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Dubai to create world's biggest Islamic Bank


Guest Mohamed Ariff
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Guest Mohamed Ariff

Dubai's Noor Islamic Bank plans to be the world's largest Islamic bank within five years, reported Reuters. CEO Hussain Al-Qemzi said the bank plans to spend between $500m and $1bn each time on a 'few' acquisitions in Europe, Asia and North Africa. Noor, which started operations two days ago, is 25% owned by Dubai Group, a unit of Dubai Holding, and 25% owned by Investment Corporation of Dubai.

 

Noor Islamic Bank will evolve the concept of Islamic banking by focusing on excellence of products and services that better customers' lives. The bank will offer state-of-the-art financial management whilst highlighting the concept of Islamic banking as a lifestyle choice. Noor Islamic Bank is initially offering its services in the UAE, and intends to extend its footprint in the Middle East, Europe, the Far East and North Africa regions.

 

Addressing the panel on Islamic Finance during the World Economic Forum on the Middle East in Dead Sea, Jordan, Ba'alawy said Islamic finance has the potential to transform the broader financial sector across the Middle East. He emphasized the importance of adopting an innovative compensation structure and investment instruments that match conventional products.

 

Dubai's Noor Islamic Bank, which is 50% owned by the Dubai government, is planning to acquire banks in Europe and Asia next year, reported Reuters. The bank has a capital of $1.1 billion and is the UAE's fifth shariah compliant lender. CEO Hussain Al Qemzi said Noor would use its capital to make initial purchases, while it could sell shares within three years.

 

'The escrow account regulation aims to protect buyers' interests and is playing a vital role in reinforcing public confidence in Dubai's freehold property market. Founded on strong principles of trust and confidence, it is only natural for Noor Islamic Bank to service escrow accounts.'

 

An escrow account essentially is a safekeeping account for buyers of off-plan units from developers and making instalment payments during the course of construction of the project until completion and delivery of the unit to the buyer. Developers will need to open separate escrow accounts for each project.

 

All proceeds into the escrow account will be protected for the buyer as payments will be released by Noor as an escrow agent upon fulfilment of specific conditions by the developer and as specified by Dubai Land Department. Noor Islamic Bank's escrow account services will be fully Shari'ah-compliant and will cover range of value added services to the property developers at competitive rates.

 

The UAE property market opened up to expatriate ownership in 2002. Since then more than 15,000 families have moved into freehold homes.

 

Speaking at the inauguration, Al Qemzi said: 'Noor Islamic Bank offers modern banking solutions to its consumers, stakeholders and partners. The Board has a remarkable vision to position the bank as the world's leading Islamic financial institution, focusing on Sharia-compliant financial services that is complemented by a solid customer-centric approach.'

 

Islamic banking is a new phenomenon that has taken many observers by surprise. The whole banking system has been islamized in both Iran and Pakistan. In addition, there are some thirty Islamic banks in operation in other parts of the globe, including the Jeddah-based Islamic Development Bank (IDB) but excluding numerous non-bank Islamic financial institutions (see Appendix). What is more, the speed with which Islamic banks have sprung up and the rate at which they have progressed make it worth-while to study them systematically. An attempt is made in this paper (a) to survey the growing literature on Islamic banking, in particular (B) to trace the growth and development of Islamic banking, and © to highlight its salient characteristics.

 

Islamic banking is not a negligible or merely temporary phenomenon. Islamic banks are here to stay and there are signs that they will continue to grow and expand. Even if one does not subscribe to the Islamic injunction against the institution of interest, one may find in Islamic banking some innovative ideas which could add more variety to the existing financial network.

One of the main selling points of Islamic banking, at least in theory, is that, unlike conventional banking, it is concerned about the viability of the project and the profitability of the operation but not the size of the collateral. Good projects which might be turned down by conventional banks for lack of collateral would be financed by Islamic banks on a profit-sharing basis. It is especially in this sense that Islamic banks can play a catalytic role in stimulating economic development. In many developing countries, of course, development banks are supposed to perform this function. Islamic banks are expected to be more enterprising than their conventional counterparts. In practice, however, Islamic banks have been concentrating on short-term trade finance which is the least risky.

 

The essential feature of Islamic banking is that it is interest-free. Although it is often claimed that there is more to Islamic banking, such as contributions towards a more equitable distribution of income and wealth, and increased equity participation in the economy (Chapra l982), it nevertheless derives its specific rationale from the fact that there is no place for the institution of interest in the Islamic order.

 

Islam prohibits Muslims from taking or giving interest (riba) regardless of the purpose for which such loans are made and regardless of the rates at which interest is charged. To be sure, there have been attempts to distinguish between usury and interest and between loans for consumption and for production. It has also been argued that riba refers to usury practiced by petty money-lenders and not to interest charged by modern banks and that no riba is involved when interest is imposed on productive loans, but these arguments have not won acceptance. Apart from a few dissenting opinions, he general consensus among Muslim scholars clearly is that there is no difference between riba and interest. In what follows, these two terms are used interchangeably.

 

A conventional bank may use its conventional banking funds to offer “Islamic financial products”, and to charge the same conventional interest rate to its “Islamic finance” customers, provided that it

adheres to the contract conditions that the Sharīca boards glean or adapt from classical books of Islamic jurisprudence.

 

Islam allows the owners of capital a share in a surplus which is uncertain. To put it differently, investors in the Islamic order have no right to demand a fixed rate of return. No one is entitled to any addition to the principal sum if he does not share in the risks involved.

 

The owner of capital (rabbul-mal) may 'invest' by allowing an entrepreneur with ideas and expertise to use the capital for productive purposes and he may share the profits, if any, with the entrepreneur- borrower (mudarib); losses, if any, however, will be borne wholly by the rabbul-mal. This mode of financing, termed mudaraba in the Islamic literature, was in practice even in the pre-Qur'anic days and, according to jurists, it was approved by the Prophet.

 

Another legitimate mode of financing recognized in Islam is one based on equity participation (musharaka) in which the partners use their capital jointly to generate a surplus. Profits or losses will be shared between the partners according to some agreed formula depending on the equity ratio. Mudaraba and musharaka constitute, at least in principle if not in practice, the twin pillars of Islamic banking. The musharaka principle is invoked in the equity structure of Islamic banks and is similar to the modern concepts of partnership and joint stock ownership. In so far as the depositors are concerned, an Islamic bank acts as a mudarib which manages the funds of the depositors to generate profits subject to the rules of mudaraba as outlined above.

 

financing. In other words, the bank operates a two-tier mudaraba system in which it acts both as the mudarib on the saving side of the equation and as the rabbul-mal on the investment portfolio side. The bank may also enter into musharaka contracts with the users of the funds, sharing profits and losses, as mentioned above. At the deposit end of the scale, Islamic banks normally operate three broad categories of account, mainly current, savings, and investment accounts. The current account, as in the case of conventional banks, gives no return to the depositors. It is essentially a safe-keeping (al-wadiah) arrangement between the depositors and the bank, which allows the depositors to withdraw their money at any time and permits the bank to use the depositors' money.

 

Islamic banking has three distinguishing features: (a) it is interest-free, (B) it is multi-purpose and not purely commercial, and © it is strongly equity-oriented.

 

Most Islamic economists attribute the vision of Islamic bank structure to the work of Mohammad Uzair in the mid-Twentieth Century.1 With very few exceptions, Islamic jurists of the Nineteenth and Twentieth Centuries have equated “interest” (or its Arabic counterpart, fa’ida) with the forbidden riba. The rise of Islamism under the influence of the Muslim Brotherhood in Arab countries and the Jamat-i-Islami in the South Asian subcontinent did not stop at condemnation of interest-based banking. The movement also called for replacing existing banking systems – which they characterized as an alien western intrusion into the Islamic world – with an Islamic alternative. The model envisioned by Uzair, Siddiqi and others was one of two-tier silent-partnership or mudaraba.

 

Iran switched to Islamic banking in August l983 with a three-year transition period. The Iranian system allows banks to accept current and savings deposits without having to pay any return, but it permits the banks to offer incentives such as variable prizes or bonuses in cash or kind on these deposits. Term deposits (both short-term and long-term) earn a rate of return based on the bank's profits and on the deposit maturity.

 

The Pakistani experience differs from the Iranian one in that Pakistan had opted for a gradual islamization process which began in l979. In the first phase, which ended on l January l985, domestic banks operated both interest- free and interest-based 'windows'. In the second phase of the transformation process, the banking system was geared to operate all transactions on the basis of no interest, the only exceptions being foreign currency deposits, foreign loans and government debts. The Pakistani model took care to ensure that the new modes of financing did not upset the basic functioning and structure of the banking system. This and the gradual pace of transition, according to the authors, made it easier for the Pakistani banks to adapt to the new system. The rate of return on profit-and-loss sharing (PLS) deposits appears not only to have been in general higher than the interest rate before islamization but also to have varied between banks, the differential indicating the degree of competition in the banking industry.

 

The Malaysian experience in Islamic banking has been encouraging. Man's study shows that the average return to depositors has been quite competitive with that offered by conventional banks. By the end of l986, after three years of operation, the bank had a network of fourteen branches. However, 90 per cent of its deposits had maturities of two years or less, and non-Muslim depositors accounted for only 2 per cent of the total. Man is particularly critical of the fact that the mudaraba and musharaka modes of operation, which are considered most meaningful by Islamic scholars, accounted for a very small proportion of the total investment portfolio, while bai'muajjal and ijara formed the bulk of the total. It is evident from Mastura's analysis that the Philippine Amanah Bank is, strictly speaking, not an Islamic bank, as interest-based operations continue to coexist with Islamic modes of financing. Thus, the PAB has been operating both interest and Islamic 'windows' for deposits. Mastura's study has produced evidence to show that the PAB has been concentrating on murabaha transactions, paying hardly any attention to the mudaraba and musharaka means of financing. The PAB has also been adopting unorthodox approaches in dealing with excess liquidity by making use of interest- bearing treasury bills. Nonetheless, the PAB has also been invoking some Islamic modes in several major investment activities.

 

The Shariah (Islamic law) does not require that the seller of a product be Muslim or that his/her own income be halal (permitted). We will therefore, initially use funds from conventional sources to finance Amanah Vehicle Finance.

 

“If in cases of genuine need, the financier appoints the client his agent to purchase the commodity on his behalf, his different capacities (i.e. as agent asnd as ultimate purchaser) should be clearly

distinguished. As an agent, he is a trustee...

 

After he purchases the commodity in his capacity as agent, he must inform the financier that, in fulfilling his obligation as his agent, he has taken delivery of the purchased commodity and now he extends his offer to purchase it from him. When, in response to this offer, the financier conveys his acceptance to this offer, the sale will be deemed to be complete, and the risk of the property will be passed on to the client as purchaser. At this point he will become a debtor…”

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