Introduction

The following is a proposal to establish an information center that concentrates on applied research and which will have its own resources independent of Islamic banks but could provide services and works that promote operations of Islamic banking and to assess their performance. The following issues raised are meant to address the practical needs and to concentrate more on issues of operational significance making use of researchers, academicians, practitioners and all who are interested in Islamic banking.

The Center should focus on the following activities

a) To undertake, country studies by having correspondents in each coun­try, such correspondents will provide information on all the operations of Islamic banks and the problems that, are encountered in investment oper­ations via different methods. Also to report on the volume of investments according to each method in addi­tion to other activities and material published in local papers relating to Islamic banking.

b) Collection of data on writers of Islamic banking, research postgradu­ate students and other Islamic and non Islamic research centers involved in Islamic banking and finance.

c) Formation of a specialized team to study contracts used in the international markets such as LME and stock exchange markets.

The Documentation Center should aim to collect and collate all the works on Shariah studies related to finance as well as empirical work on Islamic banking. Further, to undertake some basic research but its emphasis will be on that which will promote the operations of Islamic banks.

Studies on Murabaha

Murabaha is a very important tool of finance for Islamic banks; it differs from interest finance in that delay in payment does not accumulate the mark up as interest does. When properly applied it ensures that goods and not money is delivered to customers. This instrument makes it possible for Islamic banks to extend Finance to all economic sectors. However some problems need to be addressed when Murabaha is used in case of imports. In its unbinding form, Murabaha may involve risks, as the customer may not take the goods ordered by him.

The administration of Murabaha is easier than other methods of finance as it secures profits and ensures credit risk. However its application encounters some prob­lems when bank officials authorize the customer to proceed without following the Shariah requirements, which are explained in detailed manuals. These manuals need to be fully understood to set cohesive rules and regulations that will pro­tect the rights of the bank and the customer.

Other problems that face the application of this method when applied in economies are hyper inflationary conditions. Here the Murabaha mark up may not com­pensate the inflation rate. This will pose the need for economic studies, future predictions and how rates can vary with inflation or not.

A more serious problem is when customers do not pay on time. To avoid such situations it is suggested that a data bank for customers' pro­files be compiled in order to identify defaulting customers. Banks using this instrument do not share the risks with their customers. Customers fac­ing genuine problems may need help and studies need to be launched in this regard. Special institutions should be established to look after such customers or establish rescue funds in each bank. It is suggested that penalties be imposed on those customers who can afford to pay but refuse to do so, such sums should then be transferred lo such funds.

Another issue to address are problems relating to securities. Should the bank take the goods bought on a Murabaha basis as col­lateral or should it use separate col­laterals and what are the implications each course of action will have on the bank and the customer?

Further, the determination of the Murabaha mark up needs to be studied for a method of calculating what is just and fair to both banks and customers.

Using Murabaha in LCs poses a problem in terms of documentation and import regulations - can banks import directly or not; whether title in the goods can be transferred to the bank, and should the banks establish special companies for this purpose. Finally, the policies of the central bank and how they affect Murabaha as far as mark up, margins and per­centage of Murabaha finance vis a vis other forms of finance are important issues and the study of different applications by other central banks.

Musharaka Operations

Musharaka may take many forms -the bank may finance equipment or capital goods for its customers on the basis of Musharaka; or may finance working capital on the same basis. In case of financing capital equipment, the Musharaka may be a continuous one or may take a diminishing form. Many issues will have to be resolved concerning the method of evaluation of assets in the event of the termina­tion of the Musharaka and when the bank finances working capital; whether evaluation will be on a mar­ket basis or book value or on a sub­stitution basis.

Who will take responsibility for the administration of the Musharaka based project - the customer, the bank or a third party. Musharaka is not easy to administer as it involves both credit risks and project risks. More effort needs to be spent on the project rather than the credit worthiness of the customer. The study of the project at all levels as well as a follow up dur­ing its implementation, financial and administrative stages and finally when the Musharaka is terminated.

The operational problems of Musharaka are many and there is a need to study those problems. Proper implementation needs a high degree of integrity among bank employees and customers. To reduce the dependence on this factor alone it is necessary that more effort be spent on laying down a detailed manual of Musharaka appli­cation in different sectors.

Unlike conventional interest banking, the proper administration of this method needs a qualified team of experts in many fields. The construction of an efficient invest­ment administration is a big chal­lenge that faces Islamic banking.

The operational problems of Musharaka are many and there is a need to study those problems. Proper implementation needs a high degree of integrity among bank employees and customers. To reduce the dependence on this factor alone it is necessary that more effort be spent on laying down a detailed manual of Musharaka application in different sectors.

Despite the problems that face this method it is a very flexible method as it can be applied in all economic sectors without the need to go into trading directly, as compared to the Murabaha finance. This method is excellent in providing venture capital; it is efficient in the provision of working capital where other methods are limited.

Unlike conventional interest finance or Murabaha, the return to the bank when using Musharaka will fluctuate depending on economic conditions. The bank will secure a higher return in case of an econom­ic boom and vice versa. Central bank policies pertaining to Musharaka needs to be reviewed as well as the different applications in countries and economic sectors.

Mudaraba Operations

Mudaraba is a Shariah compliant method of finance where the cus­tomer will share whatever profits he makes with the financier. Losses will he borne by the financier. Mudaraba may be divided into restricted and unrestricted. Unrestricted Mudaraba is where the customer will obtain finance from the bank and use it at his discretion. It is necessary to point out here that a high standard of moral integrity is required on the part of customers.

It is therefore suggested that financial institutions may mobilize financial resources via unrestricted Mudaraba. They can utilize those funds via restricted Mudaraba either through their own investment chan­nels or by its customers. Central bank policies governing this method need to be studied and determine how such policies affect its implementation, a detailed manu­al could be established to reduce the humane influence.

Salam Operations

Salam is a flexible method whereby a financial institution can provide cash immediately in return fur prod­ucts at a later time. Utilization of Salam to raise public sector finance needs to be studied. Many issues need to be resolved when developed applications of this method are con­sidered. This method encountered many problems when applied in the agricultural sector in Sudan.

Bie Aagil Operations

Developments of this method to suit international applications '"have taken many forms. There is a need to study such applications to assess their compatibility with Shariah and develop methods that are compli­ant with Shariah requirements, which may be applicable in interna­tional markets.

Istisnah operations

Istisnah is a flexible method of finance whereby a financial institu­tion can finance a project on a turn key basis. The application of this method needs to be studied and how to resolve the problems that face it need to be identified.

Leasing Operations

Leasing or Ijara as it is known in Shariah is an acceptable method of finance through which a financial institution buys an asset and then leases it to its customer. It will have the option to sell the asset to the customer at any time during the lease period. To apply lease contracts in contemporary financial markets in compliance to Shariah principles is not an easy task, as many issues have to be resolved. For example, tax and legislative-considerations as well as risks.

When the following issues are resolved they may help in designing lease contracts that may be Shariah compliant and probably acceptable in international markets:

a) When a lessor buys the asset according to the specifications stated by the Lessee would he be responsi­ble for any default in its operations?

b) If the Lessor authorizes the Lessee to buy the asset according to Lessee's specifications, which suits his needs and that, the lessor gives no warranties as to its suitability or to any thing relating to the asset's operation.

c) When some one buys an asset and then leases it to the person from whom he bought, in case of a default in the asset's operation will the lessee be responsible for any default that occurs to the asset or if it is non operational?

The above questions are meant to address the issue of the responsibili­ty of all maintenance costs whether it should be always on the lessor as the predominant view except in case of negligence or willful conduct. Or should it be the responsibility of the lessee. At present jurists accept only operational maintenance, while other maintenance expenses is the responsibility of the lessor.

In addition, when the lessor buys the assets according to a would be lessee's specifications and the latter decides not to lease the asset will the lessor he entitled to compensation due to this default?

When the lessee chooses the sup­plier and the supplier fails to deliver completely or does not deliver on time then who will be responsible for any costs that may result to both parties i.e. is it the responsibility of the lessor or the lessee?

Is it permissible to hold the lessee responsible for the cost of installing the asset if it is not included in the purchase price? Will the lease start after installation or from the date of delivery to the site?

Who will be responsible if the supplier is bankrupted or his busi­ness is closed in the following two cases:

• When the lessee chooses the sup­plier?

• When the lessor chooses the sup­plier?

Finally, what should be done in case the lessee does not pay the lease on time or defaults.

Inter-Country and Intercontinental Studies

An international documentation center similar to many documenta­tion centers worldwide may be established. In countries where at least five Islamic banks operate full time correspondents may be appointed. A correspondent will gather information on all issues related to Islamic banking. Countries with less than five Islamic banks may have a part-time correspondent who may be paid on the basis of the materiel he sends. Such a center will help researchers and all those inter­ested in Islamic banking in finding the necessary data. This will play a pivotal role in developing Islamic banking operations.

The center may cooperate with many other centers, which collect published and unpublished materials such as journals, books and papers on Islamic banking in addition to mas­ters and PhD. dissertations. A func­tion common with other centers is the collection of addresses of those work­ing in the field with their full CVs, should be continuously updated. The center may have a special­ized team composed of Shariah scholars and experts in the field of international finance either on full or part-time basis to study the vari­ous forms of contemporary financial transactions and to see how such instruments could be tailored to be Shariah compliant.

On the other hand, what are the alternative methods when a tool cannot meet the Shariah require­ments? There is also an urgent need to develop financial instruments that will provide opportunities of finance for very short time e.g. for one hour or a few hours. Or methods that are Shariah compliant and can provide hedging from risks as well as future needs of finance and cash needs.

Public sector finance through non-fiscal tools remains a challenge, this topic has recently been addressed by some countries but not widely discussed, and remains an area open for more research.

Dr Salama is Senior Advisor of the Investment and international Relations Group, Al Rajhi Banking and Investment Corporation, Saudi Arabia. He is also a member of the Institute of Islamic Banking and Insurance's International board of governors, Shariah group.