It is difficult to evaluate the experience of Islamic banks in a global sense because results differ according to the criteria applied. Criteria applied are so diversified and the approach so different, that results could be misleading and disputable. However, any assessment should be one of constructive analysis, rather than criticism of existing systems based on past experience. If we come closer to analysis, which criteria are we to apply? 1. those of international banking practices and all the sophistication and experience gained over the centuries? 2. then, we wonder, can the practices of commercial, merchant and investment banks, with all their anomalies and differences be adopted for Islamic banking? In fact assessments have been based on a happy or unhappy mixture of all these practices, and this has sometimes led to inaccurate evaluation and hasty conclusions. 3. if we leave the criteria of International Banking and come closer to criteria of the home countries, the picture would be a little clearer, even if not very encouraging. Why? Because of the following anomalies: a) financial and fiscal legislation is based principally on western norms and relies very much on laws and regulations prevailing in the western world, b) civil and commercial legislation tends to combine elements of, western and Islamic norms; a unique mixture. c) social life and code of ethics (including business ethics) in Arab countries are more related to Islamic culture and economics and Sharia principles. Is it possible, after explaining these differences, to see some sort of an assessment that gives definite answers to questions raised by experts and laymen? 4. In my opinion, therefore, we come to the conclusion that any evaluation is, by definition only relative, because: a) of the above mentioned factors b) of the short period of experience and testing of Islamic banking practices. c) and because there is no practical or conceptual "model" of an Islamic bank to compare with. What we have now is only a state of educated guesses of what an Islamic bank ought to be. Are we then, able at all to assess the experience of Islamic banks? Yes, we should be able to do so, in all fairness and objectivity, but within the limitations set forth. We shall first take a birds' eye look into Islamic banks and then try to analyse the assets/liabilities structure. A Bird's 'eye view of Islamic Banks Looking into Islamic banks from a global point of view, one should realise easily that there are three main categories of Islamic banks, namely banks operating in a total Islamic economic order (or at least the financial sector), like Iran, Pakistan and Sudan. The second category is the Islamic Development Bank (Jeddah); a unique model, the third being the majority of Islamic banks operating in the Middle East and elsewhere. IRAN The Iranian Parliament approved legislation designed to eliminate interest from the operations of the banks in 1983 and it came into force in March 1984. According to this legislation banks are allowed two types of deposits; interest free loan deposits (current and savings), and long-term investment deposits. The legislation also described modes of financing, which are basically the same as other Islamic banks. Functions of the Central Bank to control and regulate monetary and banking matters have been spelled out to include, minimum and maximum percentages of returns on bank shares from profits of Musharaka and Murabaha business, (the same applies to investment and financing), as well as rates of service charge. Central Bank may fix minimum and maximum amount for finance under different modes (techniques). It is difficult for me at this stage to state authentically the progress in this country. In spite of some technical difficulties reported by the press, making banking in Iran Islamic is a great contribution to overall Islamic banking. An interview early this year with the Governor of the Central Bank indicates that credit facilities are more and more directed towards productive sectors, and that new segments of customers entered the banking sector after that change (South Magazine, February 1985). PAKISTAN Since President Mohammad Zia-ul-Haq asked the Council of Islamic Ideology in September 1977 to prepare a blueprint of an interest-free economic system, Islamic bankers and Ulema have recommended the development stage by stage until final application in July of this year. This pilot experience in Pakistan signifies many things; 1) it is, to my knowledge, the most comprehensive and carefully planned global system of Islamizing the economy; 2) the country is a very good testing ground with a huge population emotionally committed to the cause; 3) the country belongs to the Third World and could prove that Islamic economics can contribute to the remedy of poverty and under-development; 4) commitment of the government including the central bank, which gave no excuse for banks to claim difficulties in dealing with this new system. Reports indicate that progress is steady in spite of the difficulties in applying the permissible modes of funding as regulated by the law. Experts of Jurisprudence inside and outside Pakistan are criticizing some of these techniques as being un-Islamic. Internationally oriented bankers are stating that nothing significantly has changed aside from names. Difficulties raised by Ulema can be solved through evolution and discussion, doubts of bankers could prove to the contrary in due course. Elimination of interest from the economy report of the, Council of Islamic Ideology (Pakistan) by Dr. Tanzil-Ur-Rahman, Chairman. SUDAN Since the establishment of Faisal Islamic Bank in Khartoum in 1977, the wheel of Islamic banking moved slowly until 1984 when the government changed the banking system into Islamic, and provided the necessary push. The banking system hardly started to consolidate itself into the new order when the winds of change in the political scene started blowing. To a foreign observer, it is uncertain whether this process will continue with the same enthusiasm, but currently it appears to have moved away from the list of priorities. Experience of Islamic banks recorded progress in attracting new depositors and new customers in general. A good deal of funds went into productive sectors including self-employed entrepreneurs. Relations with Central Bank are not clear, as they are in the case in Iran and Pakistan and the process of changing the regulations appears to be less systematic.
Islamic Development Bank (IDB) The IDB is a bank of governments established in 1974 in Jeddah (Saudi Arabia) by 37 Moslem countries. The Bank has now 42 member states participating in it. Issued arid paid-up capital is two billion Islamic dinars (equivalent to the same amount of SDK's of the IMF). According to it's Statutes, it was established along the same principles declared by the OIC (Organisation of Islamic Countries) to promote cooperation and strengthen ties between member countries in all aspects of life, with special emphasis on economic development and financing. Co-financing of projects, trade financing, equity participation, promoting training and research in the fields of Islamic banking and economics, are but few examples of the functions assigned to IDB. Cooperation and co-ordination with other Islamic banks is also mentioned as a function of the IDB. At this juncture it's worth trying to highlight some of the data and achievements reflecting the performance of the bank (Annual Report 1983-84). Total Assets (Liabilities) US$ 1,881.5 Million, an increase of 11% over year. Total Equity US$ 1,335.9 Million, an increase of 17% over previous year. Total net profit increased by 35.7% over the previous year. The bank projected expected investment outlet to total around US$ 11 billion until 1995. Various financing activities reached a volume of US$ 962 Million in 1984 (accum. 3.89 billion US$) of which US$ 711 Million were granted for trade financing. Leasing activities absorbed US$ 144.5 Million in 20 countries. Project (equity) financing totaled US$ 296.9 Million. Budget for research and training was US$ 10 Million. The IDB is now in a unique position on the one hand it is a bank of governments with all related limitations enshrined in its statute, and oriented towards development projects, financing infrastructures and promoting of export-import to and from member countries. On the other hand it is requested to assist Islamic banks in various fields and co-operate with them. In fact many banks are incorrectly attacking the IDB for not being co-operative, a charge in my opinion without foundation. Needless to say that the very basis of its charter and concept, the funding and the clientele are basically different. Other Islamic Banks Before going into detail of assets/liabilities management of Islamic banks, it is necessary to characterize the general trends in Islamic banking: *The number of banks has been multiplying rapidly since the establishment of the first one in 1975. Geographical distribution covers many countries in the Middle East, Asia North and West Africa, besides a sizeable presence in Europe. Although total assets (aside from Iran and Pakistan) may not be more than the balance sheet of a major International bank, the moral significance and impact are tremendous. *Trend shows increased interest amongst the public, governments, Universities and banking sector, including central banks in the region. *On the other side of the coin, Sharia jurisprudence in terms of practices and application in Islamic banking has not been satisfactorily developed, due to basic differences between Ulemas on main issues, to suit the 20th century sophisticated financial climate of the world. *Infrastructure is not yet strong enough to take care of growing trends, i.e. systems and procedures, evaluation techniques, marketing instruments, training and lack of qualified staff. *Driving forces are more individualistic, which could be right or wrong, rather than institutional in group efforts. *Basic concept of "an Islamic bank" is still arguable, whether it is an investment bank or more related to a modern commercial bank. *The time factor and scarcity of experience have not been taken into consideration during rapid expansion. Expansion is more horizontal than vertical, with all accompanying consequences. *There is a missing link which weakens the structure of IBK's, ancillary financial functions like insurance, secondary markets, ... etc *Lack of planning, especially in differentiation between strategic objectives and tactical plans. Assets and Liabilities Management of Islamic Banks 1) Socio Economic Norms: It is worth trying to explain major factors that affect the economic behaviour of the individual Moslem, which we may describe as socio-economic norms. These are norms that regulate the behaviour of the individual towards himself and others and they constitute an integral part of the Islamic economic order. The relation to assets/liabilities is direct and important, and could explain the conduct of individuals towards banking and finance. * Environmental Norms: Trusteeship of resources Freewill within a global economic and social order Gradation and objective differences between human beings, with responsibility increasing proportionally with wealth.
* Behavioural Norms: Person to person relations regulated by Adl (justice) and Ihsan (fairness), i.e. no fraud, no monopoly, etc. Person to universe: everything is created to serve man, God's Khalifat on earth. All resources are available to be used by human beings but within limits. Profit allowed but not profiteering or greed; no exploitation of resources or efforts. Person to God: Submission to divine orders and framework laid down by God; not to man made economic of social orders based on materialism. * Functional Norms: 1) Production: There are priorities in the production process to meet needs, i.e. necessities then conveniences, then refinements. However, these priorities differ from time to time and from one society to another according to economic and social conditions and as such they are relative and flexible. 2) Distribution: a) Personal; fulfillment of basic needs, equity but not equality elimination of extreme wealth by means of Zakat (tax), Sadaqat (charity), and Nafagat (donations to relatives) . . . etc. b) Functional; each factor is rewarded according to its contribution to production. Therefore, money has no trading value in itself. 3) Consumption: regulated by code of behaviour; i.e. Infaq Wa Tadbir (consumption and spending reasonably) as opposed to Israf wa Tabthir (waste and excessive spending). Assets and Liabilities: Expectations and Achievements Assets: Unfortunately most published balance sheets do not show details of assets' structure. However, we can summarize activities according to available data as follows: * Morabaha (Mark-up purchase): which is short term financing and enjoys a leading role of activity as an Islamic instrument and is especially important with approximately 80% of assets. This activity does not add much value to the existing trade financing by conventional banks; adds to the pressure on foreign resources of Islamic countries and accelerates consumption by importing goods which are mostly non-producing. Huge surplus short-term funds are invested in trade financing and commodities in international markets. Morabaha is still considered by many scholars to be on the negative side of Islamic banking. * Modharaba (Capital trust financing): basically this mode should have been the leading instrument combining human effort and skill with capital in the producing process. Unfortunately it has a minimal, tiny place now, with very few cases recorded. * Mosharaka (Partnership) a. Equity financing in the form of creating specialized companies in the fields of trade, construction, transport, agro-industries . . . etc. or participation therein. Although this should have been one of the principal modes it contributes less than 5% of the assets side. Creation of so many companies, without, adequate infrastructure of project evaluation follow-up and control created an adverse experience, including accumulated expenses. The initial move has lost momentum. The speedy establishment created also the problem of spreading of equity funds of the holding bank or financial company and thus resulted in the declining effect on liquidity and effective funding. b. Financing of working capitals: This mode is gaining ground against equity participation, and in spite of many practical difficulties the trend is increasing. Total percentage is still small (may be around 10%). Difficulties such as: delay in start-up after evaluation; inaccuracy of feasibility studies, production difficulties, marketing difficulties and lower returns than anticipated, are but few of the important problems in this area of operation. Leasing: is gaining ground constantly and the percentage is increasing as a medium-term mode of financing. In fact leasing is one of the most used instruments in co-operation with international financial institutions along with commodity financing. Relative share in assets is about 5% presently. Leasing has some practical difficulties as to the contracts involved, replacement by certificate shares "successive participation," calculation of actual return on asset or leasing value, depreciation and appreciation value of leased assets . . . etc., but constant improvement is recorded in this respect. Al-Salam (agriculture and industry pre-financing): In the case of industrial financing it usually takes the form of working capital pre-financing for raw materials. Percentage is not high to my knowledge. However, pre-financing of agri-products is taking place on a relatively large scale in Sudan and recently in Pakistan and Bangladesh. Recently Turkey has also caught up with agri products pre-financing by some Islamic banks. This mode of financing is gaining ground although it has more technical implications and risk factors than leasing. This could be one of the major functions of Islamic banks if we take into consideration the economic structure of most Moslem countries. This could be combined with trade financing thus promoting export-import between related countries. Other modes are less significant: interest-free loans, rent sharing, financing of housing projects . . . etc. Liabilities: The structure of liabilities side in an Islamic bank does not differ from that of a conventional bank, contrary to the assets structure. We have here basically four different components: a) Current trust accounts b) P/L general deposits; c) specified P/L sharing deposits: d) shareholders equity The early stages of operations in Islamic banks, especially in Egypt and Sudan, recorded an emotional rush to open current trust accounts from many sectors of the population who did not deal with conventional banks, or dealt unwillingly. Cheap money was available and thus profits were high. Current accounts are still a substantial percentage of sharing projects. The ratio stands now almost the same as in conventional banks. P/L sharing general deposits (savings and time deposits) are aimed to be invested in the general pool of the bank and are given relatively the same rate of return as in conventional banks sometimes slightly more and sometimes less according to the structure of provisions imposed on the bank (some reach 20% of investment profit). The nature of this main funding source is short-term. Funds could be invested up to one year which gives little flexibility to banks, thus forcing them to invest mainly in Morabaha purchase and in trade financing. Lacking a lender of last resort, banks are forced to remain liquid, therefore they have a large concentration of funds invested in the international commodity markets. Longer term specified deposits (in a specified project, sector, product, . . etc) are scarce, in spite of the constant effort made by banks to encourage depositors in that direction. Directing customers towards this means, however, means hard work by banks to select, study, evaluate, sell and control investment projects to convince customers and to give them certainties about proposed projects. General Assessment of Assets/Liabilities To sum-up the experience in the Middle East, these are the main points: 1) Accumulation of deposits from outside existing banks and their increasingly available funds. 2) Motivation of depositors towards longer-term deposits as a means of savings and higher returns. 3) Return varies between banks, but within prevailing returns of conventional banks. However, return on equity is higher than on deposits which should be reconsidered. 4) Percentage of equity to investments and/or liabilities is relatively low compared to the risk factor in investment and financing, which should be consolidated and enlarged, through bigger commitment from shareholders arid promoters. 5) Increase in liabilities was faster than in assets as short-term investments yielded higher and quicker return than long-term investments. 6) Funds are more directed towards productive sectors, thus resulting in the long-run in better employment, less inflation and commitment of customers (depositors and investors) towards national development plans. 7) Entering of new segment of customers as beneficiaries from investment funds through Modarabah. 8) Diversification and development of new tools and instruments in the banking sector. 9) Problems of non-payment, or delay in repayment are recorded and need further study from legal and practical points of view. 10) Basis of costing (funding-lending) is not yet established independently from conventional banks. Although returns are calculated as non-interest, yet the base of calculation in most cases is the cost of funds in the interbank market. 11) Medium and long-term financing and co-financing in projects in other Islamic countries suffer from problems of devaluation in domestic currency, foreign problems in repayment, inflation and higher country risks. Co-ordination versus Co-operation Why Co-operation? If we follow resolutions and recommendations of Islamic banks many are asking for co-ordination and co-operation amongst those institutions. Writers are filling pages of literature about the need for closer ties and relations. The question is why? Whereas we all agree on the merits of cooperation between institutions in the same industry, why is it so essential specifically in this case? The following reasons might be valid. a) Islamic banking is not a local or even regional experiment of economic order. Its effect is beyond that and could affect many millions of people in more than 42 countries of the world. Although we agree that some details are bound to local or regional circumstances and conditions, yet common norms are regulating this experience to produce a universal model (or models) of an Islamic bank working as an operative vehicle. b) Parties concerned are disillusioned by the Different, and sometimes diverse application of norms which are supposed to be common in all countries; being customers, business partners, other banks or even central banks. This unclear picture might have added some problems to Islamic banks especially in trying to define modes of co-operation with international financial institutions. c) Resources are scarce; these include experts in Islamic jurisprudence, Islamic banking practitioners and even sums allocated for productive and development projects. Strengthening forces would cause better mobilization of resources for the benefit of all. d) Self identification: There is no doubt that Islamic economics and banking exist in the jurisprudence; and in the hearts and minds of many scholars. Models of Islamic economics existed in the past, but Islamic banking as a practical reality has not proved itself yet, and can not prove itself unless Islamic financial institutions work closely together in practical and operational banking to identify the major characteristics rather than merely trying to "Islamize" existing forms and experiences. Existing forms of Co-operation and Co-ordination: For the time being we can identify various levels of co-operation and up to the extent of co-ordination according to present groupings: Banks in a total Islamic order like Pakistan, Iran and Sudan are working closely with the Central Banking Authorities for obvious reasons, and there is no practical need for cooperation because they are all in the same boat. the International Association of Islamic Banks was established in 1977 and enjoys a juridical personality and financial autonomy to work mainly on common areas of Islamic banking including coordination, co-operation, documentation . . . etc. This association was aimed to foster the movement of Islamic banking, but partly failed to do so for various reasons. Dar Al Mai Al Islami Group (DMI): which includes mainly Faisal Islamic Banks and financial institutions. I assume a great deal of co-ordination among group members directed from its Head Office in Geneva. Al Baraka Group, which includes Al Baraka Islamic banks and Financial Institutions is currently exercising a great deal of coordination amongst group members directed from the parent Company in Jeddah. Aside from the above there are small clubs/satellites moving around for the sake of co-operation with the big groups or with each other on a bilateral basis. Apart from the groups, which are closer to the level of co-ordination, co-operation exists between banks at various levels, but not (in my opinion) with constant intensity as follows: * Liquidity and stand-by arrangements: There has been a problem of excessive or shortage of liquidity ever since the establishment of Islamic banks. Instruments have not yet been developed sufficiently to cope with this problem. The IDB initiated acceptance of liquid funds from Islamic banks, but had to stop it temporarily after being flooded out. Now the IDB is developing an instrument of investment deposit. To my knowledge stand-by arrangements do not exist between Islamic banks. An initial agreement has been signed between Gulf banks, and stand-by arrangements agreed between other banks but nothing has yet been tested. Liquidity and mobility of funds raise many practical and legal problems which have yet to be solved. Correspondent banking and general terms and conditions are distributed amongst most of the banks, but the nature of transactions originated from Islamic countries and destined to main world financial and commodity centres, do not give much scope for closer relations; especially when direct trade relations between Islamic countries are limited and are directed to and conducted by international financial centres. There is a call amongst Islamic banks that any local bank can be the agent for other Islamic banks and financial institutions in its own country. Co-financing is very limited, but the IDB has a leading role to this effect, especially by inviting other Islamic banks to participate. Equity participation in companies, banks and financial institutions is now common practice. Research and documentation: there is a great deal of "abstract" research at individual level. Some efforts have been made for the sake of conferences and seminars, but joint systematic and practical efforts are lacking in general. In the field of documentation the Association is trying to have a role, and the IDB has currently taken the initiative to establish some sort of a data bank for interested parties. Training: although training is not only essential, but vital for Islamic banks, it does not get the serious attention it deserves. There are efforts to establish formal training courses in Jordan, Egypt, Dubai, Bangladesh, Jeddah (IDB) and elsewhere. The sad experience of closing the training institute in the Turkish part of Cyprus in 1984 after three years of operation is the result of mismanagement and non-commitment. Training should not be designed only to train bankers in various disciplines of Islamic banking and economics, but also to train scholars of Islamic Theology and Jurisprudence in modem techniques of banking and finance to work together with bankers in developing Islamic instruments. Customers should be educated and informed in various ways and means. An Islamic banker should be well equipped with knowledge and experience to be able to sell this kind of banking to international institutions or at least to be able to communicate and explain what he expects from his business partner. Universal Islamic Bank The idea of creating a Universal Islamic bank emerged as a direct consequence of establishing Islamic banks and the problems facing them. On the one hand there is the problem of liquidity which might face individual banks. On the other hand, the need is for close co-operation in the fields of research, documentation and initiating new instruments for financing and investment. Another factor is the psychological need for a "longer hat" to protect the established banks after being in disagreement, conflict or "love-hate" relationship with Central Banks. The dialectical relation to Central banks, especially in terms of protecting depositors, reserves ratios, liquidity "lender of last-resort", is not solved yet, despite the declared commitment of Governors of Central Banks and monetary authorities towards establishing "regulations and guidelines in promotion, establishment and supervision of Islamic banks." Models characterized in some detailed studies show a combination of many functions from commercial banking, merchant banking. IMFWorld Bank and Central Banking. Such theoretical models available now, should be tested against the real objectives and target sot for such Jumbo bank to have its foundation in reality. A group of experts started studying the matter and the committee stopped in front of such basic issues as functions, place of establishment, legal barriers possible concessions . . . etc. The immediate problem which should be analysed and discussed is liquidity, and if this problem could be solved in a regional sense, combined with developing secondary markets for participation certificates, there might be no need for the time being for this huge institution, especially if such functions could be managed by one of the existing offshore Islamic banks. Creating a Universal Islamic bank could solve some of the immediate problems. However, many of the problems to come could be dealt with on the level of a multi-national institution rather than a bank, (see report on the follow-up of the resolutions of 14th Islamic Conference of Foreign Ministers and 6th meeting of the Governors of Central Banks on the follow-up of the study in this regard, August 1985). Islamic banks have to face a fact of life that they are operating within the jurisdiction of sovereign states governed by laws and regulations including those of money and banking. So they have to "discuss" with Central Bankers ways and means of co-operation, towards understanding the specific and different nature of Islamic banking. Keeping this in mind, we might I believe, redefine the whole concept of a Universal Islamic bank towards the idea of an "Islamic Financial Co-operation Council". That Council could be placed within certain conditions under the auspices of (OIC) which originally inspired the idea of establishing the IDB and later recognised the Association. Islamic Banks Survival or an Historic Event? The main theme of this paper has been more on the critical side, rather than appraising the experience. We should not be afraid of or shy away from criticism and self-criticism, because we care for the idea, and believe in it. Criticism is not directed to or aimed at any specific person, institution or school of thought. The answer to the question of survival or not lies in the hands of Islamic bankers and experts of Islamic jurisprudence to be able to face all challenges. Facing challenges means we should believe that; Islamic banking is relatively an open system which accepts all ideas and experiences, provided that they are within the limits laid down in the Quran and Sunnah (sayings and deeds of the Prophet Mohammad). Any person who is qualified in education, responsibility and experience could contribute to the success of Islamic banks. We are aiming to reach the stage of identification when we develop enough matured experience and create models. Until then we shall be only counted for "historical ends". This is not the spirit of doubt; but the spirit of challenge. These are some of the problems that Islamic banking suffers from. Let us not forget that the conventional banking system took four centuries to evolve to its present form, while Islamic banking is rot yet a decade old. The teething problems are there and will be there for some time. With these words, I wish to conclude my talk and say "Give us the tools, a patient hearing and a chance to evolve a compassionate structure of banking and we will successfully complete the mission. The author in Group Coordinator for Banking Affairs, Al Baraka Group, Jeddah (Saudi Arabia). The views are author's own and do not reflect those of any particular governmental body or organisation or any religious community.
* Dr. Munawer Iqbal: The Ethico-Economic System of Islam, int. inst. of Islamic banking, Islamabad, 1985 |
