Documente Academic
Documente Profesional
Documente Cultură
By
Kashif Shakeel
2014-16
Certificate of Approval
I certify that I have read Is Islamic Banking Really Islamic by Kashif Shakeel, and
in my opinion this work meets the criteria for approving a thesis submitted in the
Partial Fulfilment of the Requirements for the Degree of BBS (Finance) at the
Institute of Management Sciences, Peshawar.
Supervisor
Name: Dr. Yasir Kamal
Designation: Assistant Professor
Signature:___________________
__
Dr
Owais
Mufti
Signature:_____________________
Declaration
Dedication
This Research is dedicated to my Family, Friends and respected teachers for their
patient and support.
Abstract
This paper studies Islamic banking that whether it is pure Islamic or not. Some Islamic
scholars say that Islamic banks are pure Islamic while there are others which have
different views about Islamic banks. So to check this, questionnaire survey and
interviews of Islamic scholars, Islamic banks officials and conventional banks officials
are conducted. Sample size of 50 is taken through convenient sampling technique for
the questionnaire while 3 Islamic scholars, 2 Islamic bank officials and 2 conventional
bank officials are interviewed. After studying Islamic banking and the result of
questionnaires and surveys, it is revealed that Islamic banks are apparently working
according to shariah rules and regulations. And the result also shows that Islamic
banking is Asset backed banking and fulfils the Shariah requirements in its transactions.
But on the other hand, purposes of Islamic banks are not according to Islam which
makes difference of opinions among Islamic scholars and people. To maintain its
separate position, Islamic banks should avoid such practices which are not for the
welfare of people and made just to earn profit to make the purpose also Islamic.
Acknowledgment
I am grateful to Almighty ALLAH, Whose blessings have always been source of
encouragement for us and who gave us the ability to complete this task. I also wish my
heartiest thanks to my parents who supported me financially as well as morally
throughout my academic career and pray for me all the time. I can never turn down
their efforts they put forward for my bright and prosperous future.
I also dedicate this dissertation to my many friends and who have supported me
throughout the process. I will always appreciate all they have done, especially
I can never forget guidance the efforts of my humble teachers. I am very thankful to
them who helped me during the course of study and motivated me all the time. I am
thankful to my supervisor Sir Dr. Yasir Kamal for his kind support and help in this
thesis.
Kashif Shakeel
Table of contents
Declaration.................................................................................................................................ii
Dedication.................................................................................................................................iii
Abstract:....................................................................................................................................iv
Acknowledgment.......................................................................................................................v
Chapter 1: Introduction:.............................................................................................................1
1.1 Broad overview:.........................................................................................................1
1.2 Definition of Islamic banking:...................................................................................2
1.3 Islamic banking in Pakistan:......................................................................................3
1.4 Sariah compliance Modes of Islamic financing:.......................................................3
1.5 Importance of the topic:.............................................................................................5
1.6 Objectives:.................................................................................................................6
1.7 Research questions:...................................................................................................6
1.8 Scheme of Study:.......................................................................................................6
Chapter 2 Literature Review:.....................................................................................................6
Chapter 3: Methodology:.........................................................................................................13
3.1 Data sources:............................................................................................................13
3.2 Data types:...............................................................................................................13
3.3 Data collection and Sample size:.............................................................................13
Chapter 4: Analysis and Findings:...........................................................................................14
Chapter 1: Introduction
Besides this according to Mansoori, (2011) some religious scholars say that its
pure Islamic and they have arguments about its validity. On the other hand there are
other scholars which say that Islamic banking is not pure Islamic. It is just a copy of
conventional banking and is made to deceive people in the name of Islam and they also
have strong arguments to support their opinion.
According to Khan( 2015) Murabaha means sale on profit, in Murabaha contract the
seller sell the product to buyer but also tell the actual price and the profit. But for the
valid Murabaha certain conditions are necessary which must be fulfilled 1) the asset
which is going to be sell or purchase must be exist. 2) And the asset must be in the
ownership of seller. 3) Buyer and seller must be agree on the price of the asset.
2) Ijarah:
According to Kamali H.M (2007)Ijarah derives from the root word ajara to
recompense, compensate or give a consideration and return. Ajr refers to a workers
wage, and ujrah to rental payment. In its juristic usage, ijarah primarily refers to both a
rental as well as a hire contract that engages the services of persons."
In this mode of financing Islamic banks lease a specific asset to a customer for a
specific rental payment but the ownership title and all the risk related to asset remained
with the bank and the customer (lessee) is responsible of that loss only which is caused
miss use of asset by the customer. The bench mark used for the payment of rent is
interbank rate. The leased property may be the in the ownership of joint partners and
the rental income is contributed among themselves according to the agreed rate. At the
end of the leased period the asset may return to lessor (bank) or purchased by the
customer or bank give the asset to client as gift.
3) Bai Muajjal:
This mode of financing is based on deferred payment in this type of Islamic financing
Islamic bank purchased the desired asset for the customer and the customer paid the
amount in some later date the only difference between Murabah and Muajjal is that in
Murabaha the cost of the asset is disclosed while in Muajjal the cost of the asset is not
disclosed to the customer.
4) Salam:
It is basically used for financing agriculture. In this type of financing the bank
purchased products for spot payment with deferred delivery. It fulfils the needs of
formers and also some small manufacturers. These manufacturers and formers get
funds for their productions and seeds and when the products are manufactured or the
4
crops are grown then it is given to bank at the agreed price which is mostly less than
the market price of the product. To secure himself the bank can also ask for guarantor
which ensure the delivery of the goods or can also take some collaterals to as a security
which is sold in case if the goods are not delivered to bank up to agreed date and fulfil
his need by purchasing the same good from market or take his money.
5) Diminishing Musharakah:
Diminishing Musharakah is a mode of financing which basically finance people for the
purchase of houses. In this type of financing in which a contract is made between bank
and customer in this when a customer wants to purchase house then bank finance the
customer but some money also share of funds are paid by the purchaser and the
remaining is paid by bank and the ownership of the property is distributed among bank
and customer in the same proportion. Bank gives his share to customer on rent basis.
The portion of bank is divided in to small pieces. In this contract the customer promise
to buy the portion of bank gradually or we can say in instalments. Then customer
purchase the small pieces of land through periodic payments which include the
payment of rent and the purchase process continue until the ownership is completely
transferred to client from bank.
type of banking system but there are some other Islamic scholars which says that
current Islamic banking is not according to purely Islamic it is made just to deceive
Muslims in the name of Islam. So my topic Is Islamic banking really Islamic will
help in determining that the current practices of Islamic banking fulfil the desire of
Muslims or not.
1.6 Objectives:
There is lot of confusion about Islamic banking. That whether the current Islamic
banking is pure Islamic or not and it work according to the rules of Islam and also
achieve the purpose of Islamic financing or not. The objective of my topic is this that
whether this current banking system is really Islamic or just a subterfuge.
name instead of those names which traditional conventional banks used in order to
make their product according to Islamic principles and rules. Islamic banking should
revise its different product specially Murabahah to make it pure Islamic and according
to Islam and sharih rules.
According to Shaikh (2011) who studied the most widely used mode of Islamic banking
and concluded that apparently Murabahah is not too much different from loan given by
banks but in reality it is not like conventional banks loan it has some good features
which differentiate Islamic banking from traditional conventional banking. But still
Islamic banks should use separate indexes for Murabahah and should also make some
operational changes to remove operational similarities with conventional banking and
to maintain its unique identity. Through this way Islamic banks can get more support
from depositors and improve the level of confidence of depositors.
Muajjal or baithaman is also a mode of Islamic financing which is based on deferred
payment in this the goods are immediately delivered and payment is made in some later
dates so for this delay of payment Islamic banks charge some extra money. And it is
permissible from Islamic point of view because in Islam one can charge high prices
than the current market price for deferred payment.(Ahmad, 1993)
Salam is also a mode of Islamic financing. In Salam payment is made in advance and
the delivery of goods is made in some later date and the bank give less price than they
can get in market by selling the product in the market by spot selling but according to
Islamic principles it is permissible profit for bank or any other financial institution
because of later delivery of products or goods one can get extra benefits. It is mostly
used to finance agriculture sector in which Islamic banks give money to formers for
purchase of seeds and minerals and make a contract with them to purchase an agreed
amount of product from them in the same amount of money Islamic banks also ask for
9
a guarantee or mortgage to secure their money and ensure the delivery of products in
case of guarantor if the farmer default and cannot give goods to financer then Islamic
banks can ask guarantor to deliver the product and in case of mortgage if the former or
seller default then bank can sell the mortgaged item and can purchase the same amount
of product from the market or can get back their money. (Usmani, 2002)
According to Muhammad Hanif & Syed Tahir Hijazi, (2010) who conducted study on
Islamic house financing which is none as Diminishing Musharka. In every local
market there is large number of customers of house financing so to fulfil their needs
Islamic financial institutions start this mode of financing but it needs some serious
considerations and need some changes in the value and in variable rentals but if they
use real Musharaka then their demand effect. Islamic banks now competing with
conventional banking and thats why they offer such product and services which are
very close to conventional banking which a create a bad perception about Islamic
banking in the eyes of its customers. So to maintain a separate identity Islamic banks
should not follow the rules of capitalism and it must be visible from their practices. In
true Musharaka profit and loss must be shared between the partners and but in Islamic
house financing financer earn more money than conventional banks. The sole reason of
Islamic banks is that they must be shairh compliance. But due to fear of losing of
customers Islamic banks is not working purely according to shariah rules so Islamic
banks should not lose their identity due to this and Islamic finance practitioners should
do extra ordinary efforts to convert society to this new system.
Musharakah is contract in which two partners combined capital and share profit and
loss. Islamic banks introduced another form of Musharakah for those people who wants
to purchase house for residential purpose which is named as Diminishing Musharahkah
in which one partner (bank) do contract with another partner (customer) for the
10
purchase of real estate for house in this some share is paid by purchaser of land and the
remaining is given by bank and then divide the full land into small pieces and fix the
price of these pieces the purchaser of land will purchased the land in instalments or in
lump sum the purchase of shares continues until all the shares purchased by the
purchaser of land from bank and this technique is approved since the first Islamic
conference held in Dubai of 23 to 25 of jumadu sanni 1399hijri.(Mahdi, 1995)
Ijarah is another form of Islamic financing which in this type of financing Islamic
bank don not directly provide funds to the client but instead of funds bank provide the
asset which is needed by the customer according to the specifications provided by the
customer and then give this asset on lease to the client against fix rental payments and
the time period of lease is determined by the mutual contract between bank and
customer which may be from 3 moths to 5 years or more which is determined
according to the nature of the asset. In the lease period the ownership of the asset is
remain with the bank but in the custody of customer (lessee) during this period the
maintenance of the asset is the responsibility of the bank because bank gets benefit of
the asset as a rent. And after the expiry of the leasing period the asset revert back to the
bank. This leasing of asset is permissible according to Islamic laws in which the user of
the asset gets benefit against the payment of rent (Ahmad, 1993).
11
12
as us Muslims have that is why we cannot say that Islamic banks are un-Islamic
because of some loopholes. He also argues that all these loopholes and deficiencies in
Islamic banking system are all because of us because we as Muslims do not practice
Islam in a perfect way or near to perfect. If we go by Islamic rules and dedicate
attention towards Islamic banking system then these deficiencies in Islamic banking
system would vanish totally.
Ibrahim Essa also agrees that Islamic banking is totally in accordance with Shariah
principles and there is no loophole whatsoever in Islamic banking. It is also stressed
upon that Government of Pakistan should give unconditional support to Islamic banks
in order to keep them thrived and maintained as the Islamic principles propose.
Question 2: Should Islamic banks eliminate some of its practices? If yes then which
practices should be eliminated?
Molana Abdur Rehman and Molana Rehmatullah agree to the fact that debt instruments
of Islamic banks should be eliminated so that the purpose of Islamic banking system
could fully turn its way to Islamic principles and Islamic banks should instead divert
their practices to equity and profit & loss based. While Molana Ibraheem Essa argues
that Islamic banks are fully Islamic based and there are no practices that do not follow
Islamic principles.
15
16
4.4 Questionnaire:
Questionnaire is made on the basis of following variables to check that is Islamic banks
work under perfect Shariah rules or not. All the Questions are made simple so that
everyone can understand it. To know the perception and experience of people about
Islamic banking.
a) Riba (interest) free banking. b) Equity based banking.
1.
that are people in favour of giving money on interest or not because trading of money
as commodity is prohibited and called it interest.
7. Seventh question is about the current Islamic banking practices are according to profit
and loss sharing basis or not which is the ideal way of financing in Islam. Or Islamic
banks do other than profit and loss sharing basis finance which is mostly criticised by
most of the religious scholars.
8. Eighth question is about whether the people are also in favour of profit and loss or they
want fixed return. To know that whether the people behaviour is suitable for Islamic
banks or not and also know that Islamic banks using profit and loss according to
Islamic practices are they just use the name and do something which is worse than
conventional banks.
9. Ninth question is about ethical consideration that is Islamic banks involved in corporate
social responsibility or not because Islam practices for the welfare of whole society not
only for the investors.
10. The last question is about the purpose of Islamic banking that is it beneficial for the
poor people of society as Shriah suggest or not.
The Questionnaire is made to know about the customer perception about the Islamic
banks.
18
Valid
Frequency
Percent
Valid Percent
Cumulative Percent
Agree
27
54.0
54.0
54.0
Neutral
14.0
14.0
68.0
Disagree
16
32.0
32.0
100.0
Total
50
100.0
100.0
Interpretation:
The first question asked the respondents is about interest that whether the current
Islamic banking is interest free as they claim or not. So 27 people out of fifty are agree
that Islamic banking is really interest free while 7 people are neutral and 16 are
disagree with the statement.
19
Valid
Frequency
Percent
Valid Percent
Percent
Agree
27
54.0
54.0
54.0
Neutral
11
22.0
22.0
76.0
Disagree
12
24.0
24.0
100.0
Total
50
100.0
100.0
Interpretation:
The second question asked the responds are also about interest that is interest is the
only factor which makes any bank Islamic or Un-Islamic to know that whether people
call it Islamic just because of interest or there any other factors of which are according
to Islam. In response of this 27 respondents are agree, 11 are neutral and 12 are
disagree that interest is not the only factor which makes a bank Islamic or Un-Islamic.
20
Valid
Frequency
Percent
Valid Percent
Percent
Agree
36
72.0
72.0
72.0
Neutral
12.0
12.0
84.0
Disagree
16.0
16.0
100.0
Total
50
100.0
100.0
Interpretation:
Third question asked from people is that banks should eliminate interest or not to know
that whether people are in favour of interest free banking or not. Because an interest
free bank can does well in such society where people are in favour of Interest free
banking. In response of this question 36 respondents want to eliminate interest from
banking system, 6 people are neutral while 8 people are do not want that interest should
be eliminate.
21
Valid
Frequency
Percent
Valid Percent
Percent
Agree
25
50.0
50.0
50.0
Neutral
18
36.0
36.0
86.0
Disagree
14.0
14.0
100.0
Total
50
100.0
100.0
Interpretation:
Fourth question about equity based banking whether the current Islamic banking is
really equity based as they claim or still based on debt transections. In response of this
25 people are agree that Islamic banking equity based, 18 are neutral while 7 are
disagree that Islamic banks are not totally equity based.
22
Valid
Frequency
Percent
Valid Percent
Percent
Agree
25
50.0
50.0
50.0
Neutral
18
36.0
36.0
86.0
Disagree
14.0
14.0
100.0
Total
50
100.0
100.0
Interpretation:
Fifth question is about whether Using commodity instead of money is good for country
economy or not because Islamic banks argue that financing which is baked by asset is
good for country economy instead of that selling and purchasing money make money
on money. So in response of this question 25 people are agree that it is good for
countries economy, 18 are neutral while 7 are disagree.
23
Valid
Frequency
Percent
Valid Percent
Percent
Agree
21
42.0
42.0
42.0
Neutral
16.0
16.0
58.0
Disagree
21
42.0
42.0
100.0
Total
50
100.0
100.0
Interpretation:
Sixth question asked form the responds is that whether they agree or not that money
should be traded as commodity or not means they want return on their money or they
want to do trade and earn money. This question is asked from people that the current
situation is in favour of Islamic bank or people just want Islamic banking but they do
nothing for the Islamization of banking. In response of this 21 people are agree that
money should be traded as commodity, 8 are neutral while the remaining 21 are
disagree.
24
Valid
Frequency
Percent
Valid Percent
Percent
Agree
31
62.0
62.0
62.0
Neutral
11
22.0
22.0
84.0
Disagree
16.0
16.0
100.0
Total
50
100.0
100.0
Interpretation:
Seventh question is asked about whether the current Islamic banking is Profit and Loss
Sharing bases or not. Profit and Loss Sharing is the ideal mode in Islam for financing
any business so if Islamic banks are based on profit and loss basis then it is good
otherwise it is not purely according to Islamic principles. So in response of this
question 31 of the respondents are agree that Islamic banking is Profit and loss sharing
25
basis 11 are neutral while the remaining 8 are disagree that current Islamic banking is
not based on Profit and Loss Sharing.
Do you prefer PLS (profit and loss sharing) return over
fixed return?
Cumulative
Valid
Frequency
Percent
Valid Percent
Percent
Agree
33
66.0
66.0
66.0
Neutral
16.0
16.0
82.0
Disagree
18.0
18.0
100.0
Total
50
100.0
100.0
Interpretation:
In eighth question we asked that whether the people are also in favour of profit and loss
sharing based banking or they want fixed return which is interest free and they do not
want to take risk by investing their money in Profit and Loss Sharing based banking
transection. Through this it can be can be concluded that Islamic banks must be totally
profit and loss sharing basis or use other than PLS basis transections, for such people
which do not want to invest in profit and loss sharing basis and want interest free
26
income. But still Islamic banks transections have risk in contrast with conventional
banking. In response of this question 33 people are prefer PLS, 8 respondents neutral
while 9 respondents are disagree and give preference to fixed return.
Islamic banks involved in corporate social responsibility.
Cumulative
Valid
Frequency
Percent
Valid Percent
Percent
Agree
30
60.0
60.0
60.0
Neutral
15
30.0
30.0
90.0
Disagree
10.0
10.0
100.0
Total
50
100.0
100.0
Interpretation:
Islam seeks benefit of the whole society not only of few people so it is very important
for Islamic banks that they should include in corporate social responsibility to make the
purposes also Islamic because. Because Islamic banks use the name of Islam so they
should make their purposes of transections also Islamic to make this banking system
27
truly according to shairah rules and principles. So 30 respondents agree that Islamic
banks involved in corporate social responsibility, 15 are neutral while 5 respondents are
disagree.
Islamic banks are beneficial for poor people of the
society.
Cumulative
Frequency
Percent
Valid Percent
Percent
23
46.0
46.0
46.0
Neutral
18.0
18.0
64.0
Disagree
18
36.0
36.0
100.0
Total
50
100.0
100.0
Valid Agree
In response 23 respondents are agree that Islamic banks are beneficial for the poor
people of the society, 9 are neutral while 18 are disagree.
Chapter 5: Conclusion
Study of different articles about Islamic banking system and the results of
questionnaires and interviews show that current Islamic banking are apparently
working according to shariah rules and regulations. Islamic banking is asset based and
money has also no value in Islamic banking. It is only used as medium of exchange but
there are some flaws in Islamic banking means current Islamic banking is not ideal
banking of Islam. Current Islamic banking is not made for the purpose of welfare of
people. Islamic banking is doing all the same functions of the conventional banks but in
Islamic way, their transactions are according to the rules of shariah but not ideal
banking of Islam. On transaction basis it can be called as Islamic but on purpose basis
most of people and Islamic scholars have some queries about Islamic banking.
Recommendations:
Islamic banks are based on Islamic principles. So the first objective of Islamic banks
should be the benefit of the Muslims and benefit of the whole society as Islam teaches
us. And the purposes of Islamic banks should also be according to the Islamic
principles, and Islamic banks should also eliminate some of its practices which are very
much closer to conventional bank practices to maintain its separate identity. So to avoid
the confusion between Islamic banking and conventional banking, Islamic banks should
avoid all the agency relationships and also the debt modes of financing. Alongside this,
Islamic banks should make full banking system on profit and loss sharing basis but
Islamic banks alone cannot do this. But for the Implementation of this type of banking
system government support is very necessary, and the customers of Islamic banks
should also be loyal to bank and should also follow the sayings of Allah and
29
Muhammad (S.A.W) only in this case Islamic banks can work fully according to the
rules and teachings of Islamic.
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Usmani, T. (2002). Islamic Finance.
31
Retrieved
from
2.Agree
3.Neutral
2.
4.Disagree
Is
(interest) the only factor that makes a bank Islamic or Un-Islamic?
2.Agree
3.
Riba
3.Neutral
4.Disagree
2.Agree
3.Neutral
4.Disagree
2.Agree
3.Neutral
4.Disagree
32
Should
banks
eliminate
interest?
2.
2.Agree
3.Neutral
3.
4.Disagree
commodity.
2.Agree
3.Neutral
4.Disagree
2.Agree
3.Neutral
4.Disagree
2.
Do you prefer PLS (profit and Loss) return over fixed return?
2.Agree
3.Neutral
4.Disagree
Part 4: Ethics
1. Islamic banks involved in corporate social responsibility.
2.Agree
3.Neutral
4.Disagree
2.
2.Agree
3.Neutral
4.Disagree
33
Money
should be
traded as