Applied Islamic Banking

By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542

The aim of this work is to bring together in one research paper the experience and development of online Islamic banking and finance. This paper will not discuss the Islamic Banking Finance instruments in details. However it will discuss the impact of Internet on Islamic Banking Finance and how Islamic Banking Finance Institutions develop to become online.

Online banking finance is a system that allows an individual to be able to perform banking activities at home or anywhere and at any given time via the Internet. Online banks can be either of traditional banks which have its physical presence but also offer online banking or banks that only go online and have no physical presence. The traditional banks which go online enable their customers to perform the usual banking routine transactions. The routines transactions are such as account transfers, balance inquiries, bill payments, and stop-payment requests. Some banks even offer online loan and credit card applications. The main difference of going online which is also the main benefit is the account information can be accessed regardless of time and place.

"O you who believe! do not devour your property among yourselves falsely, except that it be trading by your mutual consent, and do not kill yourselves. Surely Allah is Merciful to you." Qur'an [4:29]

The principle of Islamic finance are now widely understood, both within the Muslim world itself and many of the western financial community who have extensive dealings with Muslim clients. The Islamic financial movement has undoubtedly been successful in its educative efforts, and there is widespread respect for the moral values which have inspired the movement, even from non-Muslim. The ideas had dating back 1400 years to the time of the prophet Mohammed saw, but modes of financing have needed to be adapted to meet the complex requirements of modern commerce, while still being in accordance with the sharia law.

There are debates amongst Muslim scholars about the application of sharia law in the financial field. The law itself is clear, however its translation into modern financial practice is difficult. There are different interpretations. Nevertheless, Islamic banks have attempted to build up a common code of practice.

The principles of Islamic finance are well known and there is a substantial literature on the methods of financing involved, however the documentation on actual practice is usually unpublished. There have been a number of studies in recent years on the working of particular Islamic financial institution, but most concentrate on the broad development policies in general terms. There is no practical guide to Islamic financial instruments, and no universally acknowledged standard reference manual for Islamic bankers to follow.

Islamic finance is not invented within this century based on Islamic political movements but rooted to the Qur’an and the sayings of the prophet Muhammad. The religious law of Islam concerning commercial dealings are as much part of the Islam as is any other areas i.e. marriage. Islamic law has prohibits all sorts of interest-taking and undue speculative practices.

In medieval times, interest-taking and undue speculative practices were considered both sinful and illegal, and were avoided. When almost the entire Islamic world came under the rule of Western powers in the period of the European colonial empires the practice of Islamic finance was obscured.

The earliest recorded Islamic financial project was established in Egypt in 1963, soon followed by the Nasser social bank in 1971. The next milestone is the founding, under the organization of Islamic conference, of the multinational Islamic development bank in 1973. During the seventies many Islamic financial institutions were established in a number of countries- some public, some partly government-owned, and some private.

Qur'an.
Hadith texts (the recorded statements and practices of Prophet Mohamed saw)
Ijma (consensus of the 'ulama') and
qiyas (drawing analogies from the Qur'an and hadith texts)
Ijtihad (the scholar's own reasoning).

The Quranic ruling has given a clear guideline on what is allowed and what is forbidden. Interest or riba is clearly forbidden in Islam

O Muslims do not devour riba , doubling and redoubling it and fear (the punishment) of Allah that you may be successful. (3:130)

Interest or riba has been the root of all conventional banks. In the modern world it is impossible a person is not to be involved directly or indirectly to banks. People would need to buy a house, vehicle etc. to enable them to live a basic life. These involve a lot of money which most would not be able to afford in a short time. Loans are needed. Saving money cannot be kept under pillows but need to be kept in a more secure place, the bank. People need financial institution to manage their financial needs. Conventional banking means involving in riba. And riba is strictly prohibited in Islam. Therefore it is a must for Muslim to develop a finance system that is riba or interest free and follows the guidance of the syariah rulings.

The following had been adapted from the IBF NET Islamic Business & Finance website and other relevance sources

Also there is so many Hadith that specify obstacles to free contract. The most important such Hadith involves a transaction of the prophet’s wife ‘A’isha, who desired to buy and the free a certain slave, Barira. The owners would not agree to the price without reserving for themselves the “right of clientage”, chiefly aright to inherit from the slave. This right ordinarily falls to the manometer, who in this case was ‘A’isha.

[The prophet advised ‘A’isha]” Take her and stipulate in [the sellers’] favour the right of clientage. For the right of client age is only his who manumits.” ‘A’isha did [this], then the messenger of God stood among the people, and praised God. Then he said,” what do you think of men who impose stipulation [shurut] which are not in the writ [or Book] of God Most High? Any stipulation not in the writ of God is void [batil]. Were it one hundred conditions, the judgment of God is more just, and the stipulation of God more reliable. The right of clientage is only his who manumits.( Bukhari. Muslim, with “purchase her, free her, and stipulate in their favour the right of clintage)

Riba has been clearly stated as forbidden. A number of Quranic verses stated clearly the definition of riba and the strict prohibition of it upon Muslims. Following are some of the versus regarding the prohibition of interest.

Muslims Do not devour riba , doubling and redoubling it and fear (the punishment) of Allah that you may be successful. (3:130)
Those who live on riba will not rise (at Resurrection) but like a man possessed of the devil and demented. This is because they say that trading is like riba . But Allah has permitted trade and forbidden riba . Those who after receo after receiving the Direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge). But those who revert to it again are the residents of Hell where they will abide for ever". (2:275)
Allah will deprive riba of all blessing, but will give increase for deeds of charity: and Allah does not love the ungrateful and unjust. (2:276)
believers fear Allah and forgo the interest that owes, if you really believe. (2:278)
If you do not, beware of war on the part of Allah and His Apostle. But if you repent, you shall keep your principal. Oppress none and no one will oppress you. (2:279)
What you provide with the with the prospect of an increase through the property of (other) people, will have no increase with Allah; yet what you give in alms and charity, seeking the countenance of Allah, (will increase): it is these who will get a recompense multiplied. (30:39).

Gambling is another type of consensual transaction condemned in the Quran, and represents a second major exception to the general approval of trade by mutual consent.

O ye who believe! Intoxicants and gambling, sacrificing to stones, and (divination by arrows, are an abomination, - of Satan's handiwork: eschew such (abomination), that ye may prosper. (3:90)

Particularly noticeable here is that the revelation offers a reason for the gambling prohibition – that mayser invokes enmity and distracts the faithful from worship. The Sunna takes this prohibition much further, in condemning not only gambling but also of ghara, a word meaning, risk, or hazard.

Give full measure when ye measure, and weigh with a balance that is straight (17: 34)

Let those (disposing of an estate) have the same ear in their minds as they would have for their own if they had left a helpless family behind (4: 9)

Those who unjustly eat up the property of orphans eat up a fire into their own bodies: they will soon be enduring a blazing fire (5: 10)

Allah doth command you to render back your trusts to those to whom they are due (4: 58)

(But the treaties are) not dissolved with those pagans with whom ye have entered into alliance and who have not subsequently failed you in aught, nor aided anyone against you. So fulfill your e so fulfill your engagements with them to the end of their term: for Allah loveth the righteous (4: 4)

In Sunna, ghara refers to a number of transactions characterized by risk or uncertainty at their inception. The following hadiths are representative of the Sunna’s instruction on ghara:

The messenger of God forbade the ‘sale of the pebble’ [hasah, sale of an object chosen or determined by the throwing of a pebble], and the sale of ghara, Do not buy fish in the sea, for it is ghara”( Ibn Hnbel, indicating that its most correct version is handed down on the authority of Ibn Mas’ud, not the prophet)

The messenger of God forbade the [sale of] the covering [copulation] of the stallion.(Bukhari)

Whoever buys foodstuffs, let him not sell them until he has possession of them.(Bukhari)

The Internet had been invented in 1969 however it takes about a quarter of a century later that it become commercialised. Prior to the early 1990’s Internet was used only by military and academic institutions. In 1994, Internet had been commercialised and World Wide Web (www) had become a new tool for business. Web has become a new technological breakthrough, which enable communications to be done effectively. Businesses had taken this new phenomenon to advantage. The power of Internet to reach millions of users around the world at any time has made Internet as one of the most powerful communications tools available. Marketers, consumers and business partners would use the Web to collect information regarding products, services or companies they intend to make business with.

Availability, convenience and efficiency (ACE) are the immediate viable benefits of online services that can be achieved by both the company and organization offering the services/products and the customers.

The development of Islamic Banking Finance online is significant in moving the society to accept the Islamic Banking Finance with the use of new technology.

The main importance of online Islamic Banking Finance is the availability of services regardless of time and location. The services are available wherever and whenever to customers as long there is Internet connection. This means that the range of customers is widen regardless of geographical locations.

The customers in other hand are able to retrieve information regarding Islamic Banking Finance at their convenience.

Islamic Banking Finance had become an international interest and caught the attention of scholars around the globe in 1970’s. It is seen as an optional to the conventional banking. Muslim scholars as well as non-Muslim worldwide discussed the issues of Islamic Banking Finance and the implementation of it. The first trial of Islamic banking was made in l963 in Egypt The savings bank are based on profit-sharing, however it is interesting to note that the Islamic image was not projected. It was feared at the time to be labelled as Islamic fundamentalist.Unfortunately the experiment only lasted until l967. However the idea of establishing Islamic Banking Finance Institutions in the real world have suffices. The experiment, though short lived had sparked a new revolution to the Muslim world in realising one of the most vital aspects in Islamic Economics System; a system free of riba or interest.

The implementation of Islamic Banking Finance institution has started to be developed in countries such as Pakistan and Iran and further be developed in other countries such as Dubai, United Arab Emirates etc. The first attempt of establishing an Islamic banking institution in the Western was made in the year l978 in Luxembourg, known as The Islamic Banking System (now called Islamic Finance House).

In Malaysia, the Islamic Banking Act that commenced on 7 April 1983 had become the milestone for the establishment of Islamic Banking Finance Institutions in Malaysia. (Tabung Haji had been established before this period (1963). However it is more of a service department serving for Malaysian pilgrimage savings rather than a financial institution)

Bank Islam is the first institution in Malaysia to be based upon Islamic syariah ruling. Other conventional banks such as Maybank, Affin Bank, Bank Bumiputra (now known as Bumiputra Commerce and Bank Muamalat) offer Islamic based banking and finance services alongside the conventional banking system.

Islamic Banking Finance had come considerably a long way from the philosophy deriving from the Quran and teaching of prohphet’s Mohamed saw, about 1400 years ago to adapting the implementation of it in the modern days now. Prior to the age of internet (used commercially 1994) in other words before early 1990’s Islamic Banking Finance had gone through some phases.

2 nd Discussions, plans and organizing of realising Islamic Banking Finance institutions are conducted seriously late960’s to mid 1970’s

3 rd Establishing Islamic Banking Finance Institutions in Muslim countries around the globe late 1970’s to mid 1980’s and attempts into the Western world

5 th Conventional banking adopting Islamic Banking Finance principles alongside with conventional banking principles early 1990’s (esp Malaysia)

6 th The use of internet to convey to the mass about Islamic Banking Finance (journals, articles etc.)mid late 1990’s

7 th Developing a more advance tools of Islamic Banking Finance online and more information, forums, discussions etc. late 1990s current

Customers would need the assurance that the data they transmitted to the bank is secure and not been spoofed or viewed by third party. The issue of privacy would be of vital importance especially if it involve a person both personal and financial information. The banks institutions would want to hold their customers confidence in them. Their credibility would diminish if their website been defaced and their system been hacked into.

Customers would want the assurance that the party they are dealing with is whom they claim to be and not fraud. Likewise companies would also want to verify the customers to avoid fraud transactions

There should no denial or interruption of service or access. This may be due to either server down, congested network, defaced, electricity power cut, virus attacks, worm etc.

This is to ensure that both parties involve in a contract agreed are not able to un do what hey had agreed upon.

To overcome security problems in online services, tools such as firewalls, anti virus software, data encryption and authentication certificate can be used. Certificate of Authenticity (CA) can be obtained from companies offering digital signatures for example VeriSign. Sky Bank is an Online Banking system and o gain the confidence of its customers it even give explanation on the security measurements it has takes

The sites can be generally divided into two main divisions, namely; Sites that offer resources about Islamic Banking Finance and sites that belongs to Islamic Banking Finance Institutions that offer products/services.

iHilal Financial Services which can be found at http://www.ihilal.com/ is the first online Islamic financial services provider. It was established in March 2000.

The following is adapted from Muslim-Investor.com. Muslim-Investor.com had listed quite a significant number of Islamic Banking Finance online sites. It listed sites that offer resources about Islamic Banking Finance and also sites that offer various services. This indicates that Islamic Banking Finance online had actually taking off and gradually will gain the public confidence.

Dow Jones Islamic Market Index
this is a group of indexes ( Global, USA, Canada, Technology, etc.) created by the Dow Jones company. Their site has a Sharia Advisory Board which overseas compliance with Islamic principles, as well as a detailed description on how a company gets selected (or excluded) for the index.
The Islamic Banking and Finance Network - IBF Net has pages for Islamic Banks, Financial Institutions, and Markets, a Journal, and lots of links for online researchers, Discussion Forum, Scholars' List with links to home pages, Islamic Accounting, and much more.
Their Mailing list sees many useful discussions from Muslims interested in Islamic Finance and Banking from around the world
IslamiQ.com
previously known as IFDS - Islamic Financial Data Services, they have now a new name. They also launched a series of web portals aiming at serving all Islamic Finance and Investment needs.

IslamiQDaily
this is the first online daily-updated e-journal for Islamic Banking and Insurance for Islamic banking professionals, academics & students.
IslamiQMoney an impressive site for any Muslim, with sections for Discussions, Ask the Scholars, Classifieds, Calculate your Zakah and more.
IslamiQStocks aims to "... become the premier 'one-stop-center' on the Internet for discerning Muslim equity investors." Target launch date is April 2000.

iHilal
An Islamic company providing stock trading, mutual funds, and Islamic stock filtering and screening. They had an Islamic Sharia Advisory board. Very good web site.
Islamic Financial Systems
a June 1997 article on the WorldBank's Finance and Development section of their web site, by Zameer Iqbal. A concise introduction of what Islamic Finance is, its basic instruments, market trends, issues and challenges, and future directions.
Islamic Banking Network
lists some Islamic Banks worldwide, as well as other institutions that provide Islamic Financial services. Their FAQ page is quite extensive and lists answers and opinions to several financial issues, from the Islamic point of view.
Al Baraka has a site on Instruments of Islamic Investment, prepared by Ezzedine Mohd. Khoja, Head of Al Baraka's Financial Investment Development Dept., and revised by the much respected scholar, Dr. Abdul Sattar Abu Ghuddah, Al Baraka's Islamic Sharia Consultant & Manager, Development and Research Dept.
Note: The table of contents currently displays a blank page. Anyone has the correct URL?
USC MSA articles on Islamic Banking and Finance
Although these articles are a bit dated, they are of extreme introductory value:
Principles of Islamic Banking
Islamic Banking by Mohamed Ariff of University of Malaya, from Asian-Pacific Economic Literature, Vol. 2, No. 2 (September 1988), pp. 46-62. The same article is on The University of Norway site on Islamic Banking
Islamic Funding Structures And Financing Vehicles
Islamic Investment in Australia with MCCA
Interview With The First Islamic Financial Institution in Australia, MCCA
The Islamic Banking and Finance Forum
The MuslimsOnline web site has a FAQ on Islamic Economy and Finance
Thesis on Islamic Banking, Theory, Practice and Evolution. This site is by Farrukh Imran Younus, a British M.Sc. student in the fields of Economics and Finance, with emphasis on Islamic Banking and Insurance.
Islamic Development Bank Research Papers are available for a nominal fee including Stocks, Banking, Finance, and a whole lot more. in Arabic.
Bibliographic material on Islamic Banking from CoombsQuest
Soundvision is an Islamic Book and Multi-Media store, in Chicago, Illinois. They have a pretty good section on Money and Profit in Islam on their website.

In Malaysia, Maybank has been the first local bank to offer online loan pre-approval to customers. They offer home loans under two schemes Maxi Home (conventional) and BBA Home Financing-I (Islamic)

The approach that Maybank use is by providing information regarding its entire Islamic Banking Finance instrument offered. The site divided the information under four topics and further subdivided it namely

About Islamic Banking Products

Concepts used

Deposits Products

Premier Mudharabah Account-I
Wadiah Accounts
Mudharabah Investment Accounts
Dividend Rates

Financing Products

BBA Financing
Tamwil Cash Line Facility-I
Murabahah Cash Line Facility-I

Trade Finance Products

Below is a screen print of one of the web page of Maybank website. The rapid growth of Internet usage has lead to existing companies to adapt to the new revolution of technology to enable them to keep a competitive edge in the market. New dot.com companies mushroomed i.e. Amazon.com, e-bay etc.

Welcome to Maybank's world of Islamic Banking. We have deposit and financing products for people from all walks of life regardless of race and religion. As a Maybank customer of Islamic Banking, you can enjoy the following benefits:

Obtain a fixed financing cost for better cash management to meet the periodical financing repayment

Enjoy monthly instalment payments online through Maybank/Mayban Finance branches nationwide

Maybank has stated in the site ‘people from all walks of life regardless of race and religion’ this is appropriate not only to Malaysia as a multi racial country but also in a way addressing the whole world that their Islamic Banking Finance can suit everybody. The power of internet that able to reach millions of users in a way making the mass to better understand the concept of Islamic Banking Finance.

This bank has also list the benefits of using its Islamic Banking Finance services.

Another interesting aspect of Maybank in promoting its Islamic Banking Finance services it’s the way it advertised on the website. On every Maybank Islamic Banking web page there is different pictures of children different race with catchy caption on the top of the picture. For instance ‘The future may be unpredictable but at least your rates won’t’, the picture shows a boy walking in the rain with an umbrella and also wearing raincoat and boots. ‘Banking where everybody profits’ a picture of two boys of different heritage laughing together. ‘What can you gain from an account that pays no interest…? A lot more than just profits’ children of mixed races playing together.

Psychologically people tend to remember visions better that what they hear or read. Marketers have used this concept in selling their product by using attractive and catchy packaging and advertisement. Maybank has use this concept to both attracts and informs the mass about their products and its benefits.

Maybank is also promoting its broad spectrum of web-enabled cash management solutions for their customer’s need of day-to-day business needs. They intend to introduce a new site Maybank2e.net, which they claim that able to change the way corporate transactions are carried

LARIBA, American Finance House is a financial institution based in US, which operates without "Riba". It was established in 1987 in Pasadena California (the Silicon Valley) The Company’s main goal is to provide financing services without riba to all people regardless of their national origin, religious beliefs, gender or colour. The site among other clearly states the goals and the services it provides.

The Internet has revolutionized the way people communicate and receive information. Information, communication and technology (ICT), these three words had been combined to illustrate the close relation of it to one another. Institutions may it be academic, political or financial and even to our personal lives are not able to deny the impact of these words to the any individual or organizational.

Online banking has made its entrance and has gradually gain the customers confidence. Islamic Banking Finance Online is fast following suit. The Islamic principles that guided the lives of Muslims worldwide are not only bounded by the specific form of ritual ibadah but as a whole. ‘Islam as the way of life’ in other words covers all aspect of a human’s life. Economic being an important aspect of life should be adhered to the Islamic teaching.

Internet has enable services to be made available anytime and anywhere. Hence, Muslims or non-Muslims worldwide can enjoy the Islamic Banking Finance provided or at least able to gain and widen their knowledge in Islamic Banking Finance. However it does not come without total cost. The issue of security will always be there. Yet, it will be confronted and handled by using the best tools and taking measurements steps to overcome any foreseen danger.

The virtual space provides an immense room for Islamic Banking Finance to venture as long as the online banking finance is according to the syariah guidelines.