ISLAMIC BANKING ISLAMIC BANKING IN THE INFORMAL IN THE INFORMAL

SECOTRSECOTR Interest Free Solutions in the Non Muslim Interest Free Solutions in the Non Muslim

SocietiesSocieties

AUSAF AHMADAUSAF AHMAD

Paper for Presentation at the International Conference on Banking 2003,Paper for Presentation at the International Conference on Banking 2003,““From Money Lenders to Bankers: Evolutions of Islamic Banking in Relation to Judo, Christian From Money Lenders to Bankers: Evolutions of Islamic Banking in Relation to Judo, Christian

and Oriental Banking Traditions”and Oriental Banking Traditions”Monash University, Prato, ItalyMonash University, Prato, Italy

September 9-10,2003September 9-10,2003

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THIS PRESENTATIONTHIS PRESENTATION

Is divided into three parts:Is divided into three parts:I.I. INTRODUCTIONINTRODUCTIONII.II. MAIN ISSUES ABOUT ISLAMIC MAIN ISSUES ABOUT ISLAMIC

BANKING IN THE INFORMAL BANKING IN THE INFORMAL SECTORSECTOR

III.III. A BRIEF SURVEY OF SOME A BRIEF SURVEY OF SOME ISLAMIC FINANCIAL ISLAMIC FINANCIAL INSTITUTIONS IN THE INFORMAL INSTITUTIONS IN THE INFORMAL SECTOR AND SOME SECTOR AND SOME SUGGESTIONS. SUGGESTIONS.

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INTRODUCTIONINTRODUCTION

• Significant Progress made by Islamic Significant Progress made by Islamic Banking during the last 25 years:Banking during the last 25 years:

• As a Theoretical ModelAs a Theoretical Model• As a financial institution.As a financial institution.• Most of the progress remained Most of the progress remained

confined in the Muslim countries. confined in the Muslim countries.

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MAIN ASSUMPTIONMAIN ASSUMPTION

• The Current literature on Islamic The Current literature on Islamic Banking and finance assumes that Banking and finance assumes that Muslims have majority and political Muslims have majority and political power to control (or can control) power to control (or can control) and / or change monetary and fiscal and / or change monetary and fiscal policies and institutions. policies and institutions.

• It has little relevance for Muslim It has little relevance for Muslim minorities and non-Muslims. minorities and non-Muslims.

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ISLAMIC BANKING AND ISLAMIC BANKING AND MINORITIESMINORITIES

• Main raison dêtre of Islamic Banking Main raison dêtre of Islamic Banking is Divine Prohibition against is Divine Prohibition against Ribā.Ribā.

• The prohibition is equally applicable The prohibition is equally applicable to Muslim majorities and minoritiesto Muslim majorities and minorities

• The minorities are also desirous of The minorities are also desirous of organizing their financial activities organizing their financial activities in accordance with in accordance with Shari’ahShari’ah but lack but lack effective institutions. effective institutions.

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Dār al IslāmDār al Islām and and Dār al Dār al HarbHarb

• Classical Jurists divided the world Classical Jurists divided the world into into Dār al IslāmDār al Islām and and Dār al HarbDār al Harb

• Some Jurists (Abu Hanifa, Ibne Some Jurists (Abu Hanifa, Ibne Taimiyah, Mohammad) allowed Taimiyah, Mohammad) allowed Ribā Ribā based transactions between Muslims based transactions between Muslims and non-Muslims in and non-Muslims in Dār al Harb.Dār al Harb.

• Some equally prominent jurists Some equally prominent jurists opposed it.[Abu Yousuf, Shafei, and opposed it.[Abu Yousuf, Shafei, and scholars from Hanbali School]scholars from Hanbali School]

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Present Day Muslim Present Day Muslim Minority Countries are not Minority Countries are not

Dar al HarbDar al Harb• The Classical distinction is not The Classical distinction is not

relevant for the following reasons:relevant for the following reasons:

1.1. Single Political Entity vs. 54 Single Political Entity vs. 54 independent statesindependent states

2.2. Not adjacent to each otherNot adjacent to each other

3.3. Migration is in the reverse orderMigration is in the reverse order

4.4. Visa RestrictionsVisa Restrictions

5.5. Muslim countries could not be Muslim countries could not be described as Dar al Islam because of described as Dar al Islam because of non application of non application of Shari’ahShari’ah

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FINANCIAL NEEDS OF FINANCIAL NEEDS OF MUSLIM MINORITY MUSLIM MINORITY

HOUSEHOLDHOUSEHOLD

P E R S O N A L F IN A N C E P E TTY TR A D E H O U S IN G F IN A N C E IN V E S TM E N T N E E D S

H O U S E H O LD

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ISLAMIC BANKING IN THE ISLAMIC BANKING IN THE CORPORATE SECTORCORPORATE SECTOR

Much of the Much of the Development of Islamic Development of Islamic Banking that has taken Banking that has taken place in the eighties and place in the eighties and nineties has been in the nineties has been in the organized Corporate organized Corporate Sector. Sector.

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LIMITATIONS OF THE LIMITATIONS OF THE CORPORATE SECTORCORPORATE SECTOR

REQUIRES:REQUIRES:1.1.Large CapitalLarge Capital2.2.Large size of MarketLarge size of Market3.3.Favorable Political ClimateFavorable Political Climate4.4.Institutional and Legal FrameworkInstitutional and Legal FrameworkNegative Mental block against Islamic Negative Mental block against Islamic banking is a big barrier against it in the banking is a big barrier against it in the Muslim Minority countries. Muslim Minority countries.

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ISLAMIC BANKING IN THE ISLAMIC BANKING IN THE COOPERATIVE SECTORCOOPERATIVE SECTOR

Cooperative Sector Requires:Cooperative Sector Requires:

1.1. Open MembershipOpen Membership

2.2. Cooperative EducationCooperative Education

3.3. Cooperative CooperationCooperative Cooperation

4.4. Democratic ParticipationDemocratic Participation

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ADVANTAGES OF THE ADVANTAGES OF THE COOPERATIVE SECTORCOOPERATIVE SECTOR

• Insulates from unhealthy competition from Insulates from unhealthy competition from the Corporate Sectorthe Corporate Sector

• Requires much less capital and is much Requires much less capital and is much less regulated.less regulated.

• Institutions in the Cooperative Sector are Institutions in the Cooperative Sector are offered many incentivesoffered many incentives

• Cooperative institutions are quite elastic Cooperative institutions are quite elastic with respect to size.with respect to size.

• Cooperative System is amenable to Cooperative System is amenable to different purposes. different purposes.

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COOPERATIVE COOPERATIVE INSTITUTIONS OF INSTITUTIONS OF ISLAMIC FINANCEISLAMIC FINANCE

• INTEREST FREE COOPERATIVE INTEREST FREE COOPERATIVE SOCIETIESSOCIETIES

• INTEREST FREE COOPETIVE INTEREST FREE COOPETIVE HOUSING SOCIETIESHOUSING SOCIETIES

• COOPERATIVE INVESTMENT COOPERATIVE INVESTMENT FUNDSFUNDS

• COOPERAITIVE ISLAMIC BANKSCOOPERAITIVE ISLAMIC BANKS

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ISLAMIC FINANCIAL ISLAMIC FINANCIAL INSTITUTIONS IN INDIA : A INSTITUTIONS IN INDIA : A

CASE STUDYCASE STUDY

• Islamic Banking movement concentrated Islamic Banking movement concentrated in the Gulf, India remained at outer fringe.in the Gulf, India remained at outer fringe.

• Introduction of Islamic banks in the Introduction of Islamic banks in the corporate sector can give a boost to corporate sector can give a boost to private commercial banking in Indiaprivate commercial banking in India

• India could invite foreign capital through India could invite foreign capital through Islamic banksIslamic banks

• Islamic banks have special relevance for Islamic banks have special relevance for micro credit schemes. micro credit schemes.

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INTEREST FREE FINANCIAL INTEREST FREE FINANCIAL INSTITUTIONS IN INDIAINSTITUTIONS IN INDIA

• More than 200 institutions, mostly loan More than 200 institutions, mostly loan societies and investment companies.societies and investment companies.

• Operating in the unorganized sectorOperating in the unorganized sector• Misnomer to describe them as Islamic Misnomer to describe them as Islamic

BanksBanks• Societies registered under Societies Act. Societies registered under Societies Act.

Many remain unregistered. Many remain unregistered. • Different sources of fundsDifferent sources of funds• Lack control and regulation due to Lack control and regulation due to

absence of legal framework. absence of legal framework. • Non Banking Financial Companies and Non Banking Financial Companies and

Islamic Investment Companies. Islamic Investment Companies.

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CONCLUSIONSCONCLUSIONS

• Require Legal FrameworkRequire Legal Framework• ProfessionalismProfessionalism• TransparencyTransparency• Productivity and Efficiency. Productivity and Efficiency. • Needs to be organized. Needs to be organized.

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• THANK YOUTHANK YOU