Moral And Social Values

Published Date: 02 Nov 2017

INTRODUCTION  

IB, guided by Islamic economics, is a banking system that strictly complies with Sharia. Some Islamic economists, Chapra (1985, 2000a, b), Ahmad, K. (2000) and Naqvi (2003) explained that the Islamic economic system wants a fair, just and balanced society. IB is based on ethical and moral framework of Sharia (Ahmad, K., 2000; Mirakhor, 2000; Warde, 2000). There are 2 primary sources of the Sharia: the Qur’an and the Hadith.

The followings are mentioned in the Qur’an:-

A Hadith of the Prophet (SAW): "Cursed is the receiver and the payer of interest, the one who records it and the two witnesses to the transaction. They are all alike in guilt." (Sahih Muslim, Hadith no.3881)

Islamic law is not the only one that forbids interest. The Jewish law considers interest as one of the worst sin. Usury is forbidden both in the Old and the new testaments of the Bible.

TYPES OF IB

The IB is made up of:

Islamic Windows

Islamic Windows are special IB services offered by conventional commercial banks. They are found within conventional banks and provide financial services.

Islamic Banks

Islamic banks are commercial and investment banks that operate fully on Islamic principles. Some Sharia scholars questioned the idea of using funds from conventional banks to finance Islamic subsidiaries (AbdRahman (2006) and Yaquby (2005)). New Islamic institutions can be set up if it undertakes to make donations (zakat) to purify the funds.

PRINCIPLES OF IB

Islamic banks function on principles based on Sharia according to which business and investments made by Muslims must be conducted in a responsible and committed manner. From Muslims’ standpoint, conventional banks operate on principles that should be avoided.

No usury or interest (Riba)

The payment and collection of riba is prohibited in IB. The Qur’an prohibits riba; "Any excess benefit derived on a loan over and above the principal". Usury is any excess amount the lender wants in excess of his capital. Any predefined payment in addition to the principal is not allowed.

Only one kind of loan is permitted; the Gard-el-hassan. It is a good loan since the borrower will not pay any interest or additional sum over the loan taken.

The following person criticized interest:

Aristotle (384-322 BC)" said: "Of all modes of getting wealth, this is the most unnatural.

According to karsten(1982) argues that wealth tend to amass in the hands of a few.

Ariff(1982):- interest is not a very effective monetary policy and have questioned it’s worth as a determinant of saving and investment.

Siddiqui (2002):- Commercial loans require a borrower to pay interest even if he is at a loss. If the borrower makes huge profit, he will give the lender only the predetermined ROI. This leads to an efficient allocation of resources and increases inequality in the distribution of income and wealth since it promises an increase in money funds lent and those needing funds are liable to pay interest

Ethical standards

According to the holy Qur’an, all investments should be made in legal products, that is, useful products not harmful ones. Haram (forbidden) activities or things, for example construction of alcohol business, betting, pork meat and adult entertainment will not be financed by Islamic banks. According to Iqbal and Molyneux (2005), Masyir (gambling) is also prohibited since it may lead to bigger financial and societal problem. Transaction involving prohibited products or activities, such as alcohol, illicit drugs and tobacco are prohibited because Islam wants to create an ethical and friendly environment (Imeson, 2007). Islamic banks should consider the production of essential goods which will satisfy basic needs and not material needs.

Moral and Social Values

The Qur’an requires people to look after the needy since every Muslim should have similar living standards. Islamic banks must have certain social projects and make charitable donations. They can provide short term free-profit loans to the poor. Islamic banks are required to give as zakat, 2.5% of their surplus wealth for a lunar year. In Islam, zakat is a compulsory tax which is pure and aims at an equal distribution of income.

Creation of more money from money is not acceptable in Islam

Islam pushes Muslims to carry out investment, become partners and share profits or losses instead of being creditors. Islamic law requires the provider and the user of capital, that is, the depositor, the bank and the borrower, to share risks and rewards evenly. Islamic banks may call for collateral of the same amount as the transaction. 

Money is only a means of exchange; it has no worth in itself and cannot make more money through charging or paying interest on loans or deposits. Loan to a business is a debt, not capital and therefore interest cannot arise. Money is viewed as potential capital in Islam (Ariff (1988)). Money becomes capital when it is invested in business. Aristotle stated ‘a piece of money cannot beget another piece of money’.According to Sharia, money is synonymous to purchasing power and should be spent via purchases or investment. Money should not be kept idle since hoarding is forbidden.

Gharar(Uncertainty, Risk or Speculation) is a taboo

Any transaction should be free of gharar since the Sharia considers the buying and selling of goods or shares at low price and reselling them at higher prices in the near future as illegal. Each party involved should have complete knowledge of the transaction undertaken. Profit should not be predefined. The foundation behind this principle is to prevent abuse of the fragile ones since speculation results in private gains at the expense of the society. Consequently, options, futures and forwards haram. Smolarski et al (2006) held that options may be used for hedging in Islamic finance so far as the economic activities are Islamically acceptable.

CONCEPTS OF IB/ SHARIA COMPLIANT CONTRACTS

The concepts of IB are different from that of conventional banks. In countries like Hong Kong and China, the Sharia Advisory Council had helped a great deal to promote IB in the region.

The different concepts of IB are:-

Al Wadiah

In this agreement, assets including cash are deposited into a bank for safekeeping. The bank keeps the assets, guarantees their safety and promise to return them back. Money kept can be withdrawn anytime. The bank may charge a fee for safeguarding the money or hibah (gift) may be paid where necessary. Hibah is a sum given voluntarily for a benefit enjoyed without hoping to obtain any replacement. The heart to this concept is that the bank has the right to use the customer’s fund, invest it elsewhere and make profits. The depositor benefits from interest free safekeeping services and is entitled to a share of the bank’s profit arising from the use of his money. This share of profit is obtained instead of the usual interest of conventional banks. The bank cannot promise any reward when receiving deposit nor can the depositor ask for any reward.

Mudharabah

Mudharabah is a profit-sharing contract between an entrepreneur and a capital provider. It is a form of partnership where one partner give capital contribution for a project and another partner handles the investment using his knowledge and expertise. The capital provider incurs losses. The owner of capital can be the depositor or the bank. Bank can also be entrepreneur.

Normally a customer deposits money to the bank. The bank will use the fund for investment which may result in profits or losses. The profit earned is shared between the depositor and the bank on a pre-fixed ratio. The depositor bears any loss though he is not involved in the management of the funds. Some Islamic banks to not promise to return the capital invested because in case of losses, it will be deducted from the capital. On the other hand, the entrepreneur is liable merely to his efforts (Zaher and Hassan, 2001). Any loss will reduce both the worth of the investment and the deposit.

According to Alkassim (2005) Mudharabah has two forms:

One tier- It is a contract between the bank and the one in need of fund

Two-tier- It operates as a joint stock Company

khan and Mirakhor (1987) held that the concept of PLS is theoretically more effective. Uzair (1995) said that mudharabah is the key idea behind ‘interestless banking’. However Naqvi (1981) argued that simply replacing interest by uncertain profits is not sufficient to make a transaction Islamic since excessive profits can also be exploitative.

Bai’BithamanAjil (BBA)

In this concept, an individual chooses an asset he wants to purchase. The customer requests the bank for a BBA and undertakes to buy it from the bank at a resale price including a profit margin. Bank purchases the asset from the owner by cash and ownership passes to the bank. Bank will transfer ownership to the individual by selling the goods at a mark-up.

Murabaha (Cost plus)

A Murabaha is the sale of goods at a mark-up price decided by both parties, like in the BBA. It is amongst the most frequently used instruments for short term duration in Islamic banks. According to Iqbal (1997), 75% financial dealings are Murabaha.

Murabaha can be between the client and the bank or between the bank and the supplier. The customer chooses an asset that he wants to purchase and look for a bank to for finance. The seller should inform the buyer of the cost and mark up at the time of the sale agreement. The bank may fund the customer by buying the asset from the vendor and then sells it to the customer at cost plus. The customer may settle his account by installment in the agreed period (Alkassim 2005).

Rollover is not permitted. The goods cannot be sold if is has been used. Where payment is made late, a penalty is charged and it is given as charity.

Tawarruq (Monetization)

This contract is widely used by Islamic banks after murabaha. It can be considered as a form of murabaha’s contract. It is made between the bank and the client. According to Al-shalhoob, the bank will purchase goods, sell it and make a stated profit. The client will sell it to the market at once for liquid money.

Musharaka (Joint Venture)

Musharaka is a joint venture contract under which two or more parties supply funds for investment purposes (Lewis and Hassan (2007)). Musharaka is an old way of financing small-scale investments. Profits are distributed between partners on a pre-agreed ratio but losses are distributed in proportion to their ratio of capital. The contract is void if the ratio is not agreed at the time the contract is effected. If one or more partners want to become silent partners, they will be entitled to a share of profit not exceeding their share of capital invested to total capital. But profit cannot be promised when partners are bringing capital. However the partner managing the musharaka may obtain a management fee, not dependent on the musharaka agreement. All assets are jointly owned in proportion to their capital contribution.

IjarahThummaBai’ (Hire Purchase)

It started as a trading activity. Later, it was used as a mode of finance in banks. It is usually used to finance consumer goods particularly motor vehicles. Two contracts are identified:

Ijarah contract- for leasing and renting

Bai’ contract- purchase

Ijarah is a contract where the bank purchases an asset the client needs and leases it for a fee (Iqbal and Abbas; 2007).

In this type of contract an individual selects a car, requests the bank for ijarah, gives the car deposit and promises to lease the car from the bank for a fixed charge after the bank has purchased the car. The bank pays the seller for the car and ownership is transferred from seller to the bank. The bank remains the owner or gradually transfers the ownership in a rent-to-own contract. The individual will pay ijarah rentals over a stipulated period of time. When the leasing period expires, the individual will buy the car from the bank at the agreed selling price.

Wakalah

The Wakalah is a contract in which a person asks someone else (agent) to act on his behalf for a specific task. The agent will obtain a fee for services rendered.

Gard-el-hassan

It means a free interest debt/loan which the bank gives to some selected customers. It is given over a fixed period of time and the borrower will repay only the amount taken. No interest is charged by the lender (Kettell, 2007). The borrower can give an extra sum over the principal loan amount to show appreciation but it should not be promised.

According to Gafoor, if a borrower is unable to repay the loan at an agreed time, he should be allowed more time for repayment or the loan should be written off and regarded as charity. It is usually considered as benevolent loan since it helps the needy. Siddiqui (1968) said that the foremost aim of IBs should be to help the poor meet their basic needs.

Salam

It is an advance purchase of particular goods, not ready for spot sale. It is usually used to finance agricultural production. Full payment is made on the spot, only delivery is deferred. One party purchases the goods and another party will manufacture goods according to decided specifications.

Istina

It is a new concept in modern IB which is used to finance goods not yet manufactured. Examples are tailoring services, architect services, amongst others.

Takaful (Mutual Insurance)

It provides clear guiding principle to commence IB and aims at protecting participants.

ISLAMIC FINANCIAL PRODUCT AND SERVICE

Islamic Financial institutions offer five categories of products and services.

Deposits

Three types of deposits are mainly used by IBs: current account (CA), savings account and investment account. According to Ariff(1988), the bank guarantees the depositor, the face value of his deposit into the current and savings deposit, but guarantees no return.

CA

A CA is an account in which a customer deposits money. It follows the wadiah principle. They offer almost the same services (bills of exchange, chequebooks and bankcards) as conventional banks. Customers can withdraw their money whenever they want to. Banks use the funds deposited to invest. The depositors will get a share of profit made out of investment (Ahmed, Rahman& Ahmed, 2006, Ali &Sarker, 1996; IBBL, 2008).

Savings account

Islamic banks operate savings deposits under Al-Wadiah and Mudharabah. Savings deposit is nearly the same as CA except that the bank promises to return the customer the full deposit plus a deliberate profit (Ahmed, Rahman, & Ahmed, 2006; Ali &Sarker, 1996; IBBL, 2008).

Investment account

Investment account can be of a fixed or unlimited time period. The depositor cannot withdraw before maturity. It is based on the mudharabah principle. Depositor put their money to obtain a future return.

Retail and Consumer banking

Some of the available instruments include umrah financing, ziarah financing, house financing, hire purchase, credit card, overdraft facility, working capital financing and factoring.

Corporate Banking

Products/services include project financing, bonds, commercial papers, leasing, underwriting and advisory.

Money Market instruments

An example includes the government investment bonds.

Trade Financing

Some examples are letters of credit, Islamic accepted bills, shipping guarantee and bank guarantee.

In light of these products/services, the asset and liability side of an Islamic bank can be identified. The mark up and PLS form part of the asset side. On the liability side are deposits kept at the bank.

REVIEW OF EMPIRICAL LITERATURE

Kamal Naser et al (1999) attempted to evaluate customer awareness and satisfaction towards Jordan IB over a period from 1990 to 1995. They opted for the study to assess whether Muslims in Jordan were aware of the products and services being offered. The author made use of questionnaires and the amount of respondents were 206 out of 300 questionnaires issued. They found that Jordanians were mostly contended with most of the characteristics of the products and services. As held by East (1997) and Richens (1993), satisfied customers would bring in more customers. Also, a lot of respondents were pleased with the bank’s image, name, and confidentiality and banked with it because of its good reputation. This result conformed to that of Erol and El-Bdour et al. (1990). In addition, the authors found that many of the respondents banked with both Islamic and non-Islamic banks which imply that they were not fully satisfied with Islamic banks.

M.Amin and Z.Isa (2008) attempted to study the relationship between service quality perception and customers’ satisfaction in Malaysian IB. A quota sampling technique was used to make sure the sample is representative (Maholtra et al, 2002). Out of 660 questionnaires issued, 440 were returned during 3 months. Respondents were those holding an account at a fully-fledged Islamic and dual-banking system. From the response, it was found that Malaysian consumers were more pleased with fully-fledged banks. There is a potential market for IB and therefore they should innovate continuously to gain a competitive advantage. A high level of service would better satisfy customer and conformed to the study of Parasuraman et al, 1988, 1991). The result of the study was also consistent with earlier studies of Othman and Owen(2001) who said that service quality and customer satisfaction are closely related and according to Arasly at al (2005a, b) service quality is a major forecaster of customer satisfaction in Turkey. Also, there were no big difference between Muslim and non-Muslim customers.

Jasim Al-Ajmi et al. (2008) performed a survey to identify the factors encouraging a customer to choose a particular bank in Bahrain. They chose this study to assess the degree to which customers were familiar with Islamic products/services and the amount of usage of these financial instruments. 1000 questionnaires were distributed but only 655 were useful. They found that religious belief and social responsibility were the most important determinant for choosing a bank and cost benefit is the third factor. Murahaba was the most widely used. Moreover, both men and women had similar taste except for murahabah and Qard-Hassan, which men tend to use them more. It was also found that more educated and higher income person will switch from traditional to Islamic banks and vice versa.

S.N.Khan et al. (2010) conducted a study to assess the behavior, demographic profile, customer satisfaction and bank selection criteria of Islamic bank customers in Bangladesh throughout the year 2007. It also studied the awareness and use of various Islamic bank products/services and whether bank selection criteria and customers’ demography are related. Data was collected from a sample of 100 customers to analyze profile. Most of the customers aged 25-35 years. They were well educated and observed long relationships with conventional banks. It was found that education and income affects the use of Islamic products/services. Customers were satisfied with many of the products/services offered. They were aware of investment products (term deposits and savings bond) but were unaware of borrowing products except Qard. Customers were pleased with many delivery elements except with employees. The following are push factors with the most important one first; religion, appropriate place, family and friends and rate of return (ROR). Customers above 25 years did not care about ROR. Those with low income level chose a bank recommended by friends and family and high income level considered religion mainly. Education level was not a significant factor in choosing a bank.

N.A khattak et al. (2010) studied the customer’s approach, satisfaction and awareness level in Pakistan by interpreting 156 questionnaires. They also assessed the relationship between demographic variables and the satisfaction and awareness of customers in Pakistan by using ANOVA. It was found that customers were satisfied with most services and also with management proficiency. A significant relationship was found between academic qualification, awareness of different products and their age. Different age groups and different income levels would prefer different bank location and product/services. Most of the customers of Islamic banks were educated and middle income persons and used both banking system. It means that Islamic banks lack features. This is consistent with Okumus(2005) study in Turkey. General products were known to clients but they were unaware of Islamic financial products. Most customers adopt IB primarily for religious reasons. Other reasons are confidentiality, efficiency of banks, working hours, amongst others.

B.Doraisamy et al. (2011) attempted to assess customers’ taste in relation to IB products/services in Kedan. They opted to examine factors motivating customers to prefer Islamic banks to conventional banks. Out of 200 questionnaires distributed, 187 useful responses were received. The results showed that customers were aware of the products/services offered and profitability and quality were the main reasons for choosing Islamic banks and its products/services. Demographic factors like race, gender and education also affected their choice. However, most of them were not making full use of facilities offered. Islamic banks should constantly improve their quality, increase their speed to boost up efficiency and charge low cost for their products/services. This would lead to a good reputation. Lastly it was found that Islamic banks should look for ways to facilitate the understanding of their products/services.

M.Awan and Bukhari’s (2011) assessed customers’ criteria of selecting an Islamic bank in Pakistan from 2003 to 2009. The study covered customer satisfaction and awareness of key products/services in Pakistan and a sample of 250 respondents were analyzed. It was found that customers cared a lot of the attributes of products and quality of service. Their result conformed with Erol and El-Bdour(1989), Gerrard and Cunningham(1997) and Zaher and Hassan(2001) which reported that the choice of Islamic bank was not solely due to Islamic reasons. In fact the result from this study showed that characteristics complying with Islamic law were ranked last. Long term financing options like pension funds were not offered and employees did not have the required skills and knowledge to attract customers. More awareness should be created since many respondents were ignorant of the different products and services offered.

Khaliq Ahmad et al (2011) examined the reasons a customer choose a particular bank in Malaysia, customer satisfaction and explained how to retain existing customers and attract new ones. They studied the brand awareness and Islamic bank products/services offered. They used questionnaires and the sample consisted of 214 university students. It was found that awareness about Islamic products and services were poor. They chose banks according to their brands. Islamic and non-Islamic banking institutions were in fierce competition with one another. Convenience was another factor that pushed a customer towards a bank. Convenience included availability of ATMs, attractive locations, parking facilities and opening hours to reduce stress (Balachander et al, 2000). Since younger generations would prefer banks with high level of technology, therefore technology and rapidity were also a push factor.

A.Echchabi et al. (2012) conducted a study in Malaysia to assess customer choice for Islamic bank attributes. The authors used both quantitative and qualitative approach; quantitative approach to collect primary data by issuing questionnaires and qualitative approach through interviews. There were 500 respondents. From the quantitative approach, they found that quality of service and conveniences were important considerations in choosing Islamic banking attributes. Qualitative approach revealed that the foremost reason for choosing Islamic banks were religion and banks’ reputation. The customers would then consider other factors like quality of service offered, transaction fees, location, professional behavior personnel, convenience and image of the bank. This is in conformity with the results of Okumus (2005) for Turkish Islamic banks.

Saeed Akbar et al (2012) conducted a study to understand and know people’s perception of IB and its overall performance in UK. 156 people were asked to fill in an online structured questionnaire. There were only 35 useable responses. They found that IB operates on different principles like no riba principle, PLS principle and rely on ethical norms. It functions on the Sharia law. But most of them did not conduct business under the PLS principle and is based on the traditional interest under different names. According to most of the respondents, Islamic banks offered distinctive products and services to meet social objectives. But it was found that there was a lack of regulatory framework and more marketing would be required to boost awareness.

IB in Mauritius

For the past fifteen years, Mauritius has been engaged in traditional Banking and Financial Services. Mauritius supports institutions like IOSCO to prevent money laundering and terrorist financing. Since 1988, Al Barakah Cooperative Society Limited attended the Mauritians of Islamic faith. It offered tailor-made Murabaha schemes like Hajj savings account and Istisna financing. Islamic finance in Mauritius dates from November 2007, when it became member of the IFSB. It then became a member of the International IILM Corporation which allows Mauritius to trade Islamic financial instruments for greater liquidity management.

The Finance Act 2007 brought some changes to the Banking Act 2004. It provides that banks can operate either as a fully-fledged Islamic bank or through Islamic windows. Banks having a license under the Banking Act 2004 can open Islamic windows and can obtain a license by the BOM to open an Islamic bank only. Islamic banks are required to disclose their amount of Zakat.

During the IMF/World Bank Annual Meetings 2010 held in Washington, the BOM also entered into a Memorandum of Understanding (MOU) with the leading regulator in Islamic finance; bank Negara Malaysia, to enhance its skills in Islamic finance and banking.

There are only two institutions providing Islamic banking services in Mauritius. One is the HSBC Amanah IB window and the second one is a fully-fledged Islamic bank.

The HSBC Ltd was the first institution to launch Islamic window in Mauritius in 2009. The Governor of the BOM, Bheenick held that Muslims and non-Muslims are to be treated equally. In 2009, HSBC Amanah introduced two products; current account and investment account through a murabaha Contract. According to Blair Harden, the managing director of HSBC, the bank is providing world-class Amanah products and will attract investors from the Middle East and other jurisdictions and Mauritius will be the gateway into Africa and Asia. HSBC offer more services in investment banking and offshore business.

Deen Banking Corporation Ltd, later renamed as Century Bank Corporation Ltd is the first fully-fledged Islamic bank in the island. On 30 March 2011, at the launching ceremony of Century bank, the Governor of the bank said: ‘For a country which is second to none in its pluralism, we just could not stay away from IB’. The Century Bank is licensed by the BOM which enables the bank to carry out retail as well as investment banking activities. In the Match 2011 speech, the chairman of Century bank, Hesham Shokry, said that for the first years of operation, the bank will concentrate on wholesale banking and treasury and wealth management. Products and services under wholesale banking includes debt, Islamic bilateral loans, loan syndications, trade finances, debt restructuring, structured products such as sukuk and securitization of assets and equity capital markets and fund management. The equity capital market offers equity valuations, equity restructuring, buy and sell side advice, private equity opportunities, mergers and acquisitions and initial public offerings. Wealth management services provide capital alternatives to borrowers and investment opportunities for investors. With treasury services, customers will benefit by trading Islamic treasury products like Sukuk trading, currency hedging and foreign exchange.

Mauritius offers a favorable jurisdiction to structure Islamic financial products because of its fiscal and non fiscal policies. Mauritius charges a flat rate of income tax of 15%. Funds holding a Category 1 Global Business License are taxed at a maximum of 3%.Being a member of the African trade bloc, Mauritius has duty free access to markets and is therefore an economical place for conducting businesses and investing. More than $50 billion of investment funds is based in Mauritius. Of the investment funds, there are also Sharia compliant funds. Islamic trusts, Protected Cell Companies for wealth management and Sukuk are also available in the island. Islamic finance in Mauritius is expected to expand from retailing to outlandish capital market.

In his 2006/2007 budget, Rama Sithanen declared that Islamic finance institutions have been successful worldwide since they ensure justice and coorperation. Therefore, Islamic finance can improve efficiency and capital access, thus leading to economic growth. Since Islamic finance is growing by 15% to 20% yearly, it means that there is ample prospect for the growth of IB in Mauritius though only 18% of the Mauritian population is Muslim. In Business Standard, India’s leading newspaper, dated November 21, 2012, Sunil Benimadhu, head of Stock Exchange of Mauritius stated that his aim is to encourage banking products and this will lead to a growth in the stock market.

However a robust regulatory framework, appropriate infrastructures, tax incentives, clearing and liquidity framework are all important aspects that should be considered. We need to develop our own niche market and strive to become a regional hub for Islamic finance. Investors on the continent and those from India will surely use Mauritius as an IB hub.