Are Islamic Banking Products Shahriah Complance?

Research Project Proposal on

"ARE ISLAMIC BANKING PRODUCTS SHAHRIAH COMPLANCE"

Islamic Banking Sector

As Pakistan is a Muslim country, there are several Islamic banks which follow the banking system according to the dictum of the Islamic law - Sharia. Islamic banking has a basic principle and is against any form of lending money with interest. It is based on the sharing of profit and loss and strictly forbids interest rates. Because of these principles, the Islamic Banks are very popular among the Pakistanis and at present there are several Islamic banks all over the country that offer a dedicated service to the countrymen who longs to start up small businesses. The Islamic banks were mostly established in the 20th century and are running quite successfully in Pakistan.

1. Problem Statement

The problem suggests "Is Islamic Banking Products Shahriah Compliance". Every bank is Pakistan opening up its Islamic Banking Branches what are the products they are offering and how they are different from commercial banks what are the procedure they follow and are these procedures completely following Shahriah.

 How different products of Islamic Banking works?

 Are there any issues that consumers are facing in Islamic Banking products?

2. Limitations Of Research

The following points could create problems:

 Time constraint



3. Research Design And Method

Design type: Descriptive Research

Method of data collection: Interviews and analysis of documented material

4. Sources Of Data

There are two sources of data one is primary sources and other one is secondary sources.

PRIMARY SOURCES:

 Interviewing (face to face)

 Surveys

SECONDARY SOURCES:

 Articles related to Islamic Banking

 Newspapers

 Financial documents

 Websites

 Magazines

Literature Review

Prospects and problems of Shariah-compliant finance

The market is growing fast in Muslim countries and among Muslim communities. Its fuller development, Euromoney's roundtable of experts suggests, depends on clearer views on objectives, further development of regulation and standardization of products and approaches

SUMMARY

* The Shariah-compliant finance sector is growing fast but remains a niche market

* Putting in place a financing system that is both Shariah compliant and produces a return for investors is a challenge

* Regulators in a Shariah-compliant system require more transparency from banks than in a non-Shariah system as investors bear relatively more risk

* The Shariah-compliant system readily attracts those for whom it is a vital component of their faith but much of the growth in the market is coming from neutrals who find that the system can deal with the majority of their banking needs

* Shariah-compliant finance has proved immune to the direct impact of the sub-prime-induced credit crisis but cannot escape entirely the broader macroeconomic effects

* A secondary market in sukuk is emerging only slowly

* Standardization is a crucial but highly challenging issue in Shariah-compliant markets

http://www.iifm.net/Euromoney_Debate_Dec2008.pdf

Islamic Banking and Finance: Theory and Practice sbp.org.pk

SUPPORTING ARTICLE

Islamic Banking Isn't Islamic

by Tarek El Diwany

Original Summer 2000; updated June 2003

An abridged version of this article was published in Banker Middle East during November 2002

The contractum trinius was a legal trick used by European merchants in the Middle Ages to allow borrowing at usury, something that the Church fiercely opposed. It was a combination of three separate contracts, each of which was deemed permissible by the Church, but which together yielded a fixed rate of return from the outset. For example, Person A might invest £100 in Person B for one year. A would then sell back to B the right to any profit over and above say £30, for a fee of £15 to be paid by B. Finally, A would insure himself against any loss of wealth by means of a third contract agreed with B at a cost to A of £5. The result of these three simultaneously agreed contracts was an interest payment of £10 on a loan of £100 made by A to B.

I had read about the contractum trinius some months before first encountering the full documentation behind an Islamic banking murabahah contract. It was the kind of contract that Person A might use in order to finance the purchase of good X from Person B. The bank would intermediate in the transaction by asking A to promise to buy good X from the bank in the event that the bank bought good X from B. With the promise made, the bank knows that if it buys good X from B it can then sell it on to A immediately. The bank would agree that A could pay for good X three months after the bank had delivered it. In return, A would agree to pay the bank a few percent more for good X than the bank had paid to B. The net effect is a fixed rate of financial return for the bank, contractually enforceable from the moment that the bank buys good X from B. Money now for more money later, with good X in between.

The above set of legal devices is nothing other than a trick to circumvent riba, a modern day Islamic contractum trinius. The fact that the text of these contracts