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Islamic Bank in Suriname: Trustbank Amanah
“ Islamic bank has made its entry in Suriname with the approval of the Central Bank of Suriname (CBS) for Islamic products and services in the banking sector. The official opening of Trustbank Amanah, the first Islamic Bank in Suriname and the region, took place on Thursday 7th of December 2017 in the presence of the Islamic Corporation for the Development of the Private Sector (ICD). For this memorable fact, the Director Advisory Nida Raza and the Program Manager Islamic Financial Institutions Mohammed Mannai of the ICD came to Suriname.”
“ Suriname is after today in the row of countries like Malaysia, Indonesia and Saudi Arabia that their growth and development also thanks to the concept of Islamic Finance.”
Islamic Banking and Finance Guides
Islamic banking is banking or banking activity that is consistent with the principles of sharia (Islamic law) and its practical application through the development of Islamic economics. As such, a more correct term for Islamic banking is sharia compliant finance. (1)
Sharia prohibits acceptance of specific interest or fees for loans of money (known as riba, or usury), whether the payment is fixed or floating. Investment in businesses that provide goods or services considered contrary to Islamic principles (e.g., pork or alcohol) is also haraam (“sinful and prohibited”). Although these prohibitions have been applied historically in varying degrees in Muslim countries/communities to prevent unIslamic practices, only in the late 20th century were a number of Islamic banks formed to apply these principles to private or semi-private commercial institutions within the Muslim community.(2) (3)
As of 2014, sharia compliant financial institutions represented approximately 1% of total world assets.(4) By 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles (5) and as of 2014 total assets of around $2 trillion were sharia-compliant.(6) According to Ernst & Young, although Islamic Banking still makes up only a fraction of the banking assets of Muslims,(7) it has been growing faster than banking assets as a whole, growing at an annual rate of 17.6% between 2009 and 2013, and is projected to grow by an average of 19.7% a year to 2018.[6]
Introduction
While secular historians and Islamic modernists see Islamic Banking as a modern phenomenon or “invented tradition“, revivalists like Mohammed Naveed insist it is “as old as the religion itself with its principles primarily derived from the Quran”.(8) (9) An early market economy and an early form of mercantilism, sometimes called Islamic capitalism, was developed between the eighth and twelfth centuries. (10) The monetary economy of the period was based on the widely circulated currency the gold dinar, and it tied together regions that were previously economically independent.
A number of economic concepts and techniques were applied in early Islamic banking, including bills of exchange, partnership (mufawada, including limited partnerships, or mudaraba), and forms of capital (al-mal), capital accumulation (nama al-mal),(11) cheques, promissory notes, (12) (Muslim traders are known to have used the cheque or ṣakk system since the time of Harun al-Rashid (9th century) of the Abbasid Caliphate.(13)), trusts (Waqf),(14) transactional accounts, loaning, ledgers and assignments.(15) Organizational enterprises independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced during that time.(16) (17) Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.(11)
Usury in Islam
The word “RIBA” (interest) literally means “excess or addition”, and has been translated as interest, usury, excess, increase or addition. According to Shariah terminology, it implies any excess compensation without due consideration (consideration does not include time value of money).[18]
According to Islamic economists Choudhury and Malik[19] by the time of Caliph Umar, the prohibition of interest was a well-established working principle integrated into the Islamic economic system.
This interpretation of usury has not been universally accepted or applied in the Islamic world. A school of Islamic thought which emerged in the 19th century, led by Syed Ahmad Khan, argued for a differentiation between sinful “usury“, which they saw as restricted to lending for consumption, and legitimate “interest”, for lending for commercial investment [20]
20th century
Building housing the Islamic Banking & Finance Institute Malaysia (IBFIM) in downtown Kuala Lumpur.
In the 20th and 21st century there has been “a gradual evolution of the institutions of interest-free financial enterprises across the world”[22]
In the 20th century, Islamic scholars such as Naeem Siddiqi, Maulana Maududi, Muhammad Hamidullah, all recognised the need for commercial banks and their perceived “necessary evil,” and proposed a banking system based on the concept of Mudarabha, defined as a relationship in which one party contributes capital and other expertise to earn profit which is shared at an agreed upon ratio, such as 50:50. The Investor is called Rab ul Maal and the other party is termed as Mudarib.[ Further works specifically devoted to the subject of interest-free banking were authored by Muhammad Uzair (1955), Abdullah al-Araby (1967), Nejatullah Siddiqi (1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974).[
Since 1970
The involvement of institutions, governments, and various conferences and studies on Islamic banking (Conference of the Finance Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study in 1972, The First International Conference on Islamic Economics in Mecca in 1976, and the International Economic Conference in London in 1977) were instrumental in applying the application of theory to practice for the first interest-free banks]
The influx of “Petro-dollars” and a “general re-Islamisation” following the Yom Kippur War and 1973 oil crisis gave great help to the development of the Islamic banking sector.[29] and since 1975 it has spread the globe.
In 1975, the Islamic Development Bank was set up with the mission to provide funding to projects in the member countries. The first modern commercial Islamic bank, Dubai Islamic Bank, was established in 1979.
By 1995, 144 Islamic financial institutions had been established worldwide, including 33 government-run banks, 40 private banks, and 71 investment companies.[37]
By 2008 Islamic banking was growing at a rate of 10–15% per year and with signs of consistent future growth. Islamic banks have more than 300 institutions spread over 51 countries, including the United States through companies such as the Michigan-based University Bank, as well as an additional 250 mutual funds that comply with Islamic principles. It is estimated that over US $822 billion worldwide sharia-compliant assets are managed according to The Economist.
In 2009, the Vatican put forward the idea that “the principles of Islamic finance may represent a possible cure for ailing markets. The Catholic Church forbids usury but began to relax its ban on all interest in the 16th century.’
It is important to note that Islamic banking co-exists within the wider economy and as such is not a safe haven bubble despite often being labelled as such. During the global financial crisis of 2008, initially the market was not affected as the ‘toxic assets’ built up on the balance sheets of US banks were not shari’a compliant hence Islamic banks were not impacted. However, following the collapse of Lehman Brothers Islamic institutions were impacted from drops in valuation of real estate and private equity, two segments heavily invested by Islamic firms
The market for Islamic Sukuk bonds has become strong enough that as of 2015, several non-Muslim majority states have issued sukuk—UK, Hong Kong, and Luxemburg
Principles
The term “Islamic banking” refers to a system of banking or banking activity that is consistent with Islamic law (Shariah) principles and guided by Islamic economics. The contemporary movement of Islamic finance is based on the belief that “all forms of interest are RIBA and hence prohibited” In addition, Islamic law prohibits investing in businesses that are considered unlawful, or haraam (such as businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values). Furthermore, the Shariah prohibits what is called “Maysir” and “Gharar“. Maysir is involved in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain event in the future whereas Gharar describes speculative transactions. Both concepts involve excessive risk and are supposed to foster uncertainty and fraudulent behaviour. Therefore, the use of all conventional derivative instruments is impossible in Islamic banking. In the late 20th century, a number of Islamic banks were created to cater to this particular banking market.
Types of Islamic Lending
Murabahah may be called an Islamic mortgage transaction, instead of lending the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank’s profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. Another approach is EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).
Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing the lender to monopolize the economy.
Islamic banking is restricted to Islamically acceptable transactions, which exclude those involving alcohol, pork, gambling, etc. The aim of this is to engage in only ethical investing, and moral purchasing.
In theory, Islamic banking is an example of full-reserve banking, with banks achieving a 100% reserve ratio. However, in practice, this is not the case, and no examples of 100 per cent reserve banking are known to exist.
Islamic Laws on Trading
The Qur’an prohibits gambling (games of chance involving money). The hadith, in addition to prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in risk, where the Arabic word gharar is taken to mean “risk” or excessive uncertainty).
There are a number of hadith that forbid trading in gharar, often giving specific examples of gharhar transactions (e.g., selling the birds in the sky or the fish in the water, the catch of the diver, an unborn calf in its mother’s womb etc.). Jurists have sought many complete definitions of the term. They also came up with the concept of yasir (minor risk); a financial transaction with a minor risk is deemed to be halal (permissible) while trading in non-minor risk (bayu al-ghasar) is deemed to be haram.What gharar is, exactly, was never fully decided upon by the Muslim jurists. This was mainly due to the complication of having to decide what is and is not a minor risk.
Industry
Islamic financial institutions take different forms. They may be
- full-fledged Islamic financial institutions (for example Islami Bank Bangladesh Ltd, Meezan Bank in Pakistan)
- Islamic windows in conventional financial institutions (for example: Commercial Bank of Dubai in UAE, HSBC, American Express Bank, ANZ Grindlays, BNP-Paribas, Chase Manhattan, UBS, Kleinwort Benson, Commercial Bank of Saudi Arabia, Ahli United Bank Kuwait, Riyad Bank;
- Islamic subsidiaries of conventional financial institutions (Citibank subsidiary Citi Islamic Investment Bank (Bahrain), UBS subsidiary Noriba Bank.
Size, Locations
% market share of Islamic banking industry by country, 2006, Saudi Arabia 19.54
Bahrain 18.97; Malaysia 16.30; Kuwait 14.46 ; UAE 14.39; Qatar 3.79; Egypt 2.83;
Iran 2.82; Switzerland 1.8; Jordan 1.73; Bangladesh 1.24; Indonesia 1.11;
Pakistan 0.35; UK 0.25; Palestine 0.09;Yemen 0.06 and Rest of the world 0.03
SOURCE: ISI Analytics (2007)(21) (22)
As of 2010, Islamic financial institutions operate in 105 countries. Statistics on Islamic banking differ, but according to Ibrahim Warde, of those countries, five dominate Islamic banking: Iran with $345 billion in Islamic assets; Saudi Arabia with $258 billion, Malaysia $142 billion, Kuwait with $118 billion and UAE with $112 billion.(23) (24) Another source (ISI Analytics, see table to right) lists Saudi Arabia as the dominate country as of 2006, with Bahrain #2, and Iran relatively insignificant.
Financial Accounting Standards
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), has been publishing standards and norms for Islamic financial institutions since 1993. By 2010, it had issued “25 accounting standards, 7 auditing standards, 6 governance standards, 41 shari’ah standards and 2 codes of ethics. The standards issued by AAOIFI are mandatory for Islamic financial institutions in Bahrain, Sudan, Jordan and Saudi Arabia, and recommended for other Muslim countries and Islamic financial institutions according to Muhammad Akram Khan. Established in Algiers in 1990, its original name was Financial Accounting Organization for Islamic Banks and Financial Institutions. It later moved its headquarters to Bahrain.
Supporting Institutions
The International Islamic Financial Market—a standardization body for Islamic capital market products and operations—was founded in November 2001 through the cooperation of the governments and central banks of Brunei, Indonesia and Sudan. Its secretariat is located in Manama Bahrain. It is not a regulatory body and its recommendations are “not implemented by most Islamic banks”.(25)
The Islamic Interbank Money Market was established by Bank Negara Malaysia on 3 January 1994, and has developed instruments to manage the liquidity needs of the Islamic financial institutions — “funding and adjusting portfolios over the short term”.(25)
The Islamic Financial Services Board was founded on 3 November 2002 at Kuala Lumpur by central banks of Bahrain, Iran, Kuwait, Malaysia, Pakistan, Saudi Arabia, Sudan along with the Islamic Development Bank, AAOIFI, and IMF.(25) As at April 2015, the 188 members of the IFSB comprise 61 regulatory and supervisory authorities, eight international inter-governmental organisations, and 119 market players (financial institutions, professional firms and industry associations) operating in 45 jurisdictions. Its objective is to standardize and harmonize the operation and supervision of Islamic financial institutions, st standards and capital adequacy, risk management and corporate governance in consultation with a wide array of stakeholders and after following a lengthy process. It complements the task of the Basel Committee on Banking Supervision.(25) As of 2015 it had published 17 standards and six guidance notes.(26)
Islamic International Rating Agency started operations in July 2005 in Bahrain. It is sponsored by 17 multilateral development institutions and leading banks and other rating agencies.(27) (28)
The Dow Jones Islamic Market Index (DJIMI) was established in 1996.(29) The Index has been approved by Fiqh Academy of the OIC.(30) It uses three levels of screening—eliminating businesses involved in activities not allowed by Islamic law (alcohol, pork, gambling, prostitution, pornography, etc.); eliminating companies whose total debts divided by their 12-month average market capitalization are 33% or more of their total sources of funds; eliminating companies that have `impure income or expenditure` (including of course, interest) of more than 5-10 per cent of their income or expenditure (eliminating businesses with any `impure income` would be too difficult).(28)
In 2006, Citigroup launched the Dow Jones Citigroup Sukuk Index. The sukuk making up the Index must be at least $250 million in size, have a maturity of at lest one year and a minimum rating of BBB-/Baaa (28) In 1998, the FTSE Global Islamic Index was launched. It has 15 Islamic indices for various regions. (28) In 2007, the MSCI Islamic Index series was launched, one of the “MSCI ‘Faith-Based’ Indexes”. It is constructed from the conventional MSCI country indices and covers 69 developed, emerging and frontier markets, including regions such as the Gulf Cooperation Council and Arabian markets.(28)
Notes/References
Khan, Ajaz A., Sharia Compliant finance|halalmonk.com
Rammal, H. G. and Zurbruegg, R. (2007). Awareness of Islamic Banking Products Among Muslims: The Case of Australia. Journal of Financial Services Marketing, 12(1), 65–74.
3.Saeed, A. (1996). “Islamic Banking and Interest: A Study of the Prohibition of Riba and its Contemporary Interpretation”. Leiden, Netherlands: E.J.Brill.
4.Mohammed, Naveed (2014-12-27). “The Size of the Islamic Finance Market”. Islamic Finance.
5.”Sharia calling”. The Economist. 2009-11-12.
6.”Islamic finance: Big interest, no interest”. The Economist. The Economist Newspaper Limited. Sep 13, 2014. Retrieved 15 September 2014.
7.Yueh, Linda (18 July 2014). “Islamic banking: Growing fast but can it be more than a niche market?”. BBC News. Retrieved 14 April 2015. “Even in countries where Islamic banking has a strong foothold, such as the Gulf states and in South East Asia, its share rarely accounts for more than one third of the market. In Indonesia, the world’s most populous Muslim country, Islamic banking currently has less than 5% market share.”
Mohammed, Naveed (2015-02-08). “A History of Islamic Finance”. Islamic Finance.
“The Islamic Banker”. Retrieved 12 February 2015.
Subhi Y. Labib (1969), “Capitalism in Medieval Islam”, The Journal of Economic History 29 (1), p. 79–96 [81, 83, 85, 90, 93, 96].
Jairus Banaji (2007), “Islam, the Mediterranean and the rise of capitalism”, Historical Materialism 15 (1), pp. 47–74, Brill Publishers.
Robert Sabatino Lopez, Irving Woodworth Raymond, Olivia Remie Constable (2001), Medieval Trade in the Mediterranean World: Illustrative Documents, Columbia University Press, ISBN 0-231-12357-4.
John Bagot (1988), A Short History Of The Arab Peoples, Dorset Press, p. 105, ISBN 978-0-88029-226-9, OCLC 603697876
Timur Kuran (2005), “The Absence of the Corporation in Islamic Law: Origins and Persistence”, American Journal of Comparative Law 53, pp. 785–834 [798–9].
Subhi Y. Labib (1969), “Capitalism in Medieval Islam”, The Journal of Economic History 29 (1), pp. 79–96 [92–3].
Said Amir Arjomand (1999), “The Law, Agency, and Policy in Medieval Islamic Society: Development of the Institutions of Learning from the Tenth to the Fifteenth Century”, Comparative Studies in Society and History 41, pp. 263–93. Cambridge University Press.
17.Samir Amin (1978), “The Arab Nation: Some Conclusions and Problems”, MERIP Reports 68, pp. 3–14 [8, 13].
18.https://www.academia.edu/4335185/Time_Value_of_Money_and_Riba_Islamic_Perspective
19.Choudhury, M.A. and Malike, U.A. (1992) The Foundations of Islamic Political Economy, London: Macmillan; New York: St. Martin’s Press. Islamic banking and finance
Ahmed, 1958
Askari, Hossein, Zamir Iqbal, Noureddine Krichene and Abbas Mirakhor. 2010. The stability of Islamic fiance: Creating a resilient financial environment for a secure future. Singapore: John Wiley & Sones (Asia), p.13)
Khan,What Is Wrong with Islamic Economics?, 2013: p.224
Khan,What Is Wrong with Islamic Economics?, 2013: p.29
Warde, Ibrahim. 2000, 2010. Islamic finance in the global economy, Edinburgh: Edinburgh University Press. p.1
Khan, What Is Wrong with Islamic Economics?, 2013: p.309-10
Published Standards”. The Islamic Financial Services Board (IFSB). Retrieved 7 August 2015.
“Islamic International Rating Agency (IIRA)”. iirating.com. Retrieved 8 August 2015.
Khan, What Is Wrong with Islamic Economics?, 2013: p.313-4