Islamic Banking theory and practice ideally draws upon central tenets of Islam. The basics thus dates back to the Holy Prophet Muhammad (Peace be upon him and his descendants) who emphatically taught his followers to keep economic considerations subordinated to moral consideration. Also Islam lays great emphasis o­n maintaining a balance between the conflicting interest of individuals and the different sections of society. Islamic Banking shall, therefore, be differentiated from much narrower concept of interest-free banking, which essentially deals with instruments, services and operations devoid of interest. Islamic Banking has been defined as baking in consonance with the ethos and value system of Islam.

Introduction:

Islamic Banking (IB) has emerged as a unique event in the economic history of Muslims; over the last two and a half decades. Islamization promoted by strong political will and commitment Of the believers in the countries such as Iran, Pakistan, Malaysia, Sudan etc. is o­ne of the crucial factors that makes Islamic Banking so important o­n the other hand non-Muslims have not o­nly seriously observed the developments related to IB theory, practices and trends but also initiated Islamic Banking in their conventional banking and finance organisations. Interest of the non-Muslims in IB which is still in the making brings lot of attention to IB system design, implementation and evaluation.

Over-view:

To date more than 200 Islamic Banks have been opened world-wide. These banks can be classified into the following categories:

1-      Banks operating in Muslim countries looking forward to change their entire banking system from conventional interest based banking to the Islamic Banking. In most of these countries  religious scholars are actively involved into system design and development. In some countries religious scholars are also supervising operations.

2-       Banks operations in Muslim countries which have not yet taken up  the task of eliminating interest-based banks which seem to  continue long in competition with the Islamic banks.

3-    Islamic Banks recognized for their Islamic character by concerned  authorities in non-Muslim countries.

4-    Islamic Banks operating in non-Muslim countries without  recognition of their religious flavour by the concerned authorities.

5-     Islamic Development Bank.

Market Fundamentals:

The major factors that shape out market fundamentals regarding Islamic Banking can be traced to originate from the following:

—Governmental Policies such as regulation and control.

—Socio- Economic and General Business Scenario:
such as value system and legal frame-work.

—Banking & Financial Services Sector Conditions:
such as structure and productivity.

—Market Opportunities & Business Development Scenario:
such as market structure and consumer behaviour and preferences.

Fig. 1 depicts interactive and dynamic relationships among the factors that influence Islamic Banking. It also facilitates understanding of the market place incentives for development and sustain ability of the Islamic Banking System. There interactive and dynamic relationship are valid o­n any scale; global, regional or local. However the complexity increases with the scope of operations. Also it is no mean task to address the concerns of both the "micro" and "macro" players.

Issues:

1.  Religious scholars and academicians are divided if Islamic Banking theory has its own certain    boundaries and concepts to constitute a comprehensive frame-work for all possible economic relationships as well as rationale for establishing arid evaluating policy goals and implementation.

2. Definition of the role of the religious scholars regarding inception, design, development, operation   and evaluation of Islamic Banking products.

3. There are controversies regarding the extent to which developments in the knowledge base in the West are relevant and applicable to Islamic Banking.

4. Acute shortage of experts and scholars who are trained in conventional economics, finance etc. and knowledgeable about Shariah and Islam.

5. In some countries efforts to Islamise have slowed down. Islamic Banks operating in such countries will face difficulties as will to conform to values of life to Islam weakens.

6. Most, of those implicated in the challenge of Islamic Banking Operations and their sustainability agree that ideal alternatives to interest are Profit and Loss Sharing and Qarz-e-Hasnah. However these ideal alternatives  are central to the operation of Islamic Banks.

7.  There are serious apprehensions about creeping of interest based transactions in Islamic  Banking. This implies continuation of exploitation. To some this is turning out to be more exploitative than interest based system. Socio-economic objectives of Islamic System remain unfulfilled.

Injustices under the Umbrella of Islamic Banking as well as short comings in the implementation, if not checked in time, would definitely bring bad name to Islamic Banking.

8. Many Islamic banks did not make efforts to introduce new products and services. Research and development has been a very low priority item. Also the institution of Ijtehad has not been utilized fully.

9.   Growing keenness of the non-Muslims in Islamic funds is manifested by names such as UBS, Roll and Ross, Indosuez and Wellington and Flemings which are creating awareness among Western investors. Also many conventional banks have opened up "Islamic Windows" and established Islamic subsidiaries.

If Islamic banks do not organise to meet the challenges ahead they might be forced out of the market by the fierce competition from these Western banks with innovative Islamic Banking Products.

10.  Islamic Banking Institutions are operating in a large number of countries each with a different social, religious, financial and economic scenario. This makes it difficult to compare results and assess progress.

11.   Accounting standards developed in the West are not best suited to Islamic Banks.

12.There are controversies regarding relationship with the foreign banks and the Central Bank.

13.Many Islamic banks lack aggressive marketing strategy. They are now old enough with a proven track record of more than 20 years to present their results confidently. Unluckily the Islamic banks seriously lag behind in developing market place incentives for their clients as well as employees.

14.Islamic banks do not focus enough o­n Human Resources Development.

Above may seem disheartening. However, we should not forget Islamic Banking is a young discipline and faces all traditional developmental problems. It is illogical to compare and comment o­n the success of Islamic Banking versus conventional banking which has existed more than 300 years.

Suggestions:

1-      Institutions of higher learning such as Universities and professional bodies such as Institutes of Chartered Accountants specially in Muslim countries should work closely to develop and disseminate knowledge regarding Islamic Banking, International Association of Islamic Banks (IAIB) should consider establishing chairs in prestigious institutions. o­n o­ne hand this will
give thrust to teaching and research related to Islamic Banking. o­n the other hand it will facilitate to resolve issues related to theoretical frame-work and rational for policy matters.

2-Experts and scholars who have multi-disciplinary education and trading both in Fiqh and Shariah and Economics and Finance should be encouraged. Universities as well as professional bodies should design educational and professional programmes combining knowledge of Islamic and Shariah with Finance, Economics and Marketing. Joint Master's Degree programmes have been very popular in USA these days. A student simultaneously enrolls

him/her in say school of Business Administration and Environmental Studies, and obtains degree from both. Islamic Banks should sponsor such programmes with prestigious educational institutions. Joint degree programmes can be started in collaboration with religious schools and business administration departments. Some elite universities of USA started as Schools of Divinity and now have fully developed teaching and research departments almost for every modern discipline.

3- The academicians and practitioners involved in Islamic Banking should keep themselves abreast of development in the Banking and Finance Sector in the West. For example theoretical advances in Finance including portfolio, option pricing and market efficiency theories have important implications in the banking sector. Similarly the theory of particle finance through in its infancy now will revolutionalize banking of the 21st century.

The advancement of science and technology is equally important to Islamic Bankers since innovative applications will re-shape the banking and finance sector. The speed, power and control of data,  and communication at o­ne hand will enable bankers to discharge their functions of financing, risk management, trading and financing and advising better and faster. o­n the other hand, bankers will be able to operate o­n a much more complex level as ever. Another characteristic of future market will be perfect market segmentation —selling to market . All these presents vast opportunities of the new discipline of Islamic Banking.

4-Islamic Banks should be convinced to exercise strict self-control to refrain from indulging into interest band transactions. Supervisory role of scholars should be enhanced through IAIB and other forums.

5-Islamic Banks should give top priority to development of innovative products and services; that cater to the needs of their customers. The bank should have the capability to direct and conduct marketing research and utilize it for developing new Islamic Banking Products. Islamic Bankers should look at new avenues of investment and a niche in the market for them. Direct Foreign Investment, venture capital, performance contracting, entrepreneurship promotion and small, business development are the emerging opportunities specially in Muslim countries and their neighborhood. Also Islamic Bank should not ignore o­n-going privatization in the developing countries like Pakistan, Egypt and Jordan. This presents opportunity to participate in the
ownership of newly privatized enterprises through Islamic Funds.

6-Islamic Bank should prepare to deal with the private sector of the Muslim countries where privatization is so trendy. Operations department should be manned with the professionals who have the required expertise and experience to deal with the private sector. Another niche for the Islamic Banks is to create their achievement out of crisis in the banking and financial sector

of the poor developing countries.

A large number of poor countries have had some banking crisis in the past two decades. Some countries have ended up shutting down sick banks. Other have been putting :in their scarce resources into these unhealthy institutions with a hope to cure them. Experts suggest different solutions such as stringent supervision and evolution of banking standards.

However this crisis and struggle of these poor economics to restore health of their sick banks present an opportunity to the Islamic Banking Practitioners. It would not be out; of place to point out that some multi-national banks have been, watching banking and financial sector crisis in Pakistan. Some are now actively shaping out a strategy to capitalize o­n it and create their achievements out of adversity of the Pakistani Nationalised Banks. Would someone work out the feasibility of taking over a sick bank and demonstrate Islamic Banking as a cure? Demonstration with strong replication potential will go a long way to promote, establish and sustain Islamic Banking.

7-Islamic bank should take up an aggressive marketing approach. Last twenty years of Islamic Banking has generated sufficient data to justify it is realistic, profitable and sustainable. This history and data should be incorporated into the promotional campaigns.

8-Islamic Banks should collaborate in the development and implementation of the accounting standards. This will facilitate the banks to have effective relationships with other and further establish credibility regarding bank performance.

9.              Islamic Banks should allocate a reasonable amount of their earnings to research. This will facilitate fostering a market oriented. Islamic Banking System Research will help establish sectors to invest, introduce new products .& services and fin ally assist in strategy formulation and review. The decision makers in the bank should acquire the knowledge and skills to direct, supervise and conduct
research as well as utilize the findings to the best advantage of their banks.

IAIB has a special role to play regarding research. IAIB through its Technical Assistance Programme may finance syndicated-research and subsidise industry, sector and industrial feasibility studies to promote project development activities of the Islamic Banks.

10.  The Isla.mic Banks should seriously tap the resources of the institution of Ijtehad to resolve developmental and operational problems as well as enhance the process of growth.

11.   Islamic Banks should realise Human Resources Development (HRD) is crucial to thei.r success and growth. The banks should give prime important to all aspect of HRD.