Islamic banking is based on two main financial principles. First is the prohibition of the collection and payment of interests. Secondly, the development of financial instruments is to be done on the basis of profit and loss sharing.
The crux of Islamic banking is freedom from Ribā, which is commonly equated with interest (the fee charged by a lender to a borrower for the use of borrowed money).The Prohibition of interest in Islam has its origins in the Qur’an and the authentic traditions (hadith) of Prophet Muhammad (peace be upon him). The Holy Quran explicitly prohibits interest, and there is no difference of opinion between any school of thought on the prohibition of interest in Islamic Shariah.
‘‘Those who charge interest are in the same position as
those controlled by the devil's influence. This is because they claim that interest is the same as commerce.
However, God permits commerce, and prohibits interest. Thus, whoever heeds this
commandment from his Lord, and refrains from interest, he may keep his past earnings, and his judgment rests
with God. As for those who persist in interest, they incur Hell, wherein they
abide forever’’
According to the teaching of the holy prophet Muhammad (peace be upon him), everyone who has something to do with ribā, whether he is one of the main parties involved or is a middleman or facilitator, has been cursed. The companion of the prophet Jabir (may Allah be pleased with him) reported:
“The Messenger of Allah cursed the
one who accepted interest, the one who paid it, the one who recorded it, and
the two witnesses to it.” He said: “They are all alike.”
Islam's prohibition of interest
and usury was not unprecedented. The early Jewish and Christian traditions also
forbade interest. Refer to Deuteronomy 23:19, Ezekiel 18:8-9, Matthew 21:12-13.
1.2 Origin of Modern day Islamic Banking.
The principles on which modern day Islamic banking operate started during the period of the prophet Muhammad (PBUH). However the first modern experiment with Islamic banking was undertaken in Egypt and took the form of savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963.The model for the experiment was to comply with Islamic principles, i.e. it was barred from charging and paying interest. This experiment lasted until 1967 by which time there were nine such banks in the country.[5] In 1972, the Mit Ghamr Savings project became part of Nasser Social Bank which, currently, is still in business in Egypt.
Beginning in 1974, several Islamic banks had been established which include: Dubai Islamic Bank in 1975, Faisal Islamic Bank of Sudan in 1977, Faisal Islamic Egyptian Bank and Islamic Bank of Jordan in 1978, Islamic Bank of Bahrain in 1979, the International Islamic Bank of Investment and Development, Luxembourg in 1980 and Bank Islam Malaysia Berhad in 1983. Today, there are more than 300 Islamic banks and financial institutions around the globe spread over more than 70 countries operating partially or fully on an interest-free basis with Malaysia being the unchallenged leader in this industry.
1.3 Global Trends in Islamic Banking.
In recent years, the expansion of Islamic banking and finance has accelerated with countries as economically significant as United Kingdom, United States, Japan, and China seriously considering some form of Shari’ah-compliant, finance for their domestic market, thereby providing credibility to the phenomenon. The system received more credibility with the 2008 global financial crisis. International Monetary Fund analysis concluded that Islamic banks overall are better poised to withstand additional stress and experts in Islamic banking claim that the global economic downturn would never have happened if the banking sector had pegged its business on the Islamic model which is not in favor of reckless offering of credit offered by conventional banks that was a major factor in the economic crisis.
1.4 Islamic Banking in East Africa
In East Africa, Islamic banking is already being practiced in Kenya, Tanzania and Rwanda. The Central Bank of Kenya announced that Islamic banking had managed to bring more of the un banked population into banking halls. The first two fully-fledged Islamic banks, Gulf African Bank and First Community Bank were licensed mid-2008 and five other conventional banks had introduced Islamic banking products, the Central Bank of Kenya was impressed that the Islamic banks that had operated for hardly a year had made milestones
In Tanzania, Stanbic
Bank Tanzania, a member of the Standard Bank Group also launched Shari’ah
banking products in 2008. Only a day after Standard Bank made its Islamic
banking announcement,
1.5 Status of Islamic Banking in
On June 16, 2008 at the Organization of Islamic Conference (OIC) Business Forum in Kampala, among the results was the idea of opening an Islamic Bank in Uganda. Bank of Uganda (BOU) worked on the amendment to the Financial Institutions Act, 2004 and submitted the proposed amendment to the Ministry of Finance. The amendments were approved by the Cabinet and tabled before parliament were views were gathered from the relevant stake holders.
The Financial Institutions Amendment Act 2016 was passed by the parliament and assented to by the president on the 19th January 2016 for among others to provide for Islamic banking as an alternative form of banking in Uganda. Bank of Uganda engaged experts in the field to work on the enabling regulations for proper implementation of the system. So far a draft of such regulations was submitted to the finance ministry and are awaiting clearance. Bank of Uganda Governor said that the Central Bank will begin licensing Islamic Banking financial institutions before the end of 2017.
2.0 MODES OF FINANCING UNDER ISLAMIC BANKING
The people not conversant with the principles of
If he/she wants to help the borrower, he must rescind from any claim to any additional amount. His principal will be secured and guaranteed, but no return over and above the principal amount is legitimate. But if he is advancing money to share the profits earned by the other party, he can claim a stipulated proportion of profit actually earned by him, and must share his loss also, if he suffers any.
It is thus obvious that exclusion of interest from financial activities does not necessarily mean that the financier cannot earn a profit. If financing is meant for a commercial purpose, it can be based on the concept of profit and loss sharing, for which mushārakah (joint venture) and mudārabah (profit sharing) have been designed since the very inception of the Islamic commercial law. There are, however, some sectors where financing on the basis of mushārakah or mudārabah is not workable or feasible for one reason or another. For such sectors the contemporary scholars have suggested some other instruments which can be used for the purpose of financing, like murābahah (cost plus), ijārah (leasing), salam (forward sale)or istisnā (manufacturing contract) discussed below;
2.1
Musharakah
(joint venture)
‘Musharakah’ is a word of Arabic origin which literally means sharing. In the context of business and trade it means a joint enterprise in which all the partners share the profit or loss of the joint venture.
Among the basic rules of Musharakah is that it is a relationship established by the parties through a mutual contract. Therefore, it goes without saying that all the necessary ingredients of a valid contract must be present here also. For example, the parties should be capable of entering into a contract; the contract must take place with free consent of the parties without any duress, fraud or misrepresentation, etc.
There are however certain ingredients which are peculiar to the contract of “musharakah” and these include; the proportion of profit to be distributed between the partners must be agreed upon at the time of effecting the contract. If no such proportion has been determined, the contract is not valid in Shari‘ah, and all the Muslim jurists are unanimous on the point that each partner shall suffer the loss exactly according to the ratio of his investment.
Diminishing Musharakah is also a form of musharakah, developed in the near past, and according to this concept, a financier and his client participate either in the joint ownership of a property or an equipment, or in a joint commercial enterprise. The share of the financier is further divided into a number of units and it is understood that the client will purchase the units of the share of the financier one by one periodically, thus increasing his own share till all the units of the financier are purchased by him so as to make him the sole owner of the property, or the commercial enterprise, as the case may be.
2.2 Mudarabah (profit sharing)
“Mudarabah” is a special kind of partnership where one partner gives money to another for investing in a commercial enterprise. The investment comes from the first partner who is called “rabb-ul-mal” (investors), while the management and work is an exclusive responsibility of the other, who is called “mudarib” (manager).
It is necessary for the validity of mudarabah that the parties agree, right at the beginning, on a definite proportion of the actual profit to which each one of them is entitled. However, they cannot allocate a lump sum amount of profit for any party, nor can they determine the share of any party at a specific rate tied up with the capital. For example, if the capital is Ushs. 100,000/- they cannot agree on a condition that Ushs. 10,000/- out of the profit shall be the share of the mudarib, nor can they say that 20% of the capital shall be given to rabb-ul-mal. However, they can agree that 40% of the actual profit shall go to the mudarib and 60% to the rabb-ul-mal or vice versa.
Unlike Musharakah, in mudarabah the loss, if any, is suffered by the rabb-ul-mal only, because the mudarib does not invest anything. His loss is restricted to the fact that his labor has gone in vain and his work has not brought any fruit to him. However, this principle is subject to a condition that the mudarib has worked with due diligence which is normally required for the business of that type. If he has worked with negligence or has committed dishonesty, he shall be liable for the loss caused by his negligence or misconduct.
2.3 Murabahah (cost plus)
“Murabahah” refers to a particular kind of sale. If a seller agrees with his buyer to provide him a specific commodity on a certain profit added to his cost, it is called a murabahah transaction. The basic ingredient of murabahah is that the seller discloses the actual cost he has incurred in acquiring the commodity, and then adds some profit thereon. This profit may be in lump sum or may be based on a percentage.
Some Basic Rules of Sale include; the subject of sale must be existing at the time of sale, subject of sale should be a thing which is used for a halal (lawful) purpose, the subject of sale must be in the ownership of the seller at the time of sale and in this context it is a basic principle of Shari‘ah that one cannot claim a profit or a fee for a property the risk of which was never borne by him and applying this principle to murabahah, the seller cannot claim a profit over a property which never remained under his risk for a moment.
Murābahah is valid only where the exact cost of a commodity can be ascertained. If the exact cost cannot be ascertained, the commodity cannot be sold on murābahah basis. In this case the commodity must be sold on musāwamah (bargaining) basis i.e. without any reference to the cost or to the ratio of profit / mark-up. The price of the commodity in such cases shall be determined in lump sum by mutual consent. Two examples will illustrate this point
A purchased a pair of shoes for U$. 100. He wants to sell it on murābahah with 10% mark-up. The exact cost is known. The murābahah sale is valid.
A purchased a ready - made suit with a pair of shoes in a single transaction, for a lump sum price of U$. 500. A can sell the suit including shoes on murābahah. But he cannot sell the shoes separately on murābahah, because the individual cost of the shoes is unknown. If he wants to sell the shoes separately, he must sell it at a lump sum price without reference to the cost or to the mark-up.
2.4
Ijarah (leasing)
“Ijarah” means ‘to give something on rent’. In the Islamic jurisprudence, the term ‘ijarah’ relates to the usufructs of assets and properties. ‘Ijarah’ in this sense means ‘to transfer the usufruct of a particular property to another person in exchange for a rent claimed from him.’ In this case, the term ‘ijarah’ is analogous to the English term ‘leasing’. The rules of ijarah, in the sense of leasing, are very much analogous to the rules of sale, because in both cases something is transferred to another person for a valuable consideration. The only difference between ijarah and sale is that in the latter case the corpus of the property is transferred to the purchaser, while in the case of ijarah, the corpus of the property remains in the ownership of the transferor, but only its usufruct i.e. the right to use it, is transferred to the lessee.
2.5
Salam (forward Sale) and Istisna
(manufacturing contract).
It is one of the
basic conditions for the validity of a sale in
2.5.1 Salam (forward sale)
Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. Here the price is cash, but the supply of the purchased goods is deferred.
The
permissibility of Salam was an exception to the general rule that prohibits the
forward sales, and therefore, it was subjected to some strict conditions. These
conditions include; it is necessary for the validity of salam that the buyer
pays the price in full to the seller at the time of effecting the sale, Salam
can be effected in those commodities only the quality and quantity of which can
be specified exactly, the quality of the commodity (intended to be purchased
through salam) should be fully specified leaving no ambiguity which may lead to
a dispute, the quantity of the commodity should be agreed upon in unequivocal
terms, the exact date and place of delivery must be specified in the contract, Salam
cannot be effected in respect of things which must be delivered at spot. For
example, if gold is purchased in exchange of silver, it is necessary, according
to
It is evident
that salam was allowed by
2.5.2 Istisna (manufacturing contract)
‘Istisna’’ is the second kind of sale where a commodity is transacted before it comes into existence. It means to order a manufacturer to manufacture a specific commodity for the purchaser. But it is necessary for the validity of istisna’ that the price is fixed with the consent of the parties and that necessary specification of the commodity (intended to be manufactured) is fully settled between them.
Keeping in view this nature of istisna, there are several points of difference between istisna’ and salam which are summarized below:
- The subject of istisna’ is always a thing which needs manufacturing, while salam can be effected on anything, no matter whether it needs manufacturing or not.
- It is necessary for salam that the price is paid in full in advance, while it is not necessary in istisna’.
- The contract of salam, once effected, cannot be cancelled unilaterally, while the contract of istisna’ can be cancelled before the manufacturer starts the work.
- The time of delivery is an essential part of the sale in salam while it is not necessary in istisna’ that the time of delivery is fixed.
3.0
SUKUK (Islamic Bonds)
Sukuk refers to the Islamic equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk securities are structured to comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest.
The basic concept behind issuing Islamic Sukuk, is for the holders of the Sukuk to share in the profits of large enterprises or in their revenues and among the benefits of Sukuk include; Sukuk enables financing large enterprises that are beyond the ability of a single party to finance, Sukuk represent an excellent way of managing liquidity for banks and Islamic financial institutions, when these are in need of disposing of excess liquidity they may purchase Sukuk and when they are in need of liquidity, they may sell their Sukuk into the secondary market.
The type of sukuk also depend upon the type of Islamic modes of financing and trades used in its structuring like mudaraba sukuk, musharaka sukuk, Ijara sukuk, murabaha sukuk, Salam sukuk, Isitisna sukuk and Hybrid sukuk.
4.0 THE SHARIA’H
ADVISORY BOARD.
One distinct feature of the modern Islamic banking movement is the role of the Shari’ah Advisory Board, which forms an integral part of an Islamic bank. The shariah board is a key element of the structure of an Islamic financial institution, carrying the responsibility of ensuring that all products and services offered by that institution are fully compliant with the principles of shariah law. Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish a Shariah Supervisory Board (SSB) to advise them and to ensure that the operations and activities of the banking institutions comply with Shariah principles.
4.1 The main duties and
responsibilities of the shari’ah board are:
Supervise the Shari'ah compliance of all the transactions in the Bank. The Shari'ah auditors ensure that all the transactions are carried out in strict compliance to Islamic principles of banking.
To approve the Shari’ah aspects in the memorandum of association, articles of association and regulations as well as the forms, policies and procedures used by the bank.
To approve the standard agreements and contracts pertaining to the bank’s financial transactions.
To give a Shari’ah opinion regarding the development of Shari'ah compliant investment and financing products introduced by the bank and issues fatwas / rulings on the questions and transactions submitted to it.
To give Shari’ah opinion regarding the financial Statements of the bank at the end of the financial year.
To write-off the prohibited profits earned through the non complaint ways to the provisions of Islamic Principle and spend it in charitable purposes.
To ensure that the distribution of the profits and bearing of the loss are calculated in accordance with the Islamic Shari’ah principle.
To ensure that Zakāt account is calculated in accordance with the Islamic Shari’ah principle and Zakāt standards of the Accounting and Auditing Organization for Islamic Financial Institutions, and notify the shareholders about the imposed Zakāt per share.
To present an annual report in front of the General Assembly of the bank encompasses the Board’s opinion about the bank’s transaction and operations which are done during the year and to which extent that the bank’s management has committed to the Board fatwas’ decisions and direction.
4.2 Qualifications of Shari’ah Board Members
Given the importance of the role of the Shari’ah boards in ensuring the conformity of the institution’s offerings, boards typically include acknowledged experts, such as contemporary Islamic scholars. Scholars of high repute with extensive experience in law, economics and banking systems and specializing in law and finance as prescribed by Islamic Shari’ah make up the Shari’ah Board. It is common for such scholars to sit on the Shari’ah boards of multiple institutions; some senior scholars may sit on the boards of 15 or more institutions.
4.3
Reporting structure.
With regard to the reporting structure, the Shari’ah Committee reports functionally to the Board of Directors of the Islamic financial institution. This reporting structure reflects the status of the Shari’ah Committee as an independent body of the Islamic financial institution
5.0
ACCOUNTS IN ISLAMIC BANKING.
Islamic Banks receive two types of deposits: (a) deposits not committed for investment which take the form of (i) Current Accounts and; (ii) Saving accounts; and (b) deposits committed for investment which are called investment accounts in Islamic banking.
5.1 Current Account
The current account is operated in the same way as it is operated in the conventional banking system. The Bank accepts deposits from its customers looking for the safe custody of their funds and absolute convenience in their use in the form of current accounts on the Islamic principle of Al-Wadiah (safe keeping). All the profits generated by the Bank from the use of the funds belong to the bank. The Bank provides its customers with cheque books and other usual services connected with current accounts.
5.2 Savings Account
In Saving Account the Bank accepts deposits from the customers looking for safe custody of their funds and a degree of convenience in their use together with the possibility of some profits in the form of savings account on the Islamic principle of Al-Wadiah. All the profits generated by the Bank from the use of such funds belong to the bank. However in contrast with current accounts, the Bank may pay a ‘hibah’ as a show of gratitude to the customer but only at its own absolute discretion from the use of the customer’s funds from time to time. The Bank provides its customers with saving pass Books and other usual services connected with Saving Accounts.
5.3 Investment Accounts in Islamic Banking.
Islamic banks offer profit-sharing and loss-bearing investment accounts, usually based on a Mudarabah partnership contract between the bank and the customer; alternatively, a Wakalah (agency contract) may be used as the basis. The partners share profits according to an agreed ratio. The share of profits received by the mudarib (the mudarib share) is that partner’s remuneration for managing the funds invested by the rabb al mal.
If the bank accepts Profit-Sharing Investment Account (PSIAs) on the basis of Wakalah contract (agency contract), according to which it acts as wakeel or agent, it receives a management fee for managing the customer’s funds. Again the wakeel does not bear any loss arising from the investment of these funds. The only exception when a mudarib or a wakeel may be held liable for losses on funds under its management is a case of misconduct or (gross) negligence on its part.
6.0 COMMON MISCONCEPTIONS ABOUT ISLAMIC BANKING
With the growing impact and influence of Islamic banking, it is necessary to clear up misconceptions and debunk myths that may be the source of misunderstandings about the industry. This is to ensure that Islamic banking is presented in a fair, balanced manner as a genuine ethical business aimed at serving the needs and demands of the market, just like any other financial discipline.
6.1 It Finances Terrorism
This is by far the most common misconception, and also the easiest excuse to disregard Islamic banking as a legitimate discipline. The fact is, Islamic Law (“Shariah”) categorically condemns terrorism, as it considers any overt and illegal use of violence a heinous crime, even more so when the innocents are involved. All institutions engaged in Islamic banking and finance is strictly prohibited from knowingly assisting or participating in any acts that constitute terrorism, or may lead to it. There has not been real, solid evidence to justify allegations linking Islamic Finance to terrorism.
Like any other financial body, Islamic financial institutions are bound by and must adhere to strict laws and regulations, including those pertaining to terrorism and money laundering. Should there ever be any proof that links an Islamic financial institution to a terrorist organization, the due process of the law should be activated in order to bring the perpetrators to justice.
6.2 It is for Muslims only and aimed towards Islam’s domination
This is another big misconception, but one that is far easier to address than most, seeing as conventional banking groups such as Citigroup, HSBC and Standard Chartered, among others, are already offering Islamic financial services. This is proof that no prohibition exists in terms of the use of Islamic financial products by non-Muslims, nor are there laws stating that non-Muslims may not own institutions offering such products and services.
6.3 It only provides interest free
loans
According to Shari‘ah, interest free loans are meant for charitable activities, and not normally for commercial transactions. Islamic banking is based on the principle of sharing profits and losses if any.
6.4 It is automatically immune from Unethical Practices
It has been proven time and again that no financial institution is too big to fail; similarly, there does not exist a financial institution that is too virtuous to fault. Just because a financial product, institution or banker comes with an “Islamic” label doesn’t at all mean that said product, institution or banker is incorruptible, faultless and perfect.
This assumption of virtue makes it easy for unscrupulous parties to misuse and abuse the name of Islam to prey on unwary individuals. There have been many cases of fraud, breach of trust and mismanagement that have occurred in the name of Islamic finance, therefore it is the responsibility of the stakeholders of the industry, from its supervisory authorities, regulators and practitioners to investors and the public at large, to remain vigilant at all times.
The fact that authorities such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) have developed comprehensive governance standards for the industry proves that Islamic Finance is not immune from unethical practices.
6.5
It is just an Islamic copy of the conventional banking
There is a misconception in the banking community that Islamic banks actually give depositors 'interest' in the name of 'profit'. In reality, there is no room for such fixed interest/return as depositors' return are fully dependent on income generated from the deployment of investable mudaraba deposits.
7.0 DIFFERENCE BETWEEN CONVENTIONAL AND ISLAMIC
BANKING
Although Islamic commercial banks have many products similar to those offered by conventional banks, the two entities differ conceptually.
|
Conventional Banking |
Islamic Banking |
|
Money is a commodity besides medium of exchange and store of value. Therefore, it can be sold at a price higher than its face value and it can also be rented out. |
Money is not a commodity though it is used as a medium of exchange and store of value. Therefore, it cannot be sold at a price higher than its face value or rented out. |
|
Time value is the basis for charging interest on capital. |
Profit on trade of goods or charging on providing service is the basis for earning profit. |
|
Interest is charged even in case the organization suffers losses by using bank’s funds. Therefore, it is not based on profit and loss sharing. |
Islamic bank operates on the basis of profit and loss sharing. In case, the businessman has suffered losses, the bank will share these losses based on the mode of finance used (Mudarabah, Musharakah). |
|
While disbursing cash finance, running finance or working capital finance, no agreement for exchange of goods & services is made. |
The execution of agreements for the exchange of goods & services is a must, while disbursing funds under Murabaha, Salam &Istisna contracts. |
|
The governance structure is majorly based on the Board of directors. |
Besides the Board, there is a sharia board which is the back borne of an Islamic bank and plays a vital role in establishment and operation of the bank. |
8.0 HOW THE FINANCIAL INSTITUTIONS AMENDMENT
ACT 2016 ADDRESSES ISLAMIC BANKING.
8.1 Recognition of Islamic banking among the
various classes.
S.10 (3) (i) of the amended Act introduces the business of Islamic bank (class 9) and S.10 (3) (J) the business of Islamic financial institution which is a non-banking financial institution (Class 10)
8.2 Islamic Window by existing banks
S.115A of the amended Act enables already licensed financial institutions to apply to the Central bank to conduct Islamic banking business through an Islamic Window.
8.3 Shari’ah Advisory Board
S.115B of the amended Act mandates every financial institution which conducts Islamic financial business to appoint and maintain a Shari’ah Advisory Board. It is further a legal requirement for the Central Bank to have a Shari’ah Advisory council to advice on matters of regulation and supervision and approve the various products offered by the financial institution offering Islamic banking.
8.4 Exemption from the prohibitions and
restrictions under s.37 and s.38 of the Act
S.115 of the Amended Act exempts financial institutions engaged in Islamic financial business from the provisions of s.37 and s.38 which restricts a financial institution from engaging in trade, commerce, industry, agriculture and investing in immovable property.
9.0.
CONCLUSION
The superiority of Islamic banking derives from its
involvement of real economic activity. During the 1950s Islamic banking concept
was mere a textbook word and was limited to theoretical extravaganza. The
sixties was actually the period of experimentation and Islamic banking started
gaining momentum in the seventies. The eighties and nineties constitute the
period of consolidation. And now it is coming up as the only just and
welfare-oriented banking system of the modern world. Consequently, more than
300 Islamic banks and financial institutions have been established around the
globe spread over more than 70 countries. Islamic banking system has been
proved to be superior and more resilient during the global financial crisis due
to their non-involvement in the toxic assets in the banking system and
adherence to real assets in lending which is directly linked with economic
development and prosperity of the country. By their inherent nature and
objectives, Islamic banks focus on moral aspects of financing. Rapid growth of
Islamic banking even in many non-Muslim countries in an environment of
overwhelmingly dominated conventional finance reveals the superiority of
Islamic banking.
Despite the superiority of Islamic banking model and global experiences, the
success and popularity of Islamic banks depends on compliance of Shari'ah and
devotion of professionals towards its inherent objectives. Mere paper-based
compliance does not ensure justice.
REFERENCES
Text Books
Abdullah Yususf Ali. ‘The Glorious Qur'an: Text,
Translation and Commentary, New revised edition,
Al-Bukhari, Muhammda Ibn Ismail. Sahih al-Bukhari. KarkhanahTijarahKutub, Karaachi, 1938 A.D.
Batibwe, M.S.
(2000). Morality in the Monetary System of
Islamic
Development Bank. (1996). Practices and performance of Modaraba Companies. (A
case study of
Muslim, Ibn
al-Hajjaj al- Qushayri. Sahih Muslim. KarkhanalTijarahKutub,
Senkumba, (2012) Legal Hurdles to the implementation of Islamic banking in Uganda, LL.M thesis, Makerere University Kampala.
Reports
AAOIFI. 2002. Accounting,
Auditing and Governance Standards, The Accounting & Auditing Organization
for Islamic Financial Institutins:
Abdul-Razzaq A. Alaro,
"Sharia Supervision as a Challenge for Islamic Banking in
Islamic Bank sector ‘shines’ amid crisis, Trade Arabia Business News Information, 07, July 2010 Retrieved 05 August 2010, from http://www.tradearabia.com/news/bank-182598.html
SalmanYounis
(2007) Business Operations and Risk Management in Islamic Banking. Retrieved on
11/10/2010 from http://www.bnm.gov
Internate Sources.
Abdul Rahim Abdul Rahman (2008) Shariah Audit for Islamic financial services: The needs and Challenges.Retrieved on 1/11/2010 from http://www.unilorin.edu.ng
Al-Rifaee, (2009) ‘Islamic Banking Myths and Facts’, Retrieved from Http://www.Arabinsight.org on 09 August 2010.
Archer,
Simon, and Rifaat Ahmed Abdel Karim. Islamic Finance: The Regulatory
Challenge.
Bizcommunity.com 4 May 2010 Islamic Banking in Tanzania Retrieved on 6 August 2010 from Http://en.islamtoday.net
Elwaleed M Ahmed, A Unified Voice: The Role of Shariah Advisory Board, October 11, 2007. Retrieved on 1/11/2010 from http://theioleof
Mohammed Al-Hamzani in Riyadh, Asharq Al-Awsat 30/09/2008 Islamic Banks Unaffected by Global Financial Crisis Retrieved 05 August 2010, from http://www.asharq-e.com/news.asp?
Muhammad Ayub, ‘Islamic Banking and Finance: Theory and Practice’ Glossary of Islamic Banking Terminology. Retrieved on 11/10/2010 from http.//www.ubl.com.pk
Musasizi, (2009, November 11) Central Bank pushes for Islamic Banking. The Observer 10.
Mutebile, ‘The progress made on the introduction of
Islamic banking in
Wikipedia, the free encyclopedia January 2009 Islamic Banking Retrieved from Http://www.islamic-banking.com on 09 August 2010.
TOPIC XV
THE INTERNATIONAL MONETRAY FUND AND THE
WORLD BANK.
Because there is no single international currency that can be spent around the world, foreign currencies have to be converted into local currencies. The set of rules and procedures by which different national currencies are exchanged for each other in the world trade is known as the International Monetary System.
Over the ages currencies have been defined in terms of gold and other items of value, and the international monetary system has been subject to a variety of international agreements. A review of these systems provides a useful perspective against which to understand today’s system.
The Gold
Standard, 1876-1913
Since the days of the Pharaohs (about 3000B.C), gold has served as a medium of exchange and a store of value. One country after another set a par value for its currency in terms of gold and then tried to adhere to the so called rules of the game. This later came to be known as the classical gold standard. Under the gold standard, the ‘rules of the game’ were clear and simple. Each country set the rate at which its currency unit (paper or coin) could be converted to the weight of gold. The United States, for example declared the dollar to be convertible to gold at a rate of $20.67 per ounce (small amount) (a rate in effect until the beginning of World War 1). The British pound was pegged at 4.2474 pound per ounce of gold. Maintaining adequate reserves of gold to back its currency’s value was very important for a country under this system. Any growth in the amount of money was limited to the rate at which official authorities could acquire additional gold.
The gold standard worked adequately until the outbreak of World War 1 interrupted trade flows and the free movement of gold. This event caused the main trading nations to suspend operation of the gold standard.
The Interwar
Years and World War II, 1914-1944
The principal disadvantage of the gold standard was its inherent lack of liquidity; the world’s supply of money was necessarily limited by the world’s supply gold. Additionally, any sizeable increase in the supply of gold, such as the discovery of a rich new mine, would cause prices to rise abruptly. Because of its disadvantages, the gold standard broke down in 1914. It was replaced in the 1920s by the gold bullion standard. Under this system, states no longer minted gold coins, instead, they backed their paper currencies with gold bullion and agreed to buy and sell the bullion at a fixed price.
During World War II and its chaotic aftermath, however, many of the main traditional currencies lost the convertibility into other currencies. The Dollar was the only major trading currency that continued to be convertible.
Bretton Woods
and the International Monetary Fund, 1944
As World War II drew close in 1944, the Allied Powers convened a meeting in the small town of Bretton Woods, New Hampshire, for the purposes of creating a new international monetary system and an international organization to oversee that system. Although the conference was attended by 45 nations, the leading policy makers at Bretton Woods were the British and Americans. The British delegation was led by Lord John Maynard Keynes, termed ‘Britain’s economic heavyweight’. Keynes advocated the creation of a world central bank that could regulate the flow and distribution of credit.
The Bretton Woods Agreement established a U.S. dollar-based international Monetary Fund and the World Bank. The International Monetary Fund (IMF) aids countries with balance of payments and exchange rate problems. The International Bank for reconstruction and Development (World Bank) helped fund postwar reconstruction. The IMF was the key institution in the new international system, and it has remained so to the present.
Under the original provisions of the Bretton Woods Agreement, all countries fixed the value of their currencies in terms of gold but were not required to exchange their currencies for gold. Only the dollar remained convertible into gold (at $35 per ounce). Therefore each country established its exchange rate vis-à-vis the dollar, and then calculated the gold par value of its currency to create the desired dollar exchange rate.
The IMF and
the World Bank.
If you have difficulty distinguishing the World Bank from the International Monetary Fund, you are not alone. Most people have only the vaguest idea of what these institutions do, and very few people indeed could, if pressed on the point, say why and how they differ. Even John Maynard Keynes, a founding father of the two institutions and considered by many the most brilliant economist of the twentieth century, admitted at the inaugural meeting of the International Monetary Fund that he was confused by the names: he thought the Fund should be called the Bank, and the Bank should be called a fund.
Known collectively as the Bretton Woods Institutions after a remote village in New Hampshire, U.S.A, where they were founded by the delegates of 44 nations in July 1944, the Bank and the IMF are twin intergovernmental pillars supporting the structure of the world’s economic and financial order.
Similarities between them do little to resolve the confusion. Superficially the Bank and IMF exhibit many common characteristics.
· Both are in a sense owned and directed by governments of member nations.
· Both institutions concern themselves with economic issues and concentrate their efforts on broadening and strengthening the economies of their member nations.
· Both have headquarters in Washington D.C., where popular confusion over what they do and how they differ is as pronounced as everywhere else. For many years both occupied the same building and even now, though located on opposite sides of a street very near the White House, they share a common library and other facilities, regularly exchange economic data, sometimes present joint seminars, daily hold informal meetings, and occasionally send out joint missions to member states.
Despite these and other similarities, however, the Bank and the IMF remain distinct. The fundamental difference is this: the Bank is primarily a development institution; the IMF is a cooperative institution that seeks to maintain an orderly system of payments and receipts between nations. Each has a different purpose, a distinct structure, receives its funding from different sources, assists different categories of members, and strives to achieve distinct goals through methods peculiar to itself.
THE World Bank and the IMF compared.
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WORLD BANK |
INTERNATIONAL MONETRAY FUND. |
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· Principal aim of assisting the world’s less developed nations through long term financing of projects and programs. |
· Oversees the international monetary system. |
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· Provides to the poorest developing countries special financial assistance through the International Development Association (IDA) |
· Promotes exchange stability and orderly exchange relations among its member countries. |
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· Encourages private enterprise in developing countries through its affiliate, the International Finance Corporation (IFC) |
· Assist all members experiencing temporary balance of payment problems with short term lending |
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· Acquire most of its financial resources by borrowing on the international bond market |
· Uses SDRs to supplement the currency reserves of members as needed, in proportion to their quotas. |
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· Has a staff of 7,000 drawn from 180 member countries. |
· Has a staff of 2,300 drawn from 182 member countries |
Articles of Agreement of the IMF and World Bank.
The IMF operates in accordance with the provisions of the Articles of Agreement of the International Monetary Fund adopted in 1949 and entered in force in 1945 amended from time to time. The Articles of Agreement provide for the original membership and procedure of becoming a member, quotas and subscription, obligations regarding exchange arrangements, operations and transactions of the fund, capital transfers etc. On the other hand the World Bank operates in accordance with the provisions of the IBRD Articles of Agreement which also provide for membership and capital of the Bank, loans and guarantee provisions, organizations and management, withdrawal and suspension of membership etc.
In Uganda the Bretton Woods Agreement Act Cap. 169 is an Act to make provision with respect to acceptance by Uganda of the agreements for the International Monetary Fund and the International Bank for Reconstruction and Development and to provide for related matters and makes certain provisions of the agreements to have force of law in Uganda.
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