
5.1.2 The Islamic concept focuses on the profit that accepts risk, and proves
fairness, honesty, avoidance of hoarding, and avoidance of that which is
an integral part of sharia law.
5.1.3 The concept of Islamic Finance according to Shariah prohibits the fixed or
acceptance of specific interest or fees which is called Riba or usury.
5.1.4 Islamic financial institutions in the GCC are noteworthy sources of capital
and are contributing to the growth of Islamic finance globally.

5.2 Recommendation. Based on the findings and conclusions, the following
recommendations are offered:

5.2.1 Regulatory authorities shall issue standards for compliance with all laws
and regulations and responsibility pertaining to Shariah governance.
5.2.2 A uniform regulatory and legal framework supportive of an Islamic
financial system must be developed in accordance with Islamic principles
not contrary to the existing laws and regulations.
5.2.3 A well-defined rules and regulations of Islamic Financial Systems
especially in the international market and for future development of
Islamic financial systems they can offer a micro-finance as alternative
solutions in the international marketplace.
5.2.4 The Islamic financial system needs broad financial accounting systems,
standard and procedures especially in the international markets.




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