In the last 20 to 24 years Islamic banking has been passing from its conceptual stages to realization. There is now no longer any doubt that methods, policies and tried practices are in place that show how a complete system can function internationally, more securely and beneficially to the small and medium size and eqully so to the large size savers and investors in Muslim countries.

The principles make the system more practical and favourable to all concerned since risk sharing, by the owners of money is, in the world of today, a reality that happens even when enterprises and countries undertake to pay fixed term debt and they discover that they cannot. Driving of individuals, enterprises, countries and even parts of the world to debt that is beyond their capacity is very short sighted and cannot be in the interest of any of the concerned parties. It has certainly caused an incredible amount of waste in the last 25 years as countries, enterprises and individuals are not adequately warned of the pitfall of inadequate scrutiny of projects and schemes. This is largely because lenders do not share the risks of project failure. The lenders rely on the countries or individuals basic resources rather than the scheme they are lending for, to pay debt and fixed term interest. Evidently, neither the efficiency nor the econoriics of the scheme are examined, not the aggregate effects of a number of such schemes on national economies. This has crippled the weak countries of the world and put impossible burdens i on international institutions like the International Development Association whose capacity has fallen far short of the needs of developing countries.

Many strong economies have been drawn into disarray and are left with incomplete capital cities, under-utilized hotels, unfinished factories, and in many cases in countries where the terms of trade have reversed and the ability to sustain such debt service is out of reach. Fortunately, in the Islamic system where the risk is shared by the investor and the financier, these problems are minimised by the scrutiny which both the financier and the sponsor alike of the scheme undertake to make sure that it can be lucrative to both the owner of the scheme and the provider of financing. As the Islamic system stretches from purely investment and banking to Takafol and business ventures as well, its growth has strengthened the under-pinning of risk sharing. No doubt financial institutions are very frightened of being associated financially with failures when the network is small and fragile. Once it has spread and strengthened and succesis readily offsets failures which are reduced to a minimum by consciousness and scrutiny.

Yet it would not be true to say that the system is now in any way complete. It is approaching completion with regard to the possibilities placed before savers/investors, but that in itself is not adequate. The next phase is to strengthen the support of the system internationally and nationally through well-developed Islamic substitutes for classical monetary regulation and central bank discounting, coupled with collaboration between banks directly and through the association of Islamic Banks and the other groups that tie them together. Finally, the closing of the gaps in the international system, both legal as well as practical, render it impossible at the moment to operate totally within an integrated Islamic network, without transiting into the existing capitalistic banking systems of the world. These transits weaken the network and render it vulnerable to abuse each time an external trade operation is financed through an international bank from a non-Islamic country. Even the movement of funds to parts of the world where goods and services are purchased or when commodities and materials are traded under the Islamic system necessitated a number of transits through classical banking.

ROLE OF CENTRAL BANKS AND MONETARY AUTHORITIES

This would be as under:

(a) setting-up of guidelines for promotion, regulation and supervision of Islamic banks

(b) simultaneously wth control and regulation, the provision of support and assistance by the Central Banks to the Islamic banks, so as to nurture their growth and development.

Some of the problem areas of Islamic banks which the Central Banks  and  policy  making authorities in Islamic countries can help resolve are:
(a) Islamic banks are at a considerable disadvantage in facing the competition with conventional banks because they do not have access to the money market and may even face hostility from the conventional banks. The conventional banks can always resort to the other banks and to the Central Bank when they face a difficult liquidity situation.

For this purpose, it will be necessary to make provision for Central Bank assistance to the Islamic Banks on a basis compatible with the Sharia. DMI Trust is studying this function for members of the Group.

(b) Islamic banks cannot deal with interest bearing financial instruments. There is need for Central Banks to foster the development of financial instruments which are interest-free to enable the Islamic banks to meet statutory liquidity requirements as also place excess liquidity in profitable shot-term avenues. Development of an efficient market for such instruments would facilitate the realisation of this objective.

(c) Existing banking laws in most Islamic countries do not facilitate functioning of Islamic banks. Thus, there is need for re-consideration of banking laws by the Islamic countries with the aims of extending the coverage of such laws or provisions applicable to conventional banks to cover also the operations of Islamic banks based on Sharia. The adoption of such a proposal would relieve the monetary authorities from having to make special laws to regulate the operations of Islamic banks

(d) Need for creation of specialized departments in Central banks to guide and supervise the operations of Islamic banks and particularly the different new functions that are undertaken by these banks

(e) Adoption of suitable methods to govern the relation between the Islamic banks and the Central Banks and monetary authorities in the following ways:

— explore appropriate methods for extending the same support as enjoyed by conventional banks concerning financing and refinancing facilities to enable the Central Banks to extend the same to the Islamic banks on a non-interest basis.

— explore appropriate methods for facilitating short-term investments of excess liquidity in Islamic banks on a profit sharing basis

— extend investment returns distributed by the Islamic banks to their depositors with privileges identical to those enjoyed by depositors of conventional banks, i.e. extending such investment returns, the same tax exemptions and incentives which are available to returns on deposits with conventional banks.

The Islamic banks on their part should adapt their functioning with modern business practices through:

(a) Expansion of the range of dealings in the bank sector through comprehensive banking services,

(b) Improving the means to attract funds and savings and directing them towards Halal (profit) participation in the domain of investments available in accordance with the provisions of the Sharia,

(c) Providing necessary funds to meet the requirements of the various sectors including the welfare sector (Zakat, Waki). Although Islamic banks mainly operate on a national basis, they also have an international role and vocation
— examples: DMI, and subsidiaries, providing finance to the general public iat local level as well as internationally oriented Islamic investment and holding companies that focus on finance and have a worldwide operational coverage. Consortium approach between Islamic banks — examples DMI, FIB Egypt and Sudan for joint venture activities, syndication of loans, etc. Need exists for coordination and cooperation among Islamic banks
to complement each other's activities rather than indulging in counterproductive, unhealthy rivalry and competition.

The role of the International Association of Islamic Banks inter alia is to:

(a) strengthen ties between Islamic banks

(b) affirm their Islamic character of the operational activities

(c) provision of technical assistance and expertise to Islamic communities wishing to establish Islamic banks

(d) coordinate exchange of data and information among Islamic banks

(e) undertake research on monetary problems, insurance and banking at national level

(f) conduct publicity campaigns for the dissemination of the concept of Islamic business dealings

(g) representing the common interests of Islamic banks at national and international levels

Interest-free banking is a novel form of finance about 25% of the world population is Muslim and would prefer to be sure that their financial affairs are in line with the precepts of Islam, but as is only natural, they would wish to earn legitimate profits. Thus, opportunities for Islamic bank in mobilising and utilising funds exists.

Establishment of many new Islamic financial institutions in different parts of the Ummat Al Islam is definite. Those already established have proved that banking according to the principles of Sharia is not only feasible but also profitable.

MODEST ROLE OF DAR AL MAAL AL ISLAMI

DMI was created in 1981 to help complete a network of diversified Islamic financial services by founding entities where there are gaps. The Dar-Al-Maal Al-Islami founded by prominent Muslims, including heads of state, was incorporated in July,  1981, with an authorized capital of US dollars 1 billion. DMI's operations started with a paid-up capital of US dollars 310 mlo. — subscribed by a group of prominent business personalities in the Muslim world and by the general public from various parts of the world.

The founders of DMI include such prominent personalities in the Islamic world as the Heads of State of Bahrain, Guinea, Pakistan, Sudan and the U.A.E., along with other leading persons and business leaders from various parts of the Islamic world.

The Chairman of the EMI, as you all know, is His Royal Highness Prince Mohamed Al Faisal Al Saoud, son of the late King Faisal of Saudi Arabia.

The principal objectives of the DMI inter alia are as follows:

To undertake financial operations required by Muslims within the framework of the principles and precepts of Sharia.

To implement its various activities through subsidiaries established or to be established in Islamic and other countries.

To invest, within an Islamic context, the funds of Muslims to general Halal profits.

To promote and consolidate cooperation amongst Muslims.

DMI is designed as a holding company and management adviser geared towards providing the setting up of Islamic banks, investment companies and Takafol companies which is the Islamic alternative to western insurance, and business companies. It also envisages organizing other operating subsidiaries to conduct other financial or business activities.

DMI started operation with one subsidiary but it has already established a network of Islamic financial institutions in various parts of the Islamic world and outside-institutions namely, Massaref (Islamic banks), investment companies, Takafol companies (substitutes of insurance) and is expected to spread cut gradually in areas of leasing, trading, contracting, consulting and shipping.

DMI played a pioneering role in establishing Islamic financial institutions in Africa. It has established subsidiaries in Guinea, Senegal and Niger which are functioning satisfactorily. In addition, DMI has established business and investment relationships with other African countries. Trading and mining activities based on Sharia principles have been undertaken in Nigeria, Mali and Upper Volta. During the coming years, new DMI entities will be established in other African countries with whom protocols have been signed or negotiations have already started.

Similar steps will be taken to establish DMI institutions in Pakistan and a Faisal Finance House in Turkey will start operating during 1984.

The DMI network shall also, at a later stage, expand outside the Umma Al Islam, to the Americas, Europe and the Far East. This will help mobilisation of Muslim funds available in these areas for Halal financial transactions. In the field of investment, Dar-Al-Maal Al-Islami has provided appropriate opportunities and investment channels through the Massaref and Investment companies which it owns.

DMI, through the Islamic Investment Company of the Gulf, the Managing Trustee has, so far, successfully floated 8 Modarabas and at present, the Modaraba funds under management of the DMI investment group are approximately 1 billion US dollars. DMI and its associates are now examining possibilities of creating new Islamic financial instruments such as leasing Modaraba, Real Estate Modarabas and Hadi Modaraba.

Current accounts are payable on demand and are debited by bank transfer or bank cheque. Since a DMI Massraf assumes all risk with respect to current accounts, the holder receives no profit or earnings of any nature.with respect to current account balances. The Massaref also offer ancillary client services such as safe deposit boxes/security accounts, individually managed discretionary accounts, letter of credit facilities, etc.

The DMI Massraf also maintains investment accounts and it invests funds received from clients in forms of investment which conform to glorious Sharia — on a profit sharing basis.

The operations of EMI are subjected to the supervision of the Religious Board which ensures that such Islamic institutions operate in conformity with the Islamic principles forbidding Riba. The Islamic Takafol companies are based, like other Islamic financial institutions, on the Modaraba concept under this system. The DMI capitalizes local operating commercial companies to serve as Mudarib (managing trustee). In the foregoing, an Islamic Takafol company is substantial identical to an Islamic Investment Company.

In order to finance projects, trade and other services provided by DMI to its clients, it has successfully devised a set of basic types of Islamic contracts which are:

Morabaha (cost plus financing)

Mosharaka (profit sharing)

Modaraba (trust financing)

Ijara (lease)

Ijara Wa Iktina (lease purchase)

Kard Hassan (interest free loan),

DMI has proved through experience that these Islamic forms of contract can adapt to new economic situations. In formulating its contracts, DMI has ensured through its Religious Board that they are compatible with the precepts of Sharia.

A brief description of these Islamic contracts are:

1. Morabaha (cost plus financing) is a contract in which a client wishing to purchase equipment or goods requests the Islamic institutions to purchase these items for him at cost plus a reasonable profit. Capital and profit are due and payable on terms agreed between the parties.

2. Mosharaka (profit sharing) is a joint venture by which the Islamic institution advances funds, added to ths client's funds, to produce a participation in the equity. Losses are shared in direct proportion to their contributions. Profits are shared in direct proportion to the contributions after the payment of an agreed management fee.

3. Modaraba (trust financing) is a contract in which all the I capital of a partnership is provided by the Islamic institution and the business expertise and management effort is the responsibility of the client, Profits accruing to a Modaraba venture are divided between the client and the institution's investors according to the contractual Modaraba terms and conditions.

4. Ijara (leasing) permits the financing by the Islamic institution of equipment, building and other facilities as requested by a client against an agreed rental.

5. In an Ijara WL Iktina (lease purchase) contract, the Islamic institution finances equipment, buildings, or an entire project for the client against an agreed rental, together with an undertaking from the client to make payments into an Islamic investment account which will eventually permit the purchase by the client of the equipment or project. The profits accumulating in the investment account are for the benefit of the client.

6. Kard Hassan (interest free loan) funds are advanced for humanitarian and welfare purposes. Repayments are made over a period agreed by both parties with no profit accruing to the financing insitution.

Numerous operations and projects have been financed by the DMI group using these methods. They are in the fields of construction, transport, shipping, road building, fishing, food and agriculture, specialised equipment and real estate. Computerised methods have been developed by DMI to suit customers needs and to ensure speedy handling of financing requests while adhering to Sharia requirements.

I am glad to note that Pakistan has made substantial progress in this field and the Pakistan Modaraba Ordinance of 1980 is an important milestone in the promotion of Islamic financial instruments. Our special congratulations to the specialised institutions in Pakistan's public sector which I mentioned before, who spearheaded the Islamization process. DMI would be only too happy to share its experience and know-how with these institutions, and to learn from them.

In the years to come, with necessary support in the Islamic countries, DMI is prepared to continue to play an even more dynamic role in promoting Islamic financial institutions in various parts of the Muslim world. The task is, however, not an easy one. It needs trained and committed people, assistance and cooperation both from the governments and the Central Banks. The policy making agencies in the Governments of Islamic countries have a very important role to play in this direction. DMI stands committed to take a more visible role in Islamic welfare and community life and shall continue its march towards its declared objective to hold secure the prosperity of all Muslims, in collaboration with Islamic financial institutions and under the coordination of the International Association of Islamic Banks.

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* Dr. S.A. El Derwish is the Chief Executiue, Dar-Al-Maal Al-hlami (DMI) SA, Geneva.