Islamic Economics

Islamic banking is based on the principles of Islamic economics — an economic framework in accordance with Islamic law (Sharia'h).

There are two types of Islamic economics:

• Caliphate , the Islamic form of government representing the political unity and leadership of the Muslim world (Islamic political framework).
• Assuming the political framework is non-Islamic, therefore, seeking to integrate some prominent Islamic tenets into a secular economic framework.

Caliphate is the absolute Islamic rule, thus the economy focuses on distribution of resources in order to meet the basic and luxurious needs of individuals in society, and the state has a clear role in policing, taxation, managing public assets, and ensuring the circulation of wealth. Such a political framework in its true form does not exist in today's world.

Assuming non-Islamic political framework simply proposes two main tenets: no interest can be earned on loans and socially responsible investing. This is the way conventional banking is Islamized—the first step towards an Islamic economic framework.

Modern day Islamic scholars and academics have developed various modes of Sharia'h complaint financing that are designed to work within the prevailing capitalist economic framework. In order to achieve this balance numerous concessions have been afforded to financial institutions that would not apply if a viable interest free economic system existed. The intention behind making these concessions is to encourage the evolution of this type of alternative system

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ISLAMIC BANKING - What is Islamic Banking?

Islamic banks appeared on the world scene as active players over two decades ago. But "many of the principles upon which Islamic banking is based have been commonly accepted all over the world, for centuries rather than decades".

The basic principle of Islamic banking is the prohibition of Riba- (Usury - or interest):

"While a basic tenant of Islamic banking - the outlawing of riba, a term that encompasses not only the concept of usury, but also that of interest - has seldom been recognised as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the bases of many religions, including Islam.

"The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice. Much of the morality championed by Victorian writers such as Dickens - ranging from the equitable distribution of wealth through to man's fundamental right to work - is clearly present in modern Islamic society.

"Although the western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century." (Islamic Finance: A Euromoney Publication, 1997).

t is evident that Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen.

The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalization of the oil prices, which had hitherto been under the control of foreign oil Corporations. These events led Muslims' to strive to model their lives in accordance with the ethics and philosophy of Islam.

Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values in their financial dealings and in the West some financial organisations have opted for ethical operations.

Islam not only prohibits dealing in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems Haram (unlawful). Islamic banking is an instrument for the development of an Islamic economic order. Some of the salient features of this order may be summed up as:

1. While permitting the individual the right to seek his economic well-being, Islam makes a clear distinction between what is Halal (lawful) and what is haram (forbidden) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious.
2. While acknowledging the individual's right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle or to squander it.
3. While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat.
4. While making allowance for the ways of human nature and yet not yielding to the consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole, by its laws of inheritance.
5. Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive.

The Islamic financial system employs the concept of participation in the enterprise, utilizing the funds at risk on a profit-and- loss-sharing basis. This by no means implies that investments with financial institutions are necessarily speculative. 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 satisfy the differing demands of participants in the contemporary environment and within the guidelines of the Shariah.

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. This concept therefore encourages better resource management.

Islamic banks are structured to retain a clearly differentiated status between shareholders' capital and clients' deposits in order to ensure correct profit-sharing according to Islamic Law.

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The pressure on the investment bank

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Investment banks ‘show green shoots’

THE retail banking sector’s prospects remained weak for the second quarter of this year, while investment banks saw an upsurge in sentiment, largely driven by business fundamentals.

Retail banking confidence fell from 32 points in the first quarter this year to a slightly weaker 28 points in the second quarter, while investment banking rose sharply, from 32 to 50.

These are the findings of the 30th quarterly Ernst & Young financial services index, released yesterday. It was carried out by the Bureau for Economic Research in Stellenbosch to measure confidence in the banking industry.

Emilio Pera, the lead financial services director at Ernst & Young, said: “We have been hearing a lot about the appearance of early signs of a recovery (green shoots) in the last four to six weeks. In the case of investment banks, this appears to be more pronounced.”

Pera said it was interesting that business fundamentals were not entirely different between retail and investment banks.

Both segments were experiencing continuing and protracted profit contractions, caused by flat or reduced income growth, and continued high growth in non-performing loans. Investments banks were benefiting from a client base more resilient to interest rate increases over the last two years, although corporate entities were starting to feel the effect toward the end of the rate tightening cycle.

Pera said a more fundamental reason for the return of confidence in investment banking was a turnaround in resource companies. All the major producers had gained from rebounding commodity prices, which had led to a resumption in corporate mergers and acquisitions (M&A) activity and a re-look at moth-balled projects.

While demand for credit remained weak, banks themselves were maintaining stringent credit standards, particularly in the retail sector. On the other hand, investment banks saw a noticeable relaxation of credit standards in the second quarter.

“Retail banks remain wary of granting credit in an environment where the ability of over-extended households to repay secured and unsecured debts continued to be a concern,” Pera said.

“Credit cards, mortgages and instalment finance are all either reflecting negative or flat growth in the year to April,” he said.

It was understandable that banks were more cautious in their credit granting processes. .

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