IN THE NAME OF ALLAH, THE BENEFICENT, THE MERCIFUL O ye who believe Fear God and ...

112 Pages·2012·1.54 MB·English

IN THE NAME OF
ALLAH, THE BENEFICENT,
THE MERCIFUL

O ye who believe Fear God and give up what remains
of your demand for usury if ye are indeed believers.
If ye do not, take notice of war from God and His Apostle.
But if ye turn back ye shall have your capital sums. Deal not
unjustly, And ye shall not be dealt with unjustly.

SURA AL BAQARA II
VERSE 278-279

-------------------------------------------------------------------

The articles published in this Journal contain references from the
sacred verses of Holy Qur’an and Traditions of the prophet (p.b.u.h)
printed for the understanding and the benefit of our readers. Please
maintain their due sanctity and ensure that the pages on which these
are printed should be disposed of in the proper Islamic manner.
Journal of Islamic Banking and Finance Oct – Dec. 2012 1
Journal Of
Islamic Banking and Finance
Publication Date: 1984 (Pioneer in field of Islamic Banking & Finance in
Pakistan)
Frequency: Quarterly (Refereed/Peer Reviewed)
Registration: ISSN 1814-8042
Index Islamicus (Indexing/Abstracting Service)
Circulation: Worldwide include IMF, World Bank, Central Commercial
Banks, Universities, Educational Institutions, and Public
Libraries in Pakistan/abroad, Individuals, Scholars, Jurists
etc.
Subscription Rates (Including postage)
S u b s c r i p t i o n
One year Two years Per single Copy
Pakistan Rs. 750.00 Rs. 1300.00 Rs. 160.00
Overseas US$. 70.00 US$. 130.00 US$. 17.00

Old Issues of One Year
Pakistan Rs. 400.00
Overseas US$. 20.00

For Students*

Pakistan Rs. 550.00
Overseas US$. 35.00
* Photocopy of the proof of the existing status of the students required

Advertisement Rates (per Insertion)
Pakistan Ordinary Full Page (Coloured) Rs. 8,500/=
( Minimum 3 Insertions)
Inside Front Cover (Coloured) Rs. 9,000/=
Inside back Cover (Coloured) Rs. 9,000/=
Full Page Back cover(Coloured) Rs. 11,000/=
Classified (Black and White) Rs. 2,000/=

Abroad Ordinary (Coloured) US$. 150/=
Full Page Back Cover (Coloured) US$. 200/=

For Further Details Please Contact:
B-5 (1st Floor), Kehkashan Apartments,
Block No. 7, Main Clifton Road,
Karachi (Pakistan)
Phone: + 92(021) 35837315
E-Mail [email protected]
2 Journal of Islamic Banking and Finance Oct – Dec. 2012
Journal of
Islamic Banking and Finance
Volume 29 Oct – Dec. 2012 No. 4
Founding Chairman Board of Editorial Advisors
Muazzam Ali (Late) S. A. Q. Haqqani
Dr. Hasan uz Zaman
Former Chairman
Dr. Mohammad Uzair
* Pakistan Press Foundation (Pak)
Altaf Noor Ali (ACA)
* Pakistan Press International (Pak)

* Institute of Islamic Banking & International Advisory Panel
Insurance (UK)
Professor Dr. Md. Ma’sum Billah
* Former Vice Chairman
Corporate Advisor & Consultant to Global Islamic
DAR AL-MAAL AL-ISLAMI Banks & Financial Market. Malaysia.
TRUST, GENEVA,
Professor Dr. Rodney Wilson
SWITZERLAND
School of Government and International Affairs,
Durham University, UK
Chairman
Dr, R. Ibrahim Adebayo
Basheer Ahmed Chowdry Department of Religions, University of Ilorin, Nigeria
Prof. Dr. Zubair Hasan
Editor The Global University of Islamic Finance,
Aftab Ahmad Siddiqi Kuala Lumpur, Malaysia

Dr. Waheed Akhtar
Associate Editor Assistant Professor, Comsats Institute of Information
Technology (CIIT), Lahore, Pakistan
Mazhar Ali

Dr. Manzoor Ahmed Al-Azhari,
Co-ordinator Research & PhD Legal Policy (Shariah & Law)
Chair, Department of Islamic Studies
Marketing
Institute of Religious Education & Research
Mohammad Farhan (IRER) HITEC University Taxila Cantt, Pakistan

Professor Dr. Khawaja Amjad Saeed FCA, FCMA
Business Executive Hailey College of Banking & Finance
University of Punjab, Lahore, Pakistan
A. N. Haqqani

Dr. Mehboob ul Hassan

Professor, Department of Business Administration,
Published by
Sindh Madarsatul Islam University, Karachi,
International Association of Pakistan
Islamic Banks
Mr. Salman Ahmed Shaikh
Karachi, Pakistan.
External Reviewer Bankers Academy USA,
Ph: 35837315 Research Associate & Faculty Member IBA,
Fax: [phone] Karachi and also Heads of Islamic Economics
Project
Email: ia _ ib @ yahoo.com

Prof/ Dr. Habib ur Rahman
Head Business Administration Deptt
Registration No. 0154
Sarhad University of Science & Information
Printed at M/S Maaz Prints, Technology, Peshawar, Pakistan
Karachi
Dr Muhammad Zubair Usmani

Jamia Daraluloom, Karachi
Journal of Islamic Banking and Finance Oct – Dec. 2012 3
4 Journal of Islamic Banking and Finance Oct – Dec. 2012
Journal of
Islamic Banking and Finance
Volume 29 Oct – Dec. 2012 No. 4
C O N T E N T S
1. Editor’s Note......................................................................................................9
2. Cooperative Micro-Bond................................................................................16
By Prof Dr. Mohd. Masum Billah

3. The Legal Framework for Islamic Banking in Nigeria....................................20
By Dr. Abdulqadir Ibrahim Abikan

4. The Performance of Insurance Industry in Malaysia: .....................................40
Islamic vis-à-vis Conventional Insurance
By Muhamad Abduh, Mohd Azmi Omar and Raudhah Mohd Tarmizi
5. Interest Based Financial Intermediation: Analysis & Solutions......................50
By Salman Ahmed Shaikh
6. The Analysis of Shariah Bank Efficiency Level in Indonesia: .......................65
A Comparison Between the Intermediary Approach and
Production Approach
By Muhamad Nadratuzzaman Hosen & Muhammad Dadi Sutisna
7. Islamic Financial Product As Alternative to Riba in the Cooperative.............81
Sector in Nigeria
By Bukhari Sikirullahi
8. Educational
Islamic Financing Models:...............................................................................94
• Salam.......................................................................................................95
• Ijara.........................................................................................................97
9. Development of New Five Years Strategic Plan
for Islamic Banking Industry by State Bank of Pakistan...............................100
BY Kazi Abdul Muktadir
10. Country Model: United Arab Emirates (UAE)...............................................102
11. Islamic Banking Glossary..............................................................................104
13. Note To Contributors of Articles...................................................................111
13. Order Form for Subscription/Ad to the Journal.............................................112 
Journal of Islamic Banking and Finance Oct – Dec. 2012 5
6 Journal of Islamic Banking and Finance Oct – Dec. 2012
Journal of Islamic Banking and Finance Oct – Dec. 2012 7
8 Journal of Islamic Banking and Finance Oct – Dec. 2012
Editor’s Note
This is an article on “Interest Based Financial Intermediation: Analysis &
Solutions” by Salman Ahmed Sheikh. It contains a plethora of pro-interest and anti-
interest arguments.
The article opens with the assertion that not only Islam but all revealed
religions prohibited interest. However, the Commandments of God to Muslims in
this respect are very strict and couched in threatening language. It is asserted that the
violators must be prepared to face wrath of God. Even the famous philosopher
Aristotle in his book “Politics” denounced Riba as being the most un-natural of all
modes of getting wealth. Thomas Aquinas in his book “Summa Theological”
condemns it as selling a non-existent thing. It leads to in-equality and is contrary to
justice. Even a modern economist Keynes has also opposed it in his treatise “General
Theory of Income, Employment and Money” and also in one of his essays.
Some scholars differentiated between interest and usury. According to them
high rate of interest charged on consumption loans in olden days was usury and it is
this practice which has been banned by the Holy Quran but the Council of Islamic
Ideology report and subsequent judgment of the Supreme court on interest held that
riba includes interest in any shape, whatsoever.
The votaries of interest have brought forth farfetched arguments to justify
interest. The lender after giving loan loses every chance of reaping any benefit from
the lent money and also incurs cost in the process of lending. These two factors are
enough to entitle him to interest as compensation. Further more subtle arguments
favoring interest have been adduced but they all stand rebutted. The paper further has
enumerated various ills of capitalist system based on Riba and the harm they wreak
on the people.
The paper outlines the financial architecture sans interest. Under this head the
point of view of Islamic economics has been projected and the advantages of Islamic
system over the interest based one have been brought out in bold relief. But these
have also been critically reviewed and the other point of view has been fully
discussed.
It is Islamic principle that in case of transactions on credit, the returned article
must be identical to the one borrowed. It is argued that the principle should be
extended to loans taken during period of inflation and deflation. This proposal has
been examined and it is found that it will raise many serious problems and hence it is
not practicable. The problems have been identified.
Journal of Islamic Banking and Finance Oct – Dec. 2012 9
Lastly the question of pricing the financial capital in Islamic finance has been
focused upon. Two studies by Muslim economists Mirakhor (1996) and Haque &
Mirakhor (1998) were undertaken and they derived two formulae. Some other
proposals were also considered. It was concluded as under:
“The merit of these proposals will rest on the criterion that how well they
remain close to the actual returns in particular sectors and overall economy”.
Concluding remarks which carry the crux of the article are reproduced below:
“Interest as a system of allocation of resources ensures a fixed return for one
variable and uncertain for another. In contrast, Islam encourages equity financing in
which loss/profit would be shared. This ensures better results from the perspective of
redistribution and better cooperative behavior since payoffs for all parties are linked
with productive sector of the economy. Consequently, markets will not have to
produce speculative surplus output just to service exorbitant amount of debt and that
could stabilize business cycles.
Islam by prohibiting interest eliminates one important source of distributive
injustice (Chapra, 1984). But, it does so in a just manner by allowing all people with
capital and labor or one o f these to contribute in productive enterprise and earn the
rewards out of actual return on productive enterprise”.
The article is on “The Analysis of Shariah Bank Efficiency Level in Indonesia:
A Comparison Between the Intermediary Approach and Production Approach” is
co-authored by i) Muhamad Nadratuzzaman Hosen and ii) Muhammad Dadi Sutisna.
They have undertaken a research to assess the efficiency of Shariah Banks and also
to find out the factors which affect the efficiency. The period covered is 2006-2008.
The Shariah banking in Indonesia has been making good progress as Indonesia has
Muslim population in majority and an efficient regulatory authority but in spite of
these advantages the market share of Islamic banking is very low and it was this
aspect which proved a catalyst for the present research.
The article defines efficiency, divides it into three categories and explains their
characteristics. The research is however based on alternative efficiency.
This article has given a detailed description of research models and
methodologies adopted in the process. Their findings in a nut-shell are that efficiency
of the Shariah banks using intermediary approach during the period 2006-2008
decreased each year, whereas those using production approach during this period
fluctuated each year. It has been recommended that the central bank of Indonesia
should take suitable action in the matter to improve the efficiency of the Shariah
banking system.
The article on “The Performance of Insurance Industry in Malaysia Islamic vis-
à-vis Conventional Insurance” is the output of three authors i) Muhamad Abduh ii)
Mohd Azmi Omar and iii) Raudhah Mohd Tarmizi, and its aim is to compare the
performance of Takaful, which signifies Islamic insurance, and the conventional
insurance.
10 Journal of Islamic Banking and Finance Oct – Dec. 2012