Islamic Perspectives on Wealth Creation

Islamic Perspectives on Wealth Creation

Copyright Date: 2005
Pages: 304
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  • Book Info
    Islamic Perspectives on Wealth Creation
    Book Description:

    This book explores the longer term issues of Islamic capital accumulation and its contribution to the development of Muslim societies in the East and West.

    eISBN: 978-0-7486-7936-2
    Subjects: Religion

Table of Contents

  1. Front Matter
    (pp. i-ii)
  2. Table of Contents
    (pp. iii-iv)
  3. List of Tables
    (pp. v-vi)
  4. List of Figures
    (pp. vii-vii)
  5. List of Contributors
    (pp. viii-viii)
  6. Acknowledgements
    (pp. ix-x)
    Munawar Iqbal and Rodney Wilson
  7. Introduction
    (pp. 1-8)
    Munawar Iqbal and Rodney Wilson

    In the global economy wealth determines power and influence, but much of the capital accumulation on which this wealth is based results from debt finance involving interest payments. Such a system brings widely acknowledged injustices, notably problems of developing country debt, and corporate insolvency resulting in unemployment and social hardship when family financial obligations cannot be met. For Muslims such economic injustices can never be acceptable, hence the need to develop systems of managing finance that are compatible with Qur’ānic teachings and the Sharīʽah.

    Wealth creation and value preservation are among the greatest challenges facing Muslims and the Islamic World...

  8. Part I Whither Islamic Banking?
    • 1 Islamic Banking at the Crossroads: Theory versus Practice
      (pp. 11-25)
      Zubair Hasan

      This chapter examines the reasons behind a widening gap between the conventional theory and current practice of Islamic banks. ‘No risk, no gain’ may not be sufficient as a general principle for organising Islamic finance. It is also not always valid to say that Islam is averse to granting a time value for money. The overuse of deferred payment contracts in Islamic finance threatens to violate the juristic principle of sadd al-dharaʽ, that is, controlling the potential avenues for circumvention of the law. Some structural changes in Islamic financial arrangements are suggested to create a balance in the use of...

    • 2 Islamic Banking Modes of Finance: Proposals for Further Evolution
      (pp. 26-46)
      Abdel-Rahman Yousri Ahmad

      Due to the prohibition of interest in Islam, Islamic banking cannot depend on lending activities. When Islamic banking models were first proposed during the 1950s and later commenced operation, the pioneers of Islamic banking focused their efforts on turning traditional Islamic contracts of trade and partnership into practicable methods for finance. This may be termed as the first phase of the evolutionary process of Islamic banking. During the last thirty years a number of viable Sharīʽah-compatible financing methods have been developed. However, modes of finance based on classical Islamic contracts are not always sufficient in fulfilling the needs of modern...

  9. Part II Islamic Retail Banking Issues
    • 3 Wealth Mobilisation by Islamic Banks: The Malaysian Case
      (pp. 49-68)
      Sudin Haron and Badrul Hisham Kamaruddin

      Since its inception in 1983, Bank Islam Malaysia Berhad (BIMB) has achieved considerable success in mobilising both Muslim and non-Muslim funds in Malaysia. As a consequence of BIMB’s success in providing Islamic banking products and services, the government adopted policies to encourage the development of the Islamic banking and insurance system. In addition to Islamic banks, conventional financial intermediaries were also allowed to provide products based on Islamic principles. Among the institutions that are actively involved in promoting Islamic financial products is Bank Kerjasama Rakyat Malaysia Berhad. Using content analysis, this chapter highlights the similarities and differences between BIMB and...

    • 4 Managing and Measuring Customer Service Quality in Islamic Banks: A Study of the Kuwait Finance House
      (pp. 69-83)
      Abdulqawi Radman Mohammed Othman and H. Lynn Owen

      This chapter introduces the alternative measures of service quality (SQ) proposed in the literature and examines their performance in the Islamic banking industry using the Kuwait Finance House (KFH) as a case study. It suggests a new model to measure SQ called CARTER which is based on 34 items. The study shows that all CARTER items that have appeared in both important items’ weights and percentages were significant. The strong link between SQ and customer satisfaction is apparent and the study identifies this through a system of CARTER-items processes inputs and overall satisfaction output. Finally, the study suggests a scenario...

    • 5 The Lending Policies of Islamic Banks in Iran
      (pp. 84-94)
      Nezamaddin Makiyan

      Since 1984, when all Iranian banks were required to operate under Islamic principles, banks have been able to increase their lending significantly. In this chapter, descriptive analysis and an error-correction model are used to investigate the lending activities of Iranian banks. The results indicate that many factors have affected lending policies. These include rate of return, inflation and state intervention, of which government directives on managing funds have played the most important role.

      This chapter is concerned with the dynamics of loans in the Iranian banking system, which operates under Islamic principles. It studies the operations of all Iranian banks...

  10. Part III Measuring Islamic Banking Efficiency
    • 6 Efficiency in Arabian Banking
      (pp. 97-117)
      Idries Al-Jarrah and Philip Molyneux

      This chapter investigates the efficiency levels of the Jordanian, Egyptian, Saudi Arabian and Bahraini banking systems. It also highlights the role of economic and financial reforms that have taken place in these countries in recent years. The chapter uses the stochastic frontier and Fourier-flexible form to estimate cost and profit efficiency levels. The cost efficiency averaged around 95.0 per cent over the 1992–2000 period. Estimates of standard and alternative profit functions reveal technical efficiency on average at around 66.0 per cent and 58.0 per cent respectively. Islamic banks are found to be the most cost and profit efficient, while...

    • 7 Determinants of Islamic Banking Profitability
      (pp. 118-141)
      M. Kabir Hassan and Abdel-Hameed M. Bashir

      This chapter analyses how bank characteristics and the overall financial environment affect the performance of Islamic banks. Utilising bank level data, the study examines the performance indicators of Islamic banks worldwide during the period 1994–2001. A variety of internal and external banking characteristics have been used to predict profitability and efficiency. Controlling for macroeconomic environment, financial market structure and taxation, the results indicate that high capital and loan-to-asset ratios lead to higher profitability. Other things remaining equal, the regression results show that implicit and explicit taxes affect the bank performance measures negatively, while favourable macroeconomic conditions impact performance measures...

    • 8 Allocative and Technical Inefficiency in Sudanese Islamic Banks: An Empirical Investigation
      (pp. 142-152)
      Abd Elrhman Elzahi Saaid

      In 1989, all the operations of Sudanese banks were required to conform to Islamic principles. Previous investigations have shown that subsequently the banks grew rapidly in terms of assets and liabilities despite difficult economic conditions. An analysis of their financial operations revealed that they made substantial profits despite relatively high risks and severe economic sanctions. However, this success does not always imply managerial efficiency. This chapter investigates the allocative and technical inefficiency (X-inefficiency) of Sudanese Islamic banks. For this purpose the basic stochastic frontier approach (SFA) is used. The results show that those Sudanese Islamic banks investigated were allocatively and...

  11. Part IV Islamic Mortgages, Insurance and Risk Management
    • 9 Islamic Mortgages in the United Kingdom
      (pp. 155-166)
      Humayon A. Dar

      The ownership of a house is a major aspiration for most families. For Muslim communities in Western countries, this poses a difficult problem because all conventional mortgage products involve interest, which is prohibited in Islam. Some alternative products are now available. This chapter discusses three such products being offered in the UK market and compares them with conventional mortgages. The study argues that though these products do not involve paying interest and hence are acceptable from an Islamic point of view, in the price-determining process of these products there is a link with interest, which is used as the benchmark....

    • 10 Wealth Creation through Takāful (Islamic Insurance)
      (pp. 167-187)
      Mervyn K. Lewis

      Despite continued growth of takāful, with over 50 companies operating in 22 countries, there is a relative lack of study of their contribution to savings in the Muslim World. Insurance products have long been recognised as major vehicles for savings in Western countries. This chapter examines different ways in which insurance products act as vehicles for savings and then goes on to consider the distinctive form of wealth creation via takāful operations. The chapter analyses the basis of takāful business and compares this with conventional insurance. While considerable differences exist between takāful and traditional insurance, similarities are found between takāful...

    • 11 Towards Optimal Risk Management for Profit-Sharing Finance
      (pp. 188-202)
      Seif I. Tag El-Din

      It is commonly alleged that the risks of profit-sharing make muḍārabah financing less appealing than fixed return modes. However, the workings of the fixed return modes imply similar potential risks as those borne by muḍārabah. The appeal of fixed return (FR) modes is attributable to the conventional banking vision that seems to have inspired the practitioners of Islamic banking. The same banking culture of money capital pricing and cost-of-credit accounting has been structured into FR-modes. However, FR-modes are becoming less appealing in the present-day variable and floating rate culture. It is high time for Islamic banking to revitalise its core...

  12. Part V Equity Finance and Venture Capital
    • 12 Stock Market Operation and Equity Price Determination in an Economy with an Interest-Free Banking System: The Case of Iran
      (pp. 205-216)
      Karim Eslamloueyan

      This chapter employs an Autoregressive Distributed Lag (ARDL) model to examine the stock price movements on the Tehran Stock Exchange (TSE) after the introduction of Islamic banking in the country. It concludes that domestic and international interest rate differentials are not important determinants of stock prices in the TSE due to restrictions on capital mobility and the implementation of the non-interest banking system in Iran. In the short run, stock prices are positively affected by their lagged value, exchange rates and current prices of foreign goods. Industrial production, the lagged values of domestic and foreign goods and a lagged exchange...

    • 13 The Demand for Mushārakah in Urban Egypt by Small Business as a Test of the Pecking Order Hypothesis
      (pp. 217-227)
      Mohamed Nasr

      For a long time Islamic finance has been tackled from the supply side, and asymmetric information and agency problems have been given as the reasons for lack of use of mushārakah by Islamic banks. This chapter attempts to investigate the lack of use of mushārakah from the demand side. It argues that if the Pecking Order Hypothesis (POH) holds, then perhaps the notion that Islamic banks are reluctant to use mushārakah mainly because of supply factors, such as the high risk embedded in such an instrument, needs to be reconsidered. The study has implications for Islamic financial institutions in so...

    • 14 Islamic Finance and Venture Capital: A Practical Approach
      (pp. 228-248)
      Saqib Rashid

      The literature on Islamic finance has focused on mimicking the traditional banking model while bypassing the interest mechanism through complex contracts. Very little attention has been paid to the potential impact of venture capital. This is a serious omission since venture capital is founded on the same principles that guide Islamic finance and because venture capital has been a key engine of growth in the most successful economy in the world, the US. A properly functioning venture capital industry benefits society at large by directing scarce economic resources to entrepreneurs with the most promising ideas, and the determination to turn...

  13. References and Bibliography
    (pp. 249-270)
  14. Appendices
      (pp. 272-272)
      (pp. 273-273)
      (pp. 274-275)
      (pp. 276-276)
      (pp. 277-277)
      (pp. 278-280)
      (pp. 281-281)
      (pp. 282-282)
  15. Glossary of Arabic Terms
    (pp. 283-287)
  16. Index
    (pp. 288-294)