Islamic Windows: Progress or Challenge?

By Justice Mohammed Taqi Usmani.

The past two decades have witnessed a substantial increase in the number of Islamic banks, financial institutions and Islamic funds in different parts of the world. Initially it was due to earnest desire of the Muslims to conform to Islamic norms in their socio-economic life. The movement of Islamic banking was thus based on religious conviction that interest-based transactions are prohibited by the Holy Quran and the Muslims must avoid it in their economic activities. This conviction created an increased demand for Islamic products in the field of financing, and gave birth to a market where only Islamic products are acceptable. It was to meet this demand and capture this emerging market that the conventional banks started opening Islamic windows and Islamic units for those clients who do not want to indulge in interest-based transactions. These Islamic windows at times established by conventional banks of a Muslim country as a first step to convert the whole bank into an Islamic institution. These windows are based on the conviction that interest is prohibited, but the immediate conversion of the bank being difficult, the conversion is undertaken on gradual basis and a separate window or unit is established as a first step.

But most of the existing Islamic windows established by international conventional banks are not based on such a conviction. They are established to provide an additional service to Muslim clients or to offer a variety of products for general clientele. The Islamic windows of this type are often criticized on the ground that, being devoid of conviction, they cannot reflect the true Islamic spirit. It is argued that such windows are established purely for commercial objectives which aim at capturing the Islamic market. The main business of these conventional banks is still based on interest and is intended to remain operative for good, but only a small part of their activities is claimed to be run on Islamic principles. This attitude, according to these critics, is neither sincere nor reliable, and the Muslims should not therefore cooperate with it.

Islamic windows established by international conventional banks are established to provide an additional service to Muslim clients or to offer a variety of products for general clientele.

The criticism is not wholly justified. If a conventional bank opens an Islamic window and it is ensured that all the requisites for a true Islamic window are fulfilled in letter spirit, this step cannot be criticized merely on the ground that the whole bank is not converted. In non-Muslim countries, in particular we find numerous commercial institutions that offer Islamic and non-Islamic products simultaneously. For example, all the hotels and restaurants in non-Muslim countries sell liquor and soft drinks. Nobody can reasonably argue that so long as they deal in liquor, they should not sell soft drinks. On the same analogy, if a conventional bank offers real Islamic products through a separate window, it will not be justified to raise objection against it. It is however necessary that full compliance of Islamic principles is ensured in reliable manner, and that liquor is not served in the name of soft drink.
Therefore, instead of raising objections on the establishment of Islamic window itself, our main focus should be on the safeguards to ensure the true Islamic nature of its constitution and operations. These safeguards are summarized below:

Separation

The first and foremost requisite for a true Islamic window is that it is carefully separated from the general side of the conventional bank. The following steps are necessary for this purpose:
1. The initial capital employed in the Islamic window must not be a part of interest or any other impermissible income earned by the bank. The ideal method for that purpose would be to raise new capital meant exclusively for the Islamic window. If this is not possible for any reason, a portion of the initial capital of the bank is earmarked to be employed in the proposed window. In the absence of a proof to the contrary, the initial capital of the bank may be presumed to be pure.
2. Accounts of the Islamic window must be separate from the conventional side of the bank. The deposits received by the window must not be mixed up with the deposits taken on conventional side. Similarly, the finances offered by the window must be independent.
3. The staff employed in an Islamic window must be distinguishable from the staff of the conventional side and the criterion for their selection must take into account their understanding of and commitment to the Islamic transactions.
4. The office of the Islamic window should also be distinct prom the conventional side, preferably with a demonstrated Islamic culture.

Compliance With Shariah

After the procedural steps highlighted above, the most essential element of an Islamic window is that all its operations are in strict compliance with Shariah. The following measures are necessary to meet this essential requirement:
1. There should be a strong Shariah Supervising Board consisting of competent Shariah scholars to prepare the model agreements and other documents, to approve the structure of every new operation and to lay down the basic guidelines for each and every mode of financing. It must be ensured that no new operation is undertaken without prior approval from the board. Members of the board must be selected from the scholars who may spare enough time to carry out these functions.
2. Apart from the Shariah Supervisory Board, a permanent Shariah cell must be established in the bank itself where some Shariah scholars are employed to monitor the compliance in each and every transaction on daily basis, This cell must be responsible for the constant supervision of the day-to-day transactions of the window to ensure that the resolutions of the Shariah Supervisory Board are implemented in their true perspective and the guidelines set by it are followed in letter and spirit.
3. There should be an annual review of the transactions carried out during the year. This is to ensure that the income derived therefrom is pure from the Shariah point of view. The Shariah Supervisory Board, after examining the transactions should deliver a report to that effect.
4. General staff of the bank should go through a training course conducted by the members of the Shariah Supervisory Board or their nominees. This course should aim at educating the staff about the basic principles of Shariah governing the commercial transactions and the basic philosophy underlying them. This is necessary because the members of the staff who undertake the responsibilities to run the day-to-day affairs of the bank may be equipped with basic knowledge of the system they are supposed to follow. They must know the difference between Islamic and non-Islamic operations, so that they may not step into the prohibited area even unknowingly.
If these steps are carefully taken to safeguard the Islamic nature of the window, no reasonable objection can be raised against their establishment by a conventional hank.

Islamic Windows And Islamic Banks

Another apprehension sometimes expressed against Islamic windows is that their development may undermine the development of Islamic banks. This apprehension is, perhaps, based on the fact that Islamic windows are normally opened by the giant international banks having enormous resources which the Islamic banks do not possess. This apprehension, however, is misconceived. If we consider the issue from the perspective of the cause of Islamic bank as a whole, the establishment of such windows will promote the cause and help in the development of Islamic finance. It is well settled that the emergence of a full competitive market is always useful for the strength of an industry. There is no reason why Islamic banks should be an exception to this rule. If these windows perform well, it will persuade the Islamic banks to perform better and if their performance is poor, they will never be able to stand before the Islamic banks as hard competitors.

It should be clearly understood that the value of the principles laid down by Islamic Shariah in the field of business and trade is not restricted to religious benefits, Being based on divine guidance, they are meant for the betterment of humanity at large. They aim at distributing wealth with justice and equity and offer best solutions to the problems created by the interest- based capitalist system. Their faithful and large scale implementation may curb the social and economic evils found in our existing economy. Therefore, the conventional banks should not be discouraged from offering Islamic financial services, because the wider the circle of these services, the greater the appreciation of their effects on the society.

Liquidity Management.

Liquidity management has been one of the big problems faced by the Islamic banks. Solution to this problem also requires specialized inter-bank relations which cannot be established unless a substantial number of Islamic banks or financial institutions come into existence. They can develop a securitized portfolio of Islamic products. The banks may purchase these securities when they are in excess of liquidity and sell them when they are short. This arrangement may provide an alternative even for overnight borrowings. But the success of this arrangement depends on the expansion of the industry and the establishment of Islamic windows will help in moving towards that end.

Unless this portfolio is fully operative, Islamic windows may have an arrangement with their mother institution whereby they may deposit their surplus funds with them without interest and in turn their mother institutions may provide them short term liquidity without interest.

Shariah Standards

Although the broad principles of Islamic Shariah are well-settled which are uniform in all Islamic banks and financial institutions, yet some details of their practical application which are based on ijtihad (decisions taken by the scholars on the day-to-day matters neither specifically mentioned in the Holy Quran nor practiced by the holy prophet (SAWS) have been subject to difference of opinion among the contemporary Shariah scholars. It is generally complained that Shariah boards of different Islamic banks come up with different rulings about the same issue. In order to solve this problem and the differences, the Auditing and Accounting Organization of Islamic Financial institutions has established a higher Shariah Board comprising Shariah scholars representing different Islamic banking groups. This Shariah Board is preparing uniform Shariah standards of financing products, and it is hoped that it will, inshaAllah, (God willing) help in fulfilling the need of standardization of Islamic products.

The preparation of a separate standard for Islamic banking windows is also under consideration which may facilitate their function in strict compliance with Shariah.

Justice Mohammed Taqi Usmani is a world renowned Shariah Scholar. He presented this paper at the Euromoney Conference held in London in January 2002.

TREATMENT OF CASH MARGIN IN ISLAMIC BANKS: BETWEEN SHARIA COMPLIANCE AND COMPLIANCE TO OBJECTIVES OF SHARIA.

INTRODUCTION.

A customer upon approval of his request for issuance of letters of guarantee (LG), she or he is required to provide security in form of cash to the value of the guarantee. Once LG is called by the beneficiary (Makful lahu) of the LG, the cash is used by the bank (Kafil) to repay the obligation. This security is what referred to as Cash Margin. However, if the customer (makful anhu) does not have cash to keep as security, other forms of securities are held to cover the bank against likelihood of the credit exposure.

TREATMENT OF CASH MARGIN IN CONVENTIONAL BANKS.

Conventional banks normally debit this amount of cash to be held as security to the account called ‘Cash Margin Account’ until maturity of the LG. If the LG is not called upon maturity, it is returned to the customer account and if it is called, the bank uses his money to settle the obligation and set-off from this customer cash to repay herself. In case the customer had no enough cash or nor cash at all to keep as Cash margin, other forms of security are held. If the LG is called and paid by the bank, the amount paid turned into a loan granted to the customer for which interest is charged until the amount paid by the bank is fully repaid.

Normally, Cash Margin account doesn’t earn interest to the customer however substantial it may be. Notwithstanding, conventional banks uses it to generate further income for herself.

TREATMENT OF CASH MARGIN IN ISLAMIC BANKS.

It won’t be a surprise to see Islamic banks treat cash margin in the same way as their conventional counterpart in the sense that customer cash deposits in Cash Margin account doesn’t earn profit for them though used by the bank for various purposes (Contrary to AAOIFI Sharia Standard No 5. Clause 4/6 “It is permissible for the pledgor (debtor) to use the pledged asset with the consent of the pledgee (creditor). However, the pledgee is not permitted to use the pledged asset at all, even if the pledgor has consented on it.”) on clear understanding that the customer forfeit any profit generated by it and hence he is not going to bear any risk of loss that might occur to it.

This is done on understanding of the fact, that the amount of cash held by the bank as cash margin is in no doubt a security and the true owner is the customer. Under Sharia, such security are falling under the rules of Rahn (contract of pledge or pawn), which dictates that: the subject manner of pawn contract shall not be used in favor of the pledgee (bank) (As per AAOFI Sharia Standard referred above). If used without his permission, that is a breach of Amanah (Trust) and benefits generated by its use should be given to the pledgor (customer). If customer allows to be used for investment purposes and but he gifted his share of profit to the bank, the bank can keep the profit for herself.

Certainly, if above requirements are upheld, Islamic banks use of Cash Margin deposits at her own risk may be ruled to be Sharia compliant. But by so doing, does it meet or comply with Maqasid Sharia (objectives of Sharia)?

It is my view that, fairness and justice in Islamic financial dealings is very important and a significant requirement or objective of Sharia. However such practice of getting permission to use the deposit in cash margin account without sharing the rewards (or loss if any) with customers defeats it. This is due to the following reasons:

One, customer seeking a guarantee from the bank to fulfill requirement of the government tender for example under the rules of Kafala or Dhamana is required by the bank to pay service charge to cover the actual costs incurred by the bank (kafil) to such issuance and cash as a security to be held under the terms of Cash Margin. Hence, the bank is in no loss/risk-situation for taking this off-balance sheet exposure.

Second, since the bank is in no loss situation, simple justice requires the customer should not be in a loss situation either. Furthermore, the objective of Kafala contract aims to render benefit to the guaranteed person (makful anhu) rather than the guarantor (kafil). However, by Islamic banks investing the deposit in cash margin for her own benefit, not only the customer doesn’t gain anything from his cash but the bank benefit from it (when used by the Islamic bank to generate profit). Furthermore, in all situation customer loses such as in a case where his cash is debited from his remunerative/investment accounts to Cash Margin Account or from non-remunerative account which he would have used it to get some benefits to Cash Margin Account which he will have no access to it completely until maturity of the LG.

Fairness and justice would then requires that this cash should be used by Islamic banks for the benefit of the customer or both rather than the bank alone and the later is what AAOIFI Sharia Standard No 5 clause 7/5/1 and 7/8/1 call for. Almighty says: Almighty says: God commands justice, the doing Of good, and liberality to kith And kin, and He forbids All shameful deeds, and injustice And rebellion: He instructs you, That ye may receive admonition.(Nahl:90)

BOZ launches Islamic Finance Guidelines in Zambia and urges strict adherence to Sharia law.

ZambiaTimes.

Bank of Zambia Governor, Dr Michael Gondwe, this morning officially launched the Islamic Finance Guidelines in Zambia at the Radisson Blu Hotel. Dr Michael Gondwe described the launch as a landmark achievement in the history of banking in Zambia.

He urged financial service providers to put in place appropriate programs and structures to build their capacity to provide high quality and Sharia compliant financial services in Zambia. Dr.Gondwe said this will play a complementary and supportive role to the effectiveness of the supervisory oversight of the central bank in this emerging area in our financial system.

Dr.Gondwe said in Islamic finance, a key consideration of the governance framework is to ensure strict adherence and compliance with the rules and principles of Sharia. I am aware that qualified Sharia scholars, who are a vital addition to the constitution of the corporate governance framework of institutions, may not be readily available. In this regard, there will be need to work with various interest groups in identifying such resources locally.

He said Islamic finance around the globe has attracted significant attention from financial sector policy makers.The Bank of Zambia embarked a process of developing a regulatory framework that would facilitate the introduction of Islamic finance in Zambia. The process involved extensive internal and external consultations with various stakeholders including Government. The framework was reviewed by the Islamic Financial Services Board, which is the standard setting body in matters of Islamic finance. Islamic finance is currently practiced in more than 50 countries worldwide. In many countries, Islamic finance co-exists with conventional finance and is not limited to Muslim countries. Islamic finance is set to continue growing at an annual rate of about 15%.

Moroccan parliament approves Islamic finance legislation.

By:By Aziz El Yaakoubi

RABAT, Nov 25 (Reuters) - Morocco's parliament gave final approval on Tuesday to an Islamic finance bill that will allow the creation of Islamic banks and enable private firms to issue Islamic debt, lawmakers said.

Morocco has been trying to develop Islamic finance - mainly to attract wealthy Gulf investors - since an Islamist-led government took power in the aftermath of the 2011 Arab Spring protests.

Islamic banks, which ban interest payments and pure monetary speculation, have been growing in the Gulf and Southeast Asia for a decade. Wary of Islamist views, Morocco has long rejected the idea. But the country's financial markets a lack liquidity and foreign investors, and Islamic finance could attract both.

"The bill has been voted by 161 votes and no one was against it," Said Khayroune, the head of parliament's economics and finance committee, told Reuters. The bill will be effective once it is published in Morocco's official bulletin in coming days.

The law will allow foreign banks and local lenders to set up Islamic banks in Morocco. It also contains measures on takaful, which allows the creation of Islamic insurers, and will enable private companies to issue sukuk (Islamic debt).

Major Moroccan banks have been preparing to open Islamic offshoots since the legislative process began. Foreign lenders have been also testing the waters.

Gulf banks from Kuwait, Bahrain and the United Arab Emirates have expressed interest in entering the market when the bill becomes law.

But sources have told Reuters Morocco may guide them towards partnering with local banks rather than establishing fully owned Islamic subsidiaries.

Morocco's BMCE Bank is preparing to open an Islamic subsidiary as a joint venture with a major Islamic financial institution from the Middle East, the bank's managing director has said.

Other Moroccan banks, including Attijariwafa Bank and Banque Centrale Poulaire, are believed to be in talks with foreign Islamic lenders.

But a Thomson Reuters study of Morocco, released earlier this year, estimated Islamic banks might account for 3 to 5 percent of total banking assets by 2018, or about $5.2 billion to $8.6 billion - far below the roughly a quarter in the developed markets of the Gulf.

The Moroccan market remains highly competitive, and bankers believe banking would expand by only a few percentage points, since Islamic finance is more expensive than conventional banking.

(Reporting by Aziz El Yaakoubi; Editing by Mark Heinrich, Larry King)

PUNISHMENT FOR NOT PAYING ZAKAH.

By Dr. Mohammad Obaidullah,

Zakah is a very significant obligatory 'ibadah' (worship) in Islam. It purifies the person's soul and not only increases the wealth but also protects it. According to al Nawawi's report from al Wahidi, the share of wealth that should be paid from a Muslim to he deservers is called zakah because it increases the funds from which it is taken and protects them from being lost or destroyed. Another prominent Muslim scholar Ibn Taimiyah said that the inner soul of the zakah payer becomes better, and his wealth becomes cleansed.

According to the Qur'an and Hadith, there are two kinds of punishment for not paying zakah such as (1) punishment in the life hereafter and (2) punishment in this world. Regarding the punishment in the life hereafter, the ultimate and infinite life after death, narrated Abu Hurairah, "The messenger of Allah, (pbuh) said: "He who is given wealth by Allah but he does not pay its zakah, that wealth is made for him, on the Day of Judgment, the form of a huge bald serpent with two horns, encircling that person and squeezing him all day, then holding him by lips telling him, 'I am your wealth, your treasure that you hoarded'. Then the Prophet quoted the verse, "and let not those who covetously withhold the gift that Allah hath given them of His grace, think that it is good for them. Nay, it will be the worse for them. Soon shall the things which they covetously withheld be tied to their necks like a collar on the Day of Judgment (Al Imran: 3:183)". (Sahih al-Bukhari).

Additionally, the Sunnah did not merely threaten of punishment in the life hereafter only for those who do not pay zakah, but also went on to warn them of a punishment in this worldly life. Sunnah mentions various types of punishment in this world for not paying zakah such as punishment from Allah and a penalty from the State. A hadith states about the punishment of Allah, "There are no people, who do not pay zakah, left without being made to suffer by God through disasters, or famine or drought." (al Targhibwa al Tarhib) In another saying, "Any people who do not pay zakah on their wealth, verily they will be prevented rain from sky except for animals and livestock." (Ibn Majah) And also, "Zakah is never intermingled with any amount of wealth without destroying and rotting it." (al-Bayhaqi). On the one hand, the legal penalty is mentioned by the Prophet (pbuh): "He who pays it seeking the reward from God will be rewarded and he who refuses to pay it, we shall take it from him, along with half of his wealth, and by the authority given to us by our Lord. The clan of Muhammad is not allowed to take anything of its proceeds." (Sunan al-Ahmad and Abu Dawud). Moreover, for the state government, the fighting against the people who reject to pay zakat is permissible in Islam as we can find the first caliph of Islam, Abu Bakr who did it during his rule. (Sahih al-Bukhari and Muslim)