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ISLAMIC BANKING IN

THE INFORMAL SECOTR

Interest Free Solutions in the Non Muslim Societies

AUSAF AHMAD

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

Traditions

Monash University, Prato, Italy

September 9-10,2003

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THIS PRESENTATION

Is divided into three parts:

I. INTRODUCTION

II. MAIN ISSUES ABOUT ISLAMICBANKING IN THE INFORMALSECTOR

III. A BRIEF SURVEY OF SOME ISLAMIC

FINANCIAL INSTITUTIONS IN THEINFORMAL SECTOR AND SOMESUGGESTIONS.

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INTRODUCTION

Significant Progress made by Islamic Bankingduring the last 25 years:

As a Theoretical Model

As a financial institution.

Most of the progress remained confined in the

Muslim countries.

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MAIN ASSUMPTION

The Current literature on Islamic Banking andfinance assumes that Muslims have majority andpolitical power to control (or can control) and /

or change monetary and fiscal policies andinstitutions.

It has little relevance for Muslim minorities and

non-Muslims.

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ISLAMIC BANKING AND

MINORITIES

Main raison dtre of Islamic Banking is DivineProhibition against Rib.

The prohibition is equally applicable to Muslimmajorities and minorities

The minorities are also desirous of organizingtheir financial activities in accordance withShariahbut lack effective institutions.

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Dr al Islmand Dr al Harb

Classical Jurists divided the world into Dr alIslmand Dr al Harb

Some Jurists (Abu Hanifa, Ibne Taimiyah,

Mohammad) allowed Ribbased transactionsbetween Muslims and non-Muslims in Dr alHarb.

Some equally prominent jurists opposed it.[AbuYousuf, Shafei, and scholars from HanbaliSchool]

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Present Day Muslim Minority

Countries are not Dar al Harb

The Classical distinction is not relevant for the

following reasons:

1. Single Political Entity vs. 54 independent states

2. Not adjacent to each other

3. Migration is in the reverse order

4. Visa Restrictions

5. Muslim countries could not be described as Daral Islam because of non application ofShariah

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FINANCIAL NEEDS OF MUSLIM

MINORITY HOUSEHOLD

PERSONAL FINANCE PETTY TRADE HOUSING FINANCE INVESTMENT NEEDS

HOUSEHOLD

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ISLAMIC BANKING IN THE

CORPORATE SECTOR

Much of the Development of

Islamic Banking that has taken

place in the eighties andnineties has been in the

organized Corporate Sector.

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LIMITATIONS OF THE

CORPORATE SECTOR

REQUIRES:

1.Large Capital

2.Large size of Market3.Favorable Political Climate

4.Institutional and Legal Framework

Negative Mental block against Islamic banking isa big barrier against it in the Muslim Minoritycountries.

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ISLAMIC BANKING IN THE

COOPERATIVE SECTOR

Cooperative Sector Requires:

1. Open Membership

2. Cooperative Education

3. Cooperative Cooperation4. Democratic Participation

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ADVANTAGES OF THE

COOPERATIVE SECTOR

Insulates from unhealthy competition from theCorporate Sector

Requires much less capital and is much less regulated.

Institutions in the Cooperative Sector are offered manyincentives

Cooperative institutions are quite elastic with respect to

size. Cooperative System is amenable to different purposes.

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COOPERATIVE INSTITUTIONS

OF ISLAMIC FINANCE

INTEREST FREE COOPERATIVESOCIETIES

INTEREST FREE COOPETIVE HOUSINGSOCIETIES

COOPERATIVE INVESTMENT FUNDS

COOPERAITIVE ISLAMIC BANKS

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ISLAMIC FINANCIAL

INSTITUTIONS IN INDIA : A CASE

STUDY

Islamic Banking movement concentrated in theGulf, India remained at outer fringe.

Introduction of Islamic banks in the corporatesector can give a boost to private commercialbanking in India

India could invite foreign capital through Islamicbanks

Islamic banks have special relevance for microcredit schemes.

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INTEREST FREE FINANCIAL

INSTITUTIONS IN INDIA

More than 200 institutions, mostly loan societies andinvestment companies.

Operating in the unorganized sector Misnomer to describe them as Islamic Banks Societies registered under Societies Act. Many remain

unregistered. Different sources of funds Lack control and regulation due to absence of legal

framework. Non Banking Financial Companies and Islamic

Investment Companies.

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CONCLUSIONS

Require Legal Framework

Professionalism

Transparency

Productivity and Efficiency.

Needs to be organized.

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THANK YOU