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.
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