Global Forum on Islamic Finance (GFIF) 2017

Transcription

1 1 P a g e

2 GFIF Programe & Proceedings Global Forum on Islamic Finance (GFIF) 2017 March 21-22, 2017 Pearl Continental Hotel, Lahore - Pakistan Online link to Programe & Proceedings Center of Islamic Finance COMSATS Institute of Information Technology M. A. Jinnah Building Defence Road, Off Raiwind Road, Lahore - Pakistan islamicfinance@ciitlahore.edu.pk Tel: +92 (42) Ext. 121 Fax: +92 (42) P a g e

3 GFIF Programe & Proceedings Global Forum on Islamic Finance (GFIF) by COMSATS Institute of Information Technology (CIIT), Lahore- Pakistan GFIF Programe & Proceedings designed and compiled by: Ms. Gulnaz Altaf 3 P a g e

4 CONTENTS 4 P a g e Executive Committee...7 Advisory Committee...7 Committee for Global Forum on Islamic Finance (GFIF) Committees...8 Message by Chief Minister, Punjab..10 Message by Minister for Science & Technology/Chancellor CIIT. 11 Message by Provincial Minister of Education, Punjab Message by Executive Director CIIT...13 Message by Director CIIT, Lahore...15 Message by GFIF Convener...16 GFIF Programme...17 GFIF Prooceedings...26 Issues of Fiqh in Islamic Economics, Finance and Banking 26 Islamic Finance and Small Medium Enterprises (SME): Leverage and Opportunitie 27 Promising progress within Modaraba Sector.28 Changing Trends in Global Development Agenda and Islamic Proposal for Achieving the Equitable Development, Inclusive Finance and Poverty Alleviation Sharia Status of Current Currency and Its Effects on Islamic Financial Matters..31 Islamic Development and the Diversification of Islamic Finance 42 Zakat Banking: A Breakthrough solution to Riba in Banking by synthesising Zakat into Qardan Hasana; The two Islamic Economic Fundamentals...43 Brand Naming Conventions in Pakistan: Islamic Banks and Conventional Banks 60 Islamization of the Economy of Pakistan and its Impact on the Material Well-being of the People: A Critical Analysis in the light of the Provisions of the Qur an and the Sunnah (pbuh) 61 Challenges in Conversion from Interest base Bank to Non Interest base Bank...78 Restructuring the Islamic Financial Institutions and Tools of their Operations: A Real Success Factor..79 Private Credits and Islamic Finance 80 External Shariah Audit Report Overview 81 The Impact of Financial Measures, Earnings Management and Sukuk Structure on Sukuk Rating...82 Islamic Finance, in the age of Black Swans and Complexities, for A Multipolar World. 94 The Interaction Effect of Trust towards Profit and Loss Sharing Element in Musharakah

5 Financing for SMEs 113 Challenges for new product development in contemporary Islamic banking Innovation in Islamic Finance Myth or Reality?.125 Risk Management Practices of Islamic Banks in Pakistan.126 Role of Islamic Microfinance in Human Capita Development: Ascertainment From Pakistan..127 Sukuk -al-ijarah: Need of a New Model Lucrativeness of Islamic vs Conventional Mutual funds in Pakistan The Current Model of Islamic Banking and Concentration of Wealth Global Emergence of Islamic Finance: a Case Study of the UK, Pakistan and German Regulatory and Supervisory Models Role of Bai Salam/Islamic finance in wheat production business: a case study from Faisalabad, Pakistan Role of Islamic Microfinance in Enhancing Financial Inclusion: Case of Pakistan Layers of misconceptions about Islamic Banking: Are Islamic Banks Threats, Challenges or Opportunities for investors? Achieving the objective of interest-free economy: Challenges And Prospects Role of Islamic Microfinance in Financial Inclusion Contriving areas of Improvement in Islamic Finance Education for Present & Future: A Practitioner's Perspective The Key Role of Zakah as an Instrument of Financial System Stability in Pakistan: A Study of Punjab Province Potential Role of Islamic Finance in Preventing Financial Crises: A Discourse based on three Financial Crises Shariah Governance Framework for Islamic Banking Institutions..234 Promoting Islamic Microfinance Portfolio, Combining Synergies for Structured Finance Solutions: A case study of Helping Hands and Meezan Bank Pakistan.235 A Critical study of Sukuk in the Islamic Debt Market Service Quality and Customer Satisfaction: A Study on Islamic Banks of Pakistan An Analytical Study of Derivatives in Conventional and Islamic Finance 261 Role of Shari ah Perception Job Satisfaction: A Comparative Study of Conventional Banks and Islamic Banks Interest Tax Shield in perspective of Maqasid al Shariah in Finance P a g e

6 Does Technology Improve Customer Satisfaction and Loyalty? A Comparative Study of Islamic and Conventional Banks Corporate Governance in Islamic banking:the role of the Board of Directors..293 Who Dominates Asia? Islamic Stock Index versus Conventional Stock Index Evaluation of Factors contributing towards the adoption of Islamic Banking: Evidence From Lahore, Punjab, Pakistan P a g e

7 Executive Committee 1. Prof. Dr. Raheel Qamar, T.I. Rector, CIIT Convener 2. Prof. Dr. Qaiser Abbas Director, CIIT Lahore Member Advisory Committee 1. Prof. Dr. Khalid Raiz Dean FBA, CIIT Member 2. Prof. Dr. Farzand Ali Jan Chairperson MS, CIIT Attock Member 3. Dr.Abdus Sattar Abbasi Head, CIF Member 4. Dr. Imran Haider Naqvi Sr. Manager HR, Member 5. Ms. Zainab Naveed Assistant Professor, CIF Convener GFIF 7 P a g e

8 Committees for Global Forum on Islamic Finance (GFIF)-2017 GFIF Secretariat 1. Ms. Zainab Naveed Assistant Professor, CIF Convener GFIF 2. Mr.Ghulam Abbas RA, CIF Incharge Secretariat 3. Ms. Gulnaz Altaf Assistant, CIF Secretary Program 4. Mr. Muhammad Saleem CO, CIF Secretary Arrangement 5. Mr. Abdul Qayyum LDC, CIF Member IT Committee 1. Mr. M. Naeem Akhtar In-charge IT & Services Convener 2. Mr. Muhammad Irfan System Admisntrator Member 3. Mr. Imran Akmal Lab Assistant Member /Secretary 4. Mr. Abdul Qayyum LDC, CIF Member Logistics & Transport Committee 1. Mr. Shahid Latif Manager C & L Member 2. Mr. M. Bashir Transport Officer Member 3. Mr.Muhammad Saleem CO,CIF Secretary/Member Hall Management Committee 1. Mr.Nayyer Pervez Butt Assistant Professor, MS Convener 2. Mr. Haroon Rashid Assistant Professor, MS Member 3. Ms. Hafza Shaukat Lecturer Member 4. Ms. Shafaq Rana Lecturer Secretary/Member Participants Recruitment & Registration Committee 1. Ms. Shakeel Aslam Lecturer, MS Convener 2. Mr. Shomail Anwar Assistant Professor, MS Member 3. Mr. Sami Ullah Lecturer, MS Member 4. Mr. Ghulam Abbas RA, CIF Member 5. Ms. Gulnaz Altaf Assistan, CIF Member /Secretary Reception Committee 1. Dr. Abdul Haque Associate Professor, MS Convener 2. Ms. Tahira Umair Assistant professor, MS Member 3. Ms. Fakhr un Nisa Lecturer, MS Member/ Secretry Session Management Committee 1. Dr. Ahmad Nawaz Assistant Professor, MS Convener 2. Dr. Asma Imran Assistant Professor, MS Member 3. Ms. Tahira Umair Assistant Professor, MS Member 4. Ms. Aqsa Akber Assistant Professor, MS Member 5. Ms. Amna Naveed Assistant Professor, HUMN Member Media Committee 1. Mr. Sohail Riaz, Assistant Professor Convener 2. Ms. Tasneem Rana Research Associate Member/ Secretary 8 P a g e

9 Guest Facilitation Committee 1. Mr. Atta UR Rehman SRO Convener 2. Mr. Umer Farooq Assistant Professor, MS Member 3. Mr. Khurram Shahazad Lecturer, MS Member 4. Mr. Shomail Sarwar Lecturer,MS Member /Secretary Finance Committee 1. Mr. Ali Raza Deputy Treasurer Convener 2. Mr. Asif Munir Accountant Secretary 9 P a g e

10 Message by Honorable Mr. Shahbaz Sharif Chief Minister, Punjab I am pleased to learn about 5 th Global Forum on lslamic Finance and the efforts of COMSATS Institute of Information Technology, Lahore for holding this event. Pakistan has been among the pioneer Islamic countries that endeavored to introduce and develop interest free banking at national level. Islamic banking was launched with renewed vigor in 2001 when the Government decided to promote it in a gradual manner as a parallel system in line with the best international practices. Islamic banking in Pakistan over the last few years has recorded a commendable growth but it is still below the huge potential we have in country. At present, the Islamic finance industry of Pakistan consists of 19 Islamic banks with a network of 1200 branches spread across 80 districts, 27 Modaraba companies, 15 mutual funds and 5 Takaful companies. The Islamic banks should tap unbanked potential markets including agriculture and SMEs through their asset based and risk sharing products and contribute in catalyzing growth in the country. Many other scheduled banks have also opened Islamic windows that enable people to access the Shariah compliant financial products. The Government is serious in supporting the growth of Islamic Banking in the country. The government has taken steps required for effective implementation of Islamic finance that includes formation of task force under the leadership of Mr. Ishaq Dar, Federal Minster Finance and Mr. Saeed Ahmad, Deputy Governor, SBP to undertake amendments in legal and regulatory framework. The issuance of sukuks by the government during the last three years, including the recent issuance of $ 1bn international sukuk, is proof of the government s commitment to Islamic finance. Once again I appreciate the efforts of CIIT for this noble cause. As a result of the Global forum on Islamic finance, the Center of Islamic finance was established at CIIT, Lahore. It is a visionary step and I am looking forward to productive and innovative research contributions from here. I congratulate all the stakeholders including the Government officials, Islamic Banks, researchers, academicians, practitioners and media for making this event highly successful and memorable. 10 P a g e

11 Message by Honorable Mr. Rana Tanveer Hussain Minister for Science & Technolog and Chancellor CIIT Pakistan has been one of the pioneers in Islamic Economics and Finance. Government of Pakistan has made sincere efforts and is still continuing in promoting Islamic Finance in the country. I am jubilant to visually perceive that conclusively there is a lot of discussion about the development and evolution of Islamic Finance in the financial sector of the country.this sub branch of Finance is a burgeoning field and has been formalized gradually since the late 60s globally. COMSATS Institute of Information Technology (CIIT), as a dynamic academic institution with its wide outreach is playing a crucial role in reinvigorating Islamic Finance. CIIT has always come forward in taking up pertinent issues and hosting Conferences. CIIT, with its national and international strategic partners, has the potential to uplift Pakistan to the eminence in academic discourse in Islamic finance. The Global Forum on Islamic Finance (GFIF) has comprehensively covered various developments in the Field of Islamic finance and provided the framework for way forward and future progress as well. GFIF has assembled together the regulators, professionals, practitioners, researchers and academic from around the globe at one platform. The open discussion of the noteworthy and accomplished professionals in Islamic finance and sessions with thought instigating research findings are very consequential contributions of this forum. The support of the national and international stakeholders for making 5th GFIF successful is highly commendable. I am gratified by the commitment and dedication of the organizing team whose untiring efforts resulted in making this event a very remarkable one. I would appreciate and pass on the felicitations to CIIT for arranging this mega event instilled with pandemic spirit. I wish good fortuity to CIIT Lahore for organizing GFIF once again in 2017 and hope this forum continues and positive results are reaped. 11 P a g e

12 Message by Honorable Mr. Syed Ali Raza Gilani Provincial Minister of Education, Punjab I am pleased to know about the 5 th global Forum on Islamic Finance organized by COMSATS Institute of Information Technology, Lahore as your participation in rendering, penetrating and insightful observations will make this event a historic milestone. The knowledgeable recommendation made at this forum will go a long way in developing future goals. The Islamic banking and finance has experienced substantial and unprecedented magnification in recent years. Such immense growth has brought Islamic finance to the attention of the international banking and finance community prompting the major banks to establish Islamic financial windows to capitalize on demand for Shari ah compliant finance. Distinct from Islamic countries, is the interest of few global financial centers around the world that now provide policy and tax incentives to promote Islamic finance industry to attract funds from high net worth clients. Same motivation seem to have driven to global bank such as HSBC, Standard Chartered Bank, Deutsche Bank, Citibank etc. to set up special hubs to structure Islamic finance product. As a result of these exhilarating development, financiers and bankers working in the field or those who wish to enter the Islamic financial market need to be cognizant of and trained in the principles, operations, techniques and mechanisms of Islamic finance and financial products as well as the dynamic if Islamic financial and capital markets. Moving from traditional Islamic product, now the industry is offering consumer financing for residential purposes and structuring financing vehicles for supporting infrastructure and housing finance projects etc. Indeed Islamic Finance promises to be a bright future and lucrative career to young generation and even to existing finance professionals. I congratulate Center of Islamic Finance at CIIT Lahore for organizing such an event. Wish you success! 12 P a g e

13 Message by Honorable Dr. S. M. Junaid Zaidi, H.I., S.I. Executive Director COMSATS and Chairman BoG CIIT It is needed my pleasure to be a part of this thought provoking forum. COMSATS Institute of Information Technology (CIIT) is serving the nation by providing quality education at undergraduate and graduate levels in various disciplines of Engineering, Sciences, Information Technology, Management Sciences and Humanities. CIIT delivers highest quality education to 40,000 students with the help of more than 1200 PhDs through eight ISO 9001:2008 certified campuses and ten research centers in Pakistan. The Times Higher Education UK and Nature Index ranked CIIT as No.1 in Pakistan. Higher Education Commission of Pakistan (HEC) has recently ranked CIIT among top five universities in the Country. In addition to sciences and business studies, CIIT is propelling towards Islamic Finance and has established Center of Islamic Finance (CIF) in 2014 for the promotion and development of Islamic Banking and Finance. Pakistan emergence was not just the emergence of new state; it was created on the basis of Islamic ideology, for the preservation of culture and civilization and the Islamic way of life. The ideology of Pakistan took shape through an evolutionary process and historical experience provided the base. The Muslims of South Asia believe that they are a nation in modern sense of the word. The basis of their nationhood is neither territorial, racial, linguistic nor ethnic rather do they believe they are a nation because they belong to the same faith, Islam. As we can witness Islamic finance services have been transformed from being a peripheral activity to a sizeable industry which is attracting global interest. Although currently the size of Islamic finance is small relative to global financial system, it has promising growth prospects. The large global financial players have been instrumental in fostering linkages and product innovation. Worldwide demand for Islamic Financing is also gaining momentum as Islamic Finance conforms itself to conventional finance by adopting proper regulatory and supervisory frameworks. It is the need of the hour to consolidate and merge Islamic financing to have the scale, efficiency and cost effectiveness to compare globally. Well developed and integrated Islamic money, Capital and foreign exchange markets will not only be beneficial for borrowers and institutional investors, they can also further enhance the stability of Islamic financing institutions, providing them with improved portfolio, liquidity and risk management tools. Therefore CIIT s commitment for promotion of Islamic Banking and Finance is a step forward in right direction. State Bank of Pakistan along with the Government of Pakistan has made notable efforts in promoting Islamic Banking and Finance. However, academia and media needs to come forward and join hands with government, and contribute their role in this noble cause, as these two pillars play a pivotal role in the progress of any nation. 13 P a g e

14 CIIT has undertaken the visionary initiative of arranging the Global Forum on Islamic Finance (GFIF) 2017, bringing together Islamic finance experts from various industries to share their findings and collaborate and development in the field. 14 P a g e

15 Message by Honorable Prof. Dr. Qaiser Abbas Director, CIIT Lahore As Director of the Lahore Campus I feel highly exalted to host you all at this magnificent forum. COMSATS Institute of Information Technology, Lahore is serving the nation by providing quality education at under graduate and graduate levels in various disciplines. In addition to pure Management Sciences, CIIT is propelling towards Islamic Finance. Islamic Finance has to be recognized as parallel systems which will argument and be augmented by the deeper knowledge and experience of the conventional financial system. As such the key challenge in going forward to its growth and sustainability would lie in how it interfaces benefits from complementing and supplementing the conventional system. Exploiting properly the unique features of Islamic finance with appropriate adaptability, without compromising Shariah principles, will be critical to the growth and promising future of Islamic Finance industry. CIIT has envisioned taking strategic move by promoting and searching the long sung Islamic finance. It has acknowledged far and wide, from East to West that Islamic Finance has the potential to the problems of inflation and financial problems the world is facing today. Global forum on Islamic Finance (GFIF) is an annual event of CIIT Lahore. GFIF 2013 resulted in the establishment of Center of Islamic Finance CIF at our Lahore campus that is a hub for training manpower and research and development in Islamic Finance for national and international markets. GFIF has brought Islamic Banking and Finance experts on one platform to discuss the recent development in the field of Islamic Finance. The valuable findings shared by the experts from around the globe are highly acknowledged by the diversified audience. I am grateful to the State Bank of Pakistan, Ministry of Science and Technology, Higher Education Commission of Pakistan, Islamic Research and Training Institute, IFAAS, Amanah Institute of Finance and Economics, Al Huda Foundation, Allied Bank of Pakistan, and other reputed stake holders of Islamic Finance for supporting in organizing such a monumental event. I congratulate the GFIF organizing team for their devoted efforts for successfully organizing this global event. 15 P a g e

16 Message by Ms. Zainab Naveed Convener GFIF First and the foremost I express my utmost gratitude to ALLAH (SWT) who enabled us to arrange Global Forum on Islamic Finance (GFIF), Working together is the source of inspiration and satisfaction, same happened during the course of last eight months in the Center of Islamic Finance CIIT Lahore, where every member of the team extended generous cooperation and assistance while organizing GFIF. It is indeed my pleasure to thank them all for their tireless commitment to make this mega event a real success. Concentration of wealth being major outcome of contemporary financial management system is challenging the global intellect to suggest solutions to pressing problems causing disparity among different segments of society. Today interest based financial system is one of the most important reasons of widening the gap between the rich and the poor thereby causing unrest in every field of life. Therefore it is the responsibility of learned society, such as the one under this roof, to explore and establish alternative models of financial management to reduce miseries of common man of this planet. There is renewed interest of scholars to discover potential of Islamic finance on a global scale to resolve difficulties emerged from contemporary financial system. With phenomenal growth over the years Islamic financial institutions around the globe are trying to keep pace with the growing demand for Shari a compliant products and services. There is a growing need of research in the field of Islamic banking and finance. This is the right time to promote Islamic finance all around the globe. COMSATS Institute of Information Technology rightly sensed this need and decided to provide a platform of GFIF to global researchers to bring forward their findings and recommendations to help the society to come out of the clutches of interest based financial and banking institutions. It has been a tremendous experience and privilege to be a part of the CIIT community, and I am hopeful that we all will be enlightened by the wisdom shared at the GFIF. All this would have not been possible without the help, cooperation and patronage of the entire organizing committee, Rector CIIT Dr. S.M. Junaid Zaidi, H.I., S.I. And Director CIIT, Lahore, Dr. Qaiser Abbas. My heartiest congratulations to each and every person involved in GFIF for playing his/her role in staging this mega-international Conference. 16 P a g e

17 Programme of Global Forum on Islamic Finance (GFIF) 2017 March 21-22, 2017 Pearl Continental Hotel, Lahore Day One March 21, 2017 Opening Ceremony (Koh-I-Noor Hall) Hours Programme 09:00 10:00 Registrations 10:00 10:05 Recitation of the Holy Quran 10:05 10:10 Welcome Address by Director CIIT, Lahore 10:10 10:30 Keynote Address by Prof Dr. Kabir Hassan, IDB Laureate in Islamic Banking and Finance 10:30 10:40 Address of Chief Guest 10:40 10:50 Vote of Thanks by Dr. S. M. Junaid Zaidi (HI, SI), Rector /Executive Director COMSATS 10:50 11:00 Souvenir Exchange 11:00 11:15 Refreshments and Networking 11:15-12:15 Session I A Policy Roundtable Meeting Chaired by Mr. Ghulam Muhammad Abbasi, Director Islamic Banking, SBP (Emerald Hall B) 11:15 13:05 Session I B (Emerald Hall A) Session Chair: Dr. Khalid Riaz, Dean, Faculty of Business Administration, CIIT. 11:15 11:35 Prof. Dr. Mehmet Asutay, Durham University, UK, Essentialising Developmentalism beyond Financalisation: Re- Situating Islamic Finance in Moral Economy for Achieving Sustainable Developmentalism 11:35 11:55 Mufti Aziz ur Rehman, Al-Raji Bank, UAE Issues of Fiqh in Islamic Economics, Finance and Banking 11:55 12:15 Dr. Turkhan Ali Abdul Manap, Islamic Research and Training Institute (IRTI), Kingdom of Saudi Arabia 17 P a g e

18 Islamic Finance and Small Medium Enterprises (SME) :Leverage An Opportunities 12:15 12:35 Mr. Mohamamd Shoaib Ibrahim, Managing Director& CEO, First Habib Mudaraba, Karachi. Promising progress within Modaraba Sector 12:35-12:55 Prof.Dr.Mehboob ul Hassan, Professor of Islamic Economics, Islamic Banking Center (IBC) King Saud University, Riyadh, Saudi Arabia Changing Trends in Global Development Agenda and Islamic Proposal for Achieving the Equitable Development, Inclusive Finance and Poverty Alleviation. 12:55 13:05 Question /Answers 11:15 13:05 Session I - C (Emerald Hall C) Session Chair: Prof. Dr. Dzuljastri Abdul Razak, IIUM, Malaysia 11:15 11:35 Mufti Muhammad Muaz Ashraf, University of Management and Technology Sharia Status of Current Currency and Its Effects on Islamic Financial Matters 11:35 11:55 Dr. Shafiullah Jan, Head, CEIF, Institute of Management Sciences, Peshawar Islamic Development and the Diversification of Islamic Finance 11:55 12:15 Abdul Malek Talib, Research Scholar, Malaysia Zakat Banking: A Breakthrough solution to Riba in Banking by Synthesising Zakat into Qardan Hasana; The two Islamic Economic Fundamentals 12:15 12:35 Prof.Dr.Mehboob ul Hassan, Professor of Islamic Economics, Islamic Banking Center (IBC) King Saud University, Riyadh, Saudi Arabia Brand Naming Conventions in Pakistan: Islamic Banks and Conventional Banks 12:35 12:55 Dr. Naseem Razi, Assoc. Professor, IIU, Islamabad Islamization of the Economy of Pakistan and its Impact on the Material Well-being of the People: A Critical Analysis in the light of the Provisions of the Qur an and the Sunnah (pbuh) 12:55 13:05 Question Answers 18 P a g e

19 13:05 14:00 Prayer Break followed by Lunch and Networking 14:00 15:50 Session II A, (Emerald Hall A) Session Chair: Prof. Dr. Mehmet Asutay, Durham University, UK 14:00 14:20 Mufti Najeeb Ahmed, Shariah Advisor, Summit Islamic Bank Challenges in Conversion from Interest base Bank to Non Interest base Bank 14:20 14:40 Prof. Dr. Ayub Ahmad, IIU, Islamabad Restructuring the Islamic Financial Institutions and Tools of their Operations: A Real Success Factor 14:40 15:00 Mufti Ehsan Waquar Ahmad, Chairman Shariah Board, NBP Aitemaad, NBP Islamic Banking Group Private Credits and Islamic Finance 15:00 15:20 Mr. Umer Suleman, Global KYC Risk Lead at HSBC, London External Shariah Audit Report Overview 15:20 15:40 Ms. Sana Affandi, Quaid-I-Azam University, Islamabad". The Impact of Financial Measures, Earnings Management and Sukuk Structure on Sukuk Rating 15:40 15:50 Question Answers 14:00 15:50 Session II B (Emerald Hall C) 19 P a g e Session Chair: Prof. Dr. Kabir Hassan, University of New Orleans, USA 14:00 14:20 Mr. Mughees Shaukat, Head of Islamic Finance, College of Banking and Financial Studies, Oman Islamic Finance, in the age of Black Swans and Complexities, for a Multipolar World 14:20 14:40 Prof. Dr. Dzuljastri Abdul Razak, IIUM, Malaysia The Interaction Effect of Trust towards Profit and Loss Sharing Element in Musharakah Financing for SMEs 14:40 15:00 Mufti Zubair Usmani, Shariah Advisor, MCB Bank Challenges for new product development in contemporary Islamic banking 15:00 15:20 Farrukh Raza, CEO IFAAS, UK Innovation in Islamic Finance Myth or Reality?

20 15:20 15:40 Mr.Masood Ahmad Khan, Lecturer Department of Business Administration, University of Agriculture Faisalabad Risk Management Practices of Islamic Banks in Pakistan 15:40 15:50 Question/Answers 15:50 16:05 Prayers Break Followed by Refreshments & Networking 16:05 17:15 Session III-A, (Emerald Hall A) Habib Session Chair: Mr. Shoaib Ibrahim, Managing Director & CEO, First Modaraba 16:05 16:25 Ms. Syda Asma Ibrar, Graduate Student, CIIT, Lahore Role of Islamic Microfinance in Human Capita Development: Ascertainment from Pakistan 16:25 16:45 Ms. Umalkhair-Fatima, IIU, Islamabad Sukuk -al-ijarah: Need of a New Model 16:45 17:05 Bilal Nafees, Research Scholar, CIIT, Lahore Lucrativeness of Islamic vs Conventional Mutual funds in Pakistan. 17:05 17:15 Question/Answers 16:05 17:15 Session III B, Workshop on Islamic Fintech: Opportunities and Challenges for Islamic Financial Services Industry (Koh-I-Noor Hall) Speaker: Muhammad Ashfaq, Chief Executive Officer, Amanah Institute of Islamic Finance and Economics, Germany 16:05 17:15 Session III C, 5th Meeting of CIF Advisory Board (Board Room) Session Chair: Prof. Dr. Khalid Riaz, Dean Faculty of Business Administration, CIIT 20 P a g e

21 Participants: Prof. Dr. Qaiser Abbas, Director, CIIT, Lahore Prof.Dr.Kabir Hassan, University of New Orleans,USA Mufti Najeeb Ahmed, Shariah Advisor, Summit Islamic Bank Mr. Farrukh Raza, CEO IFAAS, UK & Member of AAOIFI s Board of Governance and Ethics Dr. Abdus Sattar Abbasi, Associate Professor, Head Center of Islamic Finance, CIIT, Lahore Dr. Imran Haider Naqvi, Associate Professor, Senior Manager (HR), CIIT, Lahore. Ms Zainab Naveed, Assistant Professor & Convener, GFIF, CIIT Lahor Day Two March 22, 2017 Pearl Continental Hotel, Lahore Hours Programme 09:00 10:50 Session I A, (Emerald Hall A) Session Chair: Mr. Farrukh Raza, CEO IFAAS, UK 09:00 09:20 Dr. Anwar Shah Quaid-i-Azam University, Islamabad, Pakistan The Current Model of Islamic Banking and Concentration of Wealth 09:20 09:40 Muhammad Ashfaq, Chief Executive Officer, Amanah Institute Of Islamic Finance and Economics "Emergence of Islamic Fintech Opportunities for greater Financial Inclusion" 09:40 10:00 Mr.Syed Abu Bakr, Shariah Board Member Emaan Islamic Banking Islamabad Islamic Banking and the Microscope of Maqasid e Shariah 10:00 10:20 Dr. Hafiz Zahid Mahmood, Associate Professor, Department of Management Science, CIIT Lahore Role of Bai Salam/Islamic finance in wheat production business: a case study from Faisalabad, Pakistan 10:20 10:40 Ms.Sabeen Khurram Khan, Assistant Professor,Department of 21 P a g e

22 10:40 10:50 Question Answers Management Science, CIIT Islamabad Role of Islamic Microfinance in Enhancing Financial Inclusion: Case Of Pakistan 09:00 10:50 Session I B, (Emerald Hall C) Session Chair: Umer Suleman, Global KYC Risk Lead at HSBC London, UK. 09:00 09:20 Mr. Malik Shahzad Shabbir, Lecturer, Center of Professional Excellence, Layers of misconceptions about Islamic Banking: Are Islamic Banks Threats, Challenges or Opportunities for investors? 09:20 09:40 Dr. Rafi Amir-ud-Din, Assistant Professor, Department of Management Sciences, CIIT, Lahore Achieving the objective of interest-free economy: Challenges And Prospects 09:40 10:00 Mr.Muhammad Kashif Aslam, Graduate Student, CIIT, Lahore Role of Islamic Microfinance in Financial Inclusion 10:00 10:20 Mr. Pir Qasim Shah Lecturer, Management Sciences FAST- National University & PhD Scholar at Institute of Management Sciences Contriving areas of Improvement in Islamic Finance Education For Present & Future: A Practitioner's Perspective 10:20 10:40 Mr. Sana Ullah Ansari Assistant Professor, SZABIST The Key Role of Zakah as an Instrument of Financial System Stability in Pakistan: A Study of Punjab Province 10:40 10:50 Question /Answers 10:50 11:05 Refreshments & Networking 11:05 12:55 Session II A, (Emerald Hall A) Session Chair: Mufti Aziz-Ur- Rehman. Shari'ah Scholar 11:05 11:25 Mr. Muhammad Imran Ejaz, PhD. Scholar Institute of Islamic Banking University of Management and Technology, Lahore, 22 P a g e

23 Potential Role of Islamic Finance in Preventing Financial Crises: A Discourse based on three Financial Crises 11:25 11:45 Irum Saba, Assitant Professor, IBA, Karachi Shariah Governance Framework for Islamic Banking Institutions 11:45 12:05 Mr. Malik Shahzad Shabbir, Lecturer, Center of Professional Excellence Promoting Islamic Microfinance Portfolio, Combining Synergies for Structured Finance Solutions: A case study of Helping Hands and Meezan Bank Pakistan 12: 05 12:25 Ms. Farah Riaz, Lecture, CIIT Wah Optimal Islamic Capital Structure -Efficiency Comparison of Profit Sharing and Debt 12:25 12:45 Dr. Mufti Abdul Razaq, Department of Islamic Studies Ghazi University, Dera Ghazi Khan A Critical study of Sukuk in the Islamic Debt Market 12:45 12:55 Question /Answers 11:05 12:55 Session II B, (Emerald Hall C) Session Chair: Mufti Zubair Usmani, Shahriah Advisor, MCB Bank 11:05 11:25 Mr. Zubair Mughal, CEO AlHuda Centre of Islamic Banking and Economics Global Scenario of Islamic Banking and Finance 11:25 11:45 Mr.Asad Ilyas, Ph.D. Scholar.IIB, UMT, Lahore Service Quality and Customer Satisfaction: A Study on Islamic Banks of Pakistan 11:45 12:05 Muhammad Imran Ejaz, PhD. Scholar Institute of Islamic Banking University of Management and Technology, Lahore An Analytical Study of Derivatives in Conventional and Islamic Finance 12:05 12:25 Khalil Ur Rahman, Research Scholar, CIIT, Lahore Role of Shari ah Perception Job Satisfaction: A Comparative Study of Conventional Banks and Islamic Banks 12:25 12:45 Dr. Furqan Ahmed, Administrator & Sr. Lecturer Pakistan International School & College Muscat Sultanate of Oman, 23 P a g e

24 12:45 12:55 Question Answers How to make Islamic Leasing Competitive - New Dimensions 12:55 14:00 Prayers Break Followed by Lunch & Networking 14:00 15:30 Session III A (Emerald Hall A) Session Chair Prof. Dr. Mian Muhammad Akram, Head Department of Economics, Government College of Wahdat Road, Lahore 14:00 14:20 Mr. Mufti Asad Gul,, The Bank of Khyber Peshawar Principles of Islamic Jurisprudence. 14:20 14:40 Dr. Muhammad Imran, Group Head, National Bank of Oman Universal Law of Integrity - its application and importance in Islamic Finance 14:40 15:00 Mr. Qamar Uz Zaman Malik, CIIT, Sahiwal Interest Tax Shield in perspective of Maqasid al Shariah in Finance 15:00 15:20 Mr. Malik Shahzad Shabbir, Lecturer, Center of Professional Excellence Does Technology Improve Customer Satisfaction and Loyalty? A Comparative Study of Islamic and Conventional Banks 15:20 15:30 Question /Answers 14:00 15:30 Session III B (Emerald Hall C) Session Chair: Dr. Turkhan Ali Abdul Manap, Islamic Research and Training Institute (IRTI), Kingdom of Saudi Arabia 14:00 14:20 Mr.Maroof Khan, MS Scholar, Department of Management Sciences, CIIT, Abbottabad, Pakistan Corporate Governance in Islamic banking: The role of the Board of Directors 14:20 14:40 Ms.Farah Riaz, Lecturer, CIIT Wah Campus Who Dominates Asia? Islamic Stock Index versus Conventional Stock Index 14:40 15:00 Mr.Hamyoun Afzal Khichi MS Scholar, Department of 24 P a g e

25 Management Sciences, Bahauddin Zakariya University, Multan Evaluation of Factors Contributing towards the adoption of Islamic Banking: Evidence from Lahore, Punjab, Pakistan 15:00-15:20 Dr. Amna Noor, Assistant Professor, Islamia University, Bahawalpur Contribution of Islamic Finance in the Economic Development of Pakistan 15:20 15:30 Question /Answers 15:30-15:45 Prayers Break Followed by Refreshments & Networking 15:45 16:35 Panel Discussion (Koh- I-Noor Hall) Moderator: Prof. Dr. Khalid Riaz, Dean, FBA, CIIT Participants: Prof. Dr. Dzuljastri Abdul Razak, IIUM, Malaysia Prof. Dr, Kabir Hassan, Univerity of New Orleans, USA Dr. Turkhan Ali Abdul Manap, IRTI, KSA Mr.Mohammad Shoaib Ibrahim, Managing Director & CEO, First Habib Mudarabah, Karachi Prof.Dr. Mian Muhammad Akram, Government College Of Science, Wahdat Road, Lahore 16:35-16:55 Question/ Answer 16:55-17:05 Conference Report 17:05-17:20 Souvenirs Exchange (Koh-I-Noor Hall) 25 P a g e

26 Issues of Fiqh in Islamic Economic, Finance and banking Mufti Aziz Ur Rehman Manager Sharia, Auditor and General Secretary to F&SSB Abstract 40 years ago, the world's first Islamic bank was launched on the foundation of a divine law and a system of ethical banking principles for the benefit of all human beings. The aim of Islamic Banking is, keeping people out of debt s slavery, irrespective of nationality, ethnicity, language, religion, faith, belief or gender. Today, there are hundreds of IBs, IFIs offering numerous products and services and it is still the better way to bank. The plant was planted by Shari ah Scholars and Shareholders, is it became mature in 40 years? To answer this question, yes, it is our ethical and religious responsibility to water and take care of it. No doubt, it is a historical fact, civilizations vanished when they did not preserve their Past, History and Culture. We have to protect the future of Islamic economic sector. The industry doesn't need a new Islamic Bank Just a better way to bank. 26 P a g e

27 Islamic Finance and Small Medium Enterprises (SME): Leverage and Opportunity Turkhan Ali Abdul Manap Islamic Research and Training Institute, IDB Abstract Small and medium enterprises (SMEs) are widely recognized as engines of economic growth, key driver of sustainable gross domestic product (GDP) and play an important role in creating employment opportunities for both skilled and unskilled workers across many sectors, including manufacturing and service. However, higher costs and strict regulatory environments do not support SME growth and access to finance. At the same time, Islamic banking and finance has shown remarkable global success in terms of growth, expansion, and institutional and product diversification over the past decades. The asset-backed finance and risk-sharing nature of Islamic financial products aims to contribute to social and economic development by promoting entrepreneurship. However, the access of SME to Islamic finance is still limited. This presentation discuss the nature of and inherent constraints of SME and how could the Islamic finance play a significant role in closing the financing gap for SMEs promoting asset-backed and equity-based financial instruments to leverage Islamic finance. In the meantime, fulfilling the potential new to bank funding opportunity creates higher demand for Islamic banking in which will further push the development of Islamic banking and finance. 27 P a g e

28 Promising progress within Modaraba sector Mr. Mohamamd Shoaib Ibrahim Managing Director& CEO, First Habib Mudaraba, Karachi Abstract The recent reforms and strengthening of regulatory framework by the Securities and Exchange Commission of Pakistan (SECP) have pushed up the Modaraba sector asset base to PKR 41 billion (US$ million) by end of December At present sector has low level of leverage, growing quality assets and healthy dividend payouts. Within Islamic Financial sector of Modarabas are playing significant role for promotion of Islamic financial within the country. The concept of Modaraba was introduced in Pakistan in early 80s as the first Islamic Shariah business model with statutory framework and proper regulations. The Modaraba Sector being the pioneer in providing Islamic financial services in Pakistan is an important segment of the financial sector. These Modarabas were not only trend setters of Islamic modes of financing in a predominant conventional financial system in Pakistan but also built confidence among the general public regarding practice of Islamic modes of financing. The progress in the sector was largely due to strengthening of governing laws of the sector particularly the most noteworthy the guidelines for Sharia compliance issued by Registrar Modaraba. Effective monitoring and strong surveillance by the office of Registrar Modaraba has also supported a lot for better performance of the sector and enhancement of confidence of investors. At present 25 Modarabas are operating in Pakistan s financial market as listed entities and engaged in various Shariah compliant business activities. Over the years Modarabas have emerged as major sector within the segment of non-banking Islamic financial institutions. It is a viable and dependable source of medium term financing which also offer opportunity to investors to earn Riba-free income. Recently it has been seen interest of good corporate entities to enter into a Modaraba business and foresee a significant number of new entrants in the sector which will further strengthen this segment and find their way to set new milestones in coming years. New Regulations on Modarabas are also under consideration of SECP. It is expected that such regulations will support to the sector for further growth and will also enhance the confidence of investors. In my presentation, the following areas will be covered for better understanding of Modaraba venture and upcoming opportunities within this segment. 28 P a g e

29 Current status of the sector Challenges and issues Role of SECP for promotion of Modaraba sector Future business opportunities and way forward. 29 P a g e

30 Changing Trends in Global Development Agenda and Islamic Proposal for Achieving the Equitable Development, Inclusive Finance and Poverty Alleviation Mehboob ul Hassan Professor of Islamic Economics Islamic Banking Center (IBC) King Saud University, Riyadh, Saudi Arabia Abstract Since the beginning of 19 th century, capitalism has been the dominant paradigm for development agenda and approaches. Since then various approaches has been adopted and implemented for achieving the economic development. As capitalist approach deliberates a very little consideration to the social and ethical aspects, therefore, the outcomes of these approaches resulted increase in abstract poverty, widening income inequalities, hunger, frequently occurring financial turmoil and other catastrophic outcomes. Islam on the other had ponder a considerable attention onto the socio-ethical aspects of the society and focus on the equitable and just outcomes from the economic planning and dealings. Therefore, Islamic financial institutions are regarded as the vehicle for economic as well as social development. Established in 19670s, Islamic banking and financial institutions are practical application of Islamic economic teachings efforts of 1950s and 1960s. Majority of Muslims expressed unprecedented interest in Islamic banking and financial institutions (IBFIs) believing that IBFIs, having the holistic approach of social-welfare behind their establishment, will harbor the rights of the poor and underserved people of the society, and will cater needs of poor on priority basis. But, the situation of poverty is socomplex and distressing that no major change has come yet; a large segment of society is still unbanked and living under the poverty line. Poverty and underdevelopment are co-related issues are coping with these two issues is the prime objective in policies of all the developing and developed countries.using a social welfare approach, this study theoretically demonstrates that, in todays challenging environment, where the government is confronting on geopolitical conflicts, globalization, disruptions, human deprivation and poverty, the importance of establishment and promotion of Islamic social financing institutions have become more significant than the past.a financing institution with non-commercial approach can effectively address the socio-economic problems of individuals, communities and societies, and can contribute to the achieving of poverty alleviation, socio-economic justice and human development better than the formal financing institutions. Islamic social financing institution operate with the holistic spirit of human dignity, and socio-economic development approach for ending the hunger, economic inequality, illiteracy, unemployment, poor healthcare, financial inclusion and sustainable economic growth. It also provides the opportunity to the poorto employ their full capacityin economic productive projects and bring a substantial change in the state of economic and social conditions.this conceptual paper first makes an historical examination of the changing trends in global development agenda and then proposes Islamic social financial institution such as Waqf and Welfare Institutions for meeting the desired objectives of global development agenda for sustainable development and the objectives of Shari ah in a successful manner. Keywords: Equitable development, Islamic social financing institutions, poverty alleviation, financial inclusion,sustainable development. 30 P a g e

31 Sharia Status of Current Currency and Its Effects on Islamic Financial Matters Mufti Muhammad Muaz Ashraf, University of Management and Technology 31 P a g e Abstract The Rapid growth of Islamic Finance and the revolution of currency system is leading us to the doors of new researches. Especially with new mechanisms, tools and products of finance being introduced every minute, it is no more an impossible task to adopt these advancements. Undoubtedly, Islam has always appreciated and acknowledged new researches and developments, distinctly when it is more of a necessity rather than the luxury of the society. The main purpose of this study is to explain the Sharia Status of current currency and its effects on Islamic Financial Matters; such as currency exchange and trade, bank deposit and transfer, Zakat and other financial matters, which are the basic elements of current Financial System. Furthermore, we will briefly discuss the Sharia Status of current currency, in which we will highlight multiple opinions of contemporary Sharia Scholars along with the necessary facts and figures of "Ba'i Al-Sarf" and the nature of currency In Islam. What will be the effect of this Sharia status and what are the Riba elements in currency will also be discussed in this paper in a very precise manner. Design/Methodology: This is a theoretical paper that integrates information from the Qur an, Hadith, and the writings of Classical & Modern Islamic scholars and makes logical deductions therefrom. Findings: Out of four group of Scholars, First Two Groups holds opinion which isn t practically applicable. Whereas, 3 rd opinion holds solution to some issues i.e. currency exchange etc. but the 4 th and the last opinion is the most appropriate and practicable. Keywords: Sharia Status of Currency, Currency Trade, Islamic Banking, Islamic Finance, Sharia Rulings, Currency in Islam, Currency Exchange Sharia Status of Current Currency and Its Effects on Islamic Financial Matters Currency is one of those tangible entities which is being used amongst all the people, without considering the divergence occurring in between their genders, religions, sects or professions. It is a need of survival for every single human being. It is as such that all the financial markets and their activities are based upon one thing known as "Currency". This is solely because all financial transactions operated individually or through a well-organized financial institution, directly or indirectly, are based upon currency. The reverence of any certain entity is determined by its nature of work, similarly, the beneficence of currency is as such; it is a "medium of exchange". Islamic Scholars have greatly contributed in explaining the nature of currency, its trade and related Sharia Rulings. The significance of this topic can be an eye catcher, considering the fact that all prominent

32 books on Islamic Jurisprudence which have been written centuries ago, have a separate chapter on Currency Trade and Exchange, which is very well known as "Ba'i Sarf". But it s obvious that the worthwhile and unforgettable efforts of scholars were done mainly in the time where mostly gold and silver were being used as currency. Therefore, almost all their legal opinions regarding currency trade were based on the former custom. However, they left behind some significant rulings for us to determine the sharia status of current currency and this is the prime reason for modern Sharia scholars to have different opinions regarding currency status, currency trade and other financial matters related to currency. Hence, before having a debate on Sharia Status of current currency and its effects on Islamic Financial matters. There is a dire need for us to understand a few basic elements in a very precise manner, which will help us apprehend the status quo relating different opinions of the present day Sharia Scholars and their views regarding currency status. Also, this will provide us with a clear view on the nature of currency in Islam, types of currency and the relevant Sharia Rulings. The few basics elements are: 1: The nature of Currency in Islam and its types 2: Riba 3: Ba i Al-Sarf The Nature of Currency in Islam and its Types The majority of Sharia Scholars unanimously agree upon the factor that currency or money is a medium of exchange. This is because money has been used over time to trade commodities and services. Currency, having no intrinsic utility, is that specified nature of currency which makes it different from consumption and production goods (Usmani M. T., 2000). Therefore, according to Islamic Jurisprudence one cannot treat currency as goods, also this is a reason why one cannot give it on lease, unlike goods, which can be given on lease and have rent charge on them. This concept within Islam about currency or money being a medium of exchange is different from the concept of goods and this has been accepted by many economists as well. Therefore, one of the famous economists, Ludwig Von Mises, in his book The Theory of Money and Credit clearly stated in chapter five that "money neither a production good nor a consumption good" (Mises, 2013). To examine the nature of currency we have enough corroborative evidences of the time where people were experiencing the inconveniences of Barter System. Later money came into existence as a medium of exchange to solve their problems. That is why Imam Ghazali ہللا,رحمہ the famous Muslim Jurist, considered the existence of money or currency as one of the blessings from Allah SWT and it would be truly unjust to omit the valuable opinions of Imam Ghazali regarding the nature of currency. After considering the creation of Dirhams (coin made of silver) and Dinars (coins made of gold) is graciousness of Allah SWT, he embraced the reality of his time that the entire world is running upon the basis of transaction, with these two very kinds of currency. He clarified that these are nothing but stones with no benefits in within themselves. However, people need them in order to exchange them for different things food, clothing and other goods (Al-Ghazali, 1993). This view presented by Imam Ghazali; money isn t desired for its own sake has been supported by many famous Sharia Experts such as Imam Ibn Taymiyyah, who proudly declares that money is not something which is desired for itself, but it is a mean 32 P a g e

33 or medium of exchange (Taymiyyah, ). Apart from Muslim jurists supporting the interpretations of Imam Ghazali regarding the nature of currency, many other economists also assent to his notions. The authenticity of these sayings became further undeniable when almost nine hundred years later, a very well recognized British Economist presented the same ideology of this great Muslim Scholar in rephrased format; he elaborated; The essential characteristics of money, which sets it apart from all other substances, is that it is not desired for itself. It is in the fullest sense, a medium or means, or mechanism of exchange. (Crowther, 1941). Here, the question may arise over the recently debated argument and the ideology of Islamic jurisprudence regarding currency; having a glaringly obvious contradistinction leads us to contemplate over the fact that currency exchange or trade in currencies is declared unlawful by Sharia Laws. The possibility of the arising question will become much more relevant once Imam Ghazli s prospect on trading is emphasized further; One who opens the business of purchase and sale of gold and silver in order to earn profit or to take interest will be working against the plan and object of Allah and therefore commit sin. He is ungrateful to the gift of god as these coins are created for other purposes and are not needed for themselves. When someone is trading in dirhams and dinars themselves, he is making them as his goal, which is contrary to their objectives. Money is not created to earn money, and doing so is transgression..the two kinds of money are means to acquire other things; they are not meant for themselves. (Al-Ghazali, 1993) The dilemma of the question doesn t end here, because one of the famous types of sale contracts which is known as Ba i Al-Sarf is wholly based upon the trade and exchange of these metals and it has been declared lawful by the Islamic jurisprudence with the enforcement of certain rules and regulations. Imam Ghazali himself pondered upon this difficulty, he further justified it as: If it is asked why one of the two kinds of money is permitted to be exchanged for the other and why exchanging dirham is permitted with the same amount of it? Then, you should know that the two kinds of money are different from each other in being means of obtaining something else. Sometimes one of them is more useful in being because it is in larger quantity, like dirham, which is disbursed on different needs in smaller units. If this exchange is forbidden, then their special purpose, i.e. their use as means of getting other things is destroyed. (Al-Ghazali, 1993) In the light of above mentioned argument it is now vividly clear that currency in itself is a medium of exchange and not a type of good. This is why Islam vehemently prohibits treating currency as goods, but on the other hand allows it to be exchanged within certain conditions because it doesn t annihilate their objects. This very nature of currency is also accepted by many other economists. Unfortunately, the adversity of the world economy has become an integral part of trading system in today's era and currency in this very form is being targeted, treated and traded as good and rented out as lands, which is considered illicit by Islamic Jurisprudence. Types of Currency in Islam There are two types of money or currency according to Islamic Jurisprudence: 1: Al-Thaman-ul-Khilqi or Al-Nuqood-ul-Khilqiyyah (Usmani M. T., 2015), it s a type of currency which is created to work in a form of currency or price or medium of exchange in contracts and trades for us buy commodities and services by using it as a medium of exchange. We can call it Natural Money or Intrinsic Money and Created Currency. As their value of being a currency or a power of being a medium of exchange is not based upon 33 P a g e

34 tradition, custom or common agreement. Islam does not recognize anything as a natural or intrinsic currency except for gold and silver. 2: Al-Thaman-ul-Istilahi or Al-Nuqood-ul-Istilahiyya (Usmani M. T., 2015), it s a type of currency where its currency value is established through a common agreement, custom or tradition. We can call it Artificial Currency or Token Money as its validity as currency is not constant, because this quality of being currency can be removed any time by the government. All great Sharia Scholars who have written books on Islamic Jurisprudence were used to present Fuloos (Pices/Coins) as an example for artificial currency. In our modern era one can present the paper currency as the best example of Al-Thaman-ul-Istilahi. These both types of currencies have their own rulings and injunctions which have been substantiated by Sharia. But before starting debate on their rulings and currency exchange, we have to understand Riba. Riba. The word Riba is a Shaira terminology which means, any excess compensation without due consideration. (Usmani D. M., 2015) It has two types, which have been identified by Sharia Scholars as Riba Al-Nasiyah and Riba Al-Fadl. Riba AL-Nasiyah. This type of Riba is defined as excess, which results from predetermined interest which a lender receives over and above the principal in loan transaction. The Quran itself prohibited Riba Al-Nasiyah and declared it unlawful. Therefore, it s also called Riba Al-Quran. (Usmani D. M., 2015) Since it is not directly related to our topic, we will not discuss it deeply. Riba Al-Fadl. This type of Riba is directly related to our topic and it is defined as excess which is taken in exchange of specific homogenous commodities and encountered in their hand-to-hand sale and purchase as explained in the hadith, in which the Prophet ہللا عليه وسلم : saidصلي Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, should be exchange like for like, equal for equal and hand-to-hand. If the types of exchanged commodities are different, then sell them as you wish, if they are exchanged on the basis of hand-to-hand transaction. (Muslim, 1956) It s clearly mentioned in this hadith that these six different commodities, which are also called Amwaal-ul-Ribiwiyyah can only be sold and bought for similar commodities on spot and in equal quantities, otherwise it will constitute Riba. Majority of Sharia Experts hold that this hadith doesn t apply only to the mentioned items, but it also includes some other commodities. But to determine those other commodities there was a need for analogical deduction (Qiyas) which is always work on the basis of effective cause (illat). So in this particular case, on the basis of the characteristics which are common among these six commodities, the effective cause has been defined differently by various schools. (Usmani D. M., 2015) Imam Abu Hanifa رحمه ہللا noted only two common characteristics: 1. Weight or Volume 2. Exchange in between similar commodities Imam Shafi also sees two: 34 P a g e

35 1. Medium of Exchange 2. Eatable Imam Malik رحمه ہللا on the other hand observed the following: 1. Eatables 2. Preservable While the school of Imam Ahmed رحمه ہللا has three different opinions. One of them conforms to the opinion of Imam Abu Hanifa and the second one is very similar to the opinion of Imam Shafi ہللا,رحمه while the third one includes three characteristics at the same time: 1. Weight 2. Volume 3. Edibles Ba i Al-Sarf. Ba i Al-Sarf is one of the very well-known types of sale contracts. In this kind of sale the articles opposed in exchange to each other are both representative of price (A-Murghinani, 2005). In simple words it s a sale and purchase of money for money, but money here, in the chapter of Ba i Al-Sarf means Created Currency or Al-Nuqood-ul-Khilqiyyah which are gold and silver, as we discussed above. So now it s easy to figure out that Sarf is a sale of something that is price in its own nature for something which is also a price. For instance, sale of gold for gold or silver for silver. It also implies on sale of Dirhams (coins made of silver) and Dinars (coins made of gold). The validity of the Sarf is derived from the hadith which we have already been mentioned under Riba Al-Fadl. That hadith is very important and decisive because it doesn t only testify the legality of The Sarf but also provides some basic principles for this type of sale, as it introduces a kind of interest (Riba) which has been named later as Riba Al-Hadith by Sharia experts. Sharia scholars extracted few rules for currency exchange from the above mentioned hadith. Some of them are directly related to our topic and we can precisely arrange them in a few points: 1. Sale and purchase of gold for gold should be in equal value and hand to hand. Deferment of counter values to the specific time of period, from both sides or from one side is not permitted, it should be on spot as it necessarily has to be done in equal quantity, but they can be differ in quality. (A-Murghinani, 2005) 2. Sale and purchase of silver for silver should be on spot and in equal value. Delivery of any counter values cannot be deferred as inequality is not allowed. (Usmani D. M., 2015) The difference between both values in point of quality is allowed as we mentioned above in the first point. 3. Sale of gold for silver or silver for gold should be on spot, deferred or credit sale is not permissible. However, in this particular case, where these two kinds of currencies are not similar, the condition of equality in both counter values would not be considered and they can be sold and bought for each other at an unequal rate, only if the counter values are not homogenous, nonetheless taking possession on both before separation is indispensable. Sharia Scholars have different opinions regarding the sale of Artificial Currency (Al-Nuqoodul-Istilahiyya) for Artificial Currency, for example, exchange between those coins which are 35 P a g e

36 made from non-precious metals, which are known as Fuloos, whether this sale does fall under the rulings of Sarf or not? رحمه ہللا Imam Malik Imam Malik رحمه ہللا holds that they are like dirhams and dinars and we have discussed above that the exchange of dirham for dirham or for dinar is Sarf. Therefore, if both artificial currencies are homogenous, the condition of possession and equality will be applied and if they are different then possession is necessary while the difference in quantity is allowed. رحمه ہللا Imam Shafi Since Imam Shafi رحمه ہللا does not find here the effective cause which leads towards Riba or prohibition of deferment, he do not accept their exchange as Sarf. That s why he allowed their exchange with deferment and with difference in quantity, whether the both counter values are similar or not. (Al-Ramli, 2003) رحمه ہللا Imam Ahmed There are two different citations related to him: 1. There is no restriction in exchanging one Fals for two Fals (Fals is a singular form of Fuloos). Because they are countable and he holds that the effective cause for the constitution of Riba is weight. (Qudamah, 2009) 2. The conditions of Riba and Sarf are implemented in exchange of Fals for Fals. رحمه ہللا School of Imam Abu Hanifa Hanafi scholars are unanimous that exchange of Fals for Fals is not Sarf. But at the same time they are also agreed upon if Fuloos from both sides are not specified then exchange of Fuloos for Fuloos can only be executed with the condition of equal quantity and possession from both sides before the separation of the parties. (Usmani M. T., 2015) The condition of equality is because of the price they have in themselves, which is obviously established by the custom or government law, because they are not created currency, and anything which is naturally a price itself or becomes currency (Al-Thaman) by the custom or law and as long as they are price, they cannot be specified. On the other hand the condition of possession is not because it s Sarf but because of the homogeneity which alone prohibits deferment according to Hanafi school of thought. However, there are two different opinions in Hanafi school of thought, regarding the specification of Al-Thaman-ul-Istilahiyyah, for example Fuloos, whether or not they can be specified? If yes, then their exchange for one another can be done at unequal rate or not? 1. Imam Abu Hanifa and his student, Imam Abu Yousuf ہللا observedرحمھما that their currency value (Thamaniyyat) has been established by both parties, because Fuloos are not natural money, and when they can establish it they have authority to remove it as well. When their currency value has been revoked by them, they can be specified now, and their exchange for one another can be done at an unequal rate. Providing that they have become like any other goods after the revocation of their currency status. Thus, the sale of one specified Fals for two Fals which are also been specified is allowed. 36 P a g e

37 37 P a g e 2. Imam Muhammad رحمه ہللا does not allow exchange of Fuloos for Fuloos except in equal quantities. According to him, the status of Fuloos as currency hasn t been validated by both parties only, but it s the general custom which made them currency. Thus, they are not authorized to vitiate this custom, and when Fuloos are still Thaman they cannot be specified. That is why he sees the sale of one Fals for two Fals as the sale and purchase of one Dirham for two Dirhams and the later transaction is unanimously unlawful. (A-Murghinani, 2005). Sharia Status of Current Currency. The above mentioned debate on Fuloos and different opinions of religious scholars were mainly in the time where gold and silver were being used as medium of exchange, and standard for payment. Gold and silver at that time were the frequently used currency in general and big transactions, while Fuloos were meant for the small transactions only. After this stage currency has seen a notable revolution and vicissitude which consists Metallic Money System, Gold Specie Standard, Gold Bullion standard and the era of Fiduciary Money and Gold Exchange Standard. However, today we are unable to find currency which made of gold or silver, they have lost their existence as currency, because paper currency having no gold or silver behind it, replaced them long ago (Shabbir, 1998). This revolution lead the Muslim Scholars towards the new research and adoption of different opinions to decide the Sharia status of current currency. After the conclusion, these opinions can be divided into four segments. Every single of them effects differently on Islamic Financial Matters and the consequences of these effects create negative or positive influences. Now we will discuss here different opinions and their effects. First Opinion. Some Sharia Scholars believe that currency paper is actually a certificate of debt which the issuer is obliged to pay to the holder. This point of view is based on a statement mostly written on a currency note and contains a promise to pay. This opinion might be accepted in a time when these notes were actually certificates of debt and were not in the shape of legal tender. That is why we cannot simply reject the views of those great Islamic scholars of the late century who issued fatawa (legal opinions) on the basis of this opinion (Al-Thanwi, 2010), because they were undoubtedly right at that time. But today, since this written promise on the face of currency notes is totally meaningless, we cannot stick to this view, because there is no gold or silver behind these papers. They are just papers having no intrinsic value. That is why we cannot convert them into gold or silver today. This is the basic reason why many countries stopped mentioning this promise on their currency notes and we don t find it on Australian Dollars, Saudi Riyals and Euro etc. However, countries like Pakistan and India, did not stop mentioning this promise, which is in fact, nothing to do with gold or silver. Effects If we adopt this opinion today, which is nearly impossible, it will create many difficulties in Islamic matters, especially in Islamic finance. For instance, if we imagine this currency as certificates of debts, we cannot make it capital (R asul Maal) in Salam based transactions hence the possession on notes will not be considered as possession on real capital (Thaman), which is necessary in Salam. Also, we will not be able to purchase gold or silver through notes, because it will be a Sarf sale which does not allow deferment. While the possession on currency notes would be considered as possession on the certificates of debt which represents certain amount of gold or silver. According to this opinion, if we pay Zakat and give currency

38 notes to a needy person, it will not be paid until that person use it and convert it into the real money or buy something and become the owner of that particular thing (Al-Thanwi, 2010). Moreover, currency exchange is impossible in accordance of this opinion. Second Opinion. As we discussed above that anything which currency value establishes through common agreement or custom is artificial currency (Al-Nuqood-ul-Istilahiyya). We can assume current paper currency as artificial currency, because these papers are not created currency like gold and silver. They are actually commonly agreed upon currency like Fuloos, and we just discussed above that it is allowed to exchange Fuloos in non-equal amount in the Shafi opinion as it is allowed in the strongest opinion of Hanbali school of thought. Also, according to Imam Abu Hanifa and Imam Abu Yousuf رحمہم ہللا it is permissible if they are specified. In consequence of this opinion and the mentioned analogy, some scholars issued Fatwa that exchange of paper currency is unrestrictedly allowed with deferment and in non-equal amount. (Usmani M. T., 2015) Effects If we adopt this dangerous opinion today, which allows the exchange of paper currency without any limitations of equality and possession, it will not just open the door of Riba but break it and Riba will become an imaginary thing. According to this opinion there is no restriction for anyone who want to borrow money with interest, because he can use the word sale instead of loan and can sell currency with prohibited excess and deferment. This will obviously disrupt the objectives of Sharia and renders in-operable the rules and warnings of the Quran and Sunnah regarding Riba. That is why, many reputed Sharia Scholar, including those who considered currency paper as certificate of debts, have refuted this opinion regarding the status of current currency. (Usmani M. T., 2015) Third Opinion Since paper money became well-accepted as currency, and after gold and silver lost their existence as currency, a large group of contemporary Sharia scholars believe that paper money has replaced gold and silver in most Sharia rulings. We can call them substitutes of gold and silver. This means that paper money is a separate genus independent of gold and silver, but with equivalent rulings to gold and silver because of the fact that they are real currencies. So the rulings of Riba are applicable and it is necessary to fulfill the requirements of Sarf sale in currency exchange. (Usmani M. T., 2015) This opinion has also been adopted in AAOIFI Sharia Standards. (AAOIFI, 2010) Effects The obligation of paying zakat on currency and using it as a medium of paying zakat is one of the consequence of this opinion, as well as using them as the capital amount in Salam transaction is permissible according to this point view. Similarly, immediate possession in the contract session and equality in the quantity are required. If one type of paper currency is sold against the same type, equivalence in quantity and possession in the contract session is necessarily required. (Al-Zuhayli, 2001) As for the case where one genus is sold against another, such as selling it for gold or silver, difference in quantity is allowed with immediate possession in the contract session being obligatory. This opinion also prohibits a binding bilateral promise to sell or purchase currencies. (AAOIFI, 2010) This point of view is wellaccepted, but it has some issues, for example, if we consider currency exchange as Sarf then we have to avoid constructive possession which is unanimously impermissible in Sarf sale, so 38 P a g e

39 the matter of possession on bank cheque, and bank transfer will be much more difficult for sharia scholars to explain. Fourth opinion Based on the previously discussed opinion of Imam Muhammad ہللا regardingرحمہ Fuloos there is another strong opinion of contemporary Sharia scholars regarding paper money. According to this point of view paper money is customary currency or artificial currency (Al- Nuqood-ul-Istilahiyya), which is same as Fuloos (Al-Zarqa, 1972) and currency of each country is a separate genus. Providing that there is a huge difference between gold and silver and paper money, because gold and silver have always been considered currency from the time that they were created until today. Therefore, they are called created currencies. According to Islamic Scholars, the quality and characteristics of currency can never be removed from them neither by custom nor by agreement. While paper currency has become currency with general agreement and custom, and its validity as currency is not constant like gold and silver, as this quality can be removed at any time with a government decree. So we can validly say that it is more similar to Fuloos than to gold and silver, but if we applied the rules of Fuloos as they are discussed in the Shafi and Hanbali schools of thoughts, this would open the doors of Riba widely, so after considering them as Fuloos there is no way left except for the adoption of the opinion of Imam Muhammad regarding Fuloos. Also because if we consider the time of Imam Abu Hanifa and Abu Yousuf, we will realize that during their time Fuloos were only used and meant for small transactions, if they were alive in this time where paper currency is being used in most transactions, they must have issued fatwa that it is impermissible to exchange currency except with equal quantity. It is not just an unsupported claim, but we have evidences of the time when some scholars of Central Asia applied the same rules on currency of their time as we applied under this opinion, they prohibited nonequivalent exchange in Al-Adali and Al-Ghatarifah and provided the same reason that they are valuable currencies and if we allowed non-equivalent exchange of them we will open the door of Riba. (A-Murghinani, 2005) Effects According to this, paper money is zakatable and Zakat can be paid in it. Similarly, it is permissible for it to be used as capital in a Salam transaction. Also, the rules of Riba apply such that if it is sold for the same genus, equivalence in value and possession in the contract session are required. This is not because it is Sarf (FX transaction), but because deferment is prohibited in a transaction where both counter values are of the same genus according to the opinion of the Hanafi, as mentioned earlier, but the rules of Sarf don t apply. The meaning of this is, in the exchange of two different genera such as selling USD against Pakistani Rupee, that possession in the contract session is not obligatory, and that deferment is permissible with the condition that the exchange happens at the price of the transaction day so that it could not lead us to Riba. The Difference between Last two opinions: Last two opinions are very similar about currency, in a sense that in both, currency is a thing by which we can pay zakat and it is itself a zakatable thing, and we can also make it capital in Salam transaction. That is why many Islamic Banks are offering currency Salam. But there are difference as well, according to third opinion it is like gold and silver and there is no room for deferment in currency exchange. Whereas it is allowed in the light of fourth opinion, if 39 P a g e

40 exchange happens between two different currencies, because this opinion is based on the opinion of Imam Muhammad. Currency Exchange in the light of last two opinions: According to the resolution of International Islamic Fiqh Academy, currency of one country is considered a separate genus and currencies of different countries are considered different genera. (Usmani M. T., 2015) On the basis of this resolution and the above mentioned debates, we can easily understand the rulings for currency exchange, if the currencies are of the same country they can only be sold and bought on spot and at their face values. However, if they are of the different countries they can be sold and bought at agreed rate which can be different from the market rate. In later case it should be on spot according to the third opinion, but conforming to the fourth opinion, possession from both sides is not necessary in this case, because it is not Sarf, but it should be then at market rate to avoid Riba. (Usmani M. M., 2001) Bill Discounting This last condition directly effects on discounting of bills of exchange and makes it unlawful in Islamic Sharia, doesn t matter if it is done in same currencies or different. The reason is that these bills are actually represent the amount of the bills which are debt payable by other party and their exchange for cash simply means that two currencies are being exchanged and payment from one side is deferred, thus it requires the last condition, that it should be at the market spot rate, and this condition is omitted there. To make it a lawful transaction we have other options and those alternatives which has been introduced by Islamic Finance such as currency Salam, Musharkah and Murabaha. Foreign Exchange Trade: Trading of currencies through Forex is being used by many ways and most of them are not allowed in Sharia, such as forward sale and future sale. There are many reasons such as impermissible speculation and sale without acquiring ownership of the subject matter, but one of the biggest reasons is that even spot sale in forex does not fulfil the requirement of possession which makes the transaction void in both last two opinions especially. Sale and Purchase of Old Currencies: In exchange of currencies that have lost their status as currency, like old coins and currency papers which have not been made of gold or silver, there is a room for non-equivalent sale and purchase based on the opinion of Imam Abu Hanifa and Imam Abu Yousuf ہللا.رحمھما The opinion of these two great jurists regarding the exchange of Fuloos can be adopted here for currency exchange, because these currencies are purchased for their historical values, material and craftsmanship, not as a means of exchange. Sale and purchase of Gold and Silver jewelry through currency paper The jurists who opine that currency papers are like gold and silver, do not allow purchasing of gold and silver such as gold jewelry through currency papers with deferment. On the contrary, if one purchases jewelry contains gold or silver with deferment and in accordance with the price of that contract day, it is allowed on the basis of fourth decision. Because this sale has not been considered as Sarf sale. (Al-Sarakhsi, 1992) 40 P a g e

41 Conclusion: The scope of this paper was to describe the Sharia status of current currency, which is totally based upon the fundamental theories of Islamic Sharia regarding currency. We found that Islamic Sharia do not allow treating currency as commodity and do not appreciate trading in currencies. But as Islam does not omit the essentials of human being, it allowed the exchange of currencies but in accordance with very exacting rulings so that it cannot be taken as a device to Riba. We also examined different opinions of great both old and contemporary sharia experts in order to determine the Sharia status of current currency and how differently these decision leaves their effects on Islamic financial matters. In the light of this study, we can validly say that first two opinions are not acceptable today, and last two are not just acceptable but they are being implemented in various financial matters, but we can also firmly say that the fourth opinion is the strongest opinion today, because it solves various Islamic Financial problems and make easy for us to avoid such transactions which are not permitted in Islam. References AAOIFI. (2010). Sharia Standards. Manama, Bahrain: Accounting and Auditing Organization for Islamic Financial Institutions. Al-Ghazali, A. H. (1993). Ihya (احياء علعوم الدين) Ulum-id-din (1st edition ed., Vol. 4). Karachi, Pakistan: Darul Ishaat. Al-Ramli, M. B. (2003). Nihayatul Muhtaj (3rd ed., Vol. 3). Beirut: Darul Kutub Al-Ilmiyyah. Al-Thanwi, M. A. (2010). Imdad-Ul-fatawa (Vol. 2). Karachi: Maktabah Darululoom Karachi. Al-Zarqa, S. A. (1972). Sharhul Qawaid Al-Fiqhiyyah. Beirut: Dar Al-Ghrab Al-Islami. A-Murghinani, S. B. (2005). A-Hidayah (1st ed.). Karachi: Darul Isha'at. Crowther, G. (1941). An Outline of Money (2nd edition ed.). London: Thomas Nelson & Sons Ltd. Mises, L. V. (2013). The Theory of Money and Credit. New York City: Skyhorse Publishing. Muslim, A.-H. A. (1956). Sahih Muslim (2 ed., Vol. 2). Karachi: Qadeemi Kutub Khana. Qudamah, I. (2009). Al-Mughni (Vol. 4). Beirut: Darul Kutub Al-Ilmiyyah. Shabbir, D. M. (1998). Al-Muamlatul Maliyyah Al-Muasirah Fil Fiqhil Islami (3rd ed.). Jordan: Dar-ul-nafais. Taymiyyah, T. A.-D. ( ). Majmu'al-Fatawa Ibn Taymiyyah (1st edition ed., Vol. 19). Riyadh: Matabi Al-Riyadh (Riyadh Press). Usmani, D. M. (2015). Islamic Finance (2nd ed.). Karachi: Maktaba Ma'ariful Quran. Usmani, M. M. (2001). Contemporary Fatawaa. LAhore: Idara-e-Islamiat. Usmani, M. T. (2000). The Historic Judgment On Interest. Karachi: Idartul M'aarif. Usmani, M. T. (2015). Fiqh-ul-Buyo'o (Vol. 2). Karachi: Maktabah Ma'ariful Qura'an. 41 P a g e

42 Islamic Development and the Diversification of Islamic Finance Dr. Shafiullah Jan Present Assistant Professor Institute of Management Sciences (IMSciences) Peshawar, Pakistan Abstract A world where every global citizen has a lifestyle that is similar to those citizens in rich countries (McKay, 2004) The improvement of living conditions and productive resources of poor people (Peet, 1999) The removal of the major sources of unfreedom, referring not to lifestyle goods implied in the previous definitions (Sen, 1999) not a property of people or firms, but of the economic and social system itself (Barder 2012 Varying and contrasting concepts and goals of development arise from the variation of theoretical underpinnings which in turn may spring from differing ontologies Euro-centric (conventional) Islamic 42 P a g e

43 Zakat Banking: A Breakthrough solution to Riba in Banking by Synthesising Zakat into Qardan Hasana; The two Islamic Economic Fundamentals Abdul Malek Talib Research Scholar, Malaysia Abstract The reason why Conventional banking charges interest rate to borrowers is because the banks have to pay interest to depositors. The difference is we make noise when banks charge interest but keep quite when banks pay us interest. Islamic banking takes adaptive reform approach to circumvent riba by replacing interest bearing loan into two combined trade transactions that are not inter-independent while maintaining the overall banking system. Adaptive reform include changes of name from interest rate to profit rate and base lending rate to base financial rate, to mention a few. Notwithstanding this, Muslims around the globe have no other choice but to adhere to the current adaptive reform. The growth of Islamic banking shows the dire need for shariah compliant products albeit its shortcoming. That is the reason why many Islamic scholars are looking for a better solution in combating riba where the depositors gain at the expense of the borrowers in the two banking systems. The proposed Zakat banking takes transformational reform approach to riba in banking in wider Islamic economic fundamentals. It starts with the concept that depositors must pay zakat on their deposits at 2.5% per annum. This is because money like gold and silver are zakatable. On the deposit side, Zakat banking acts as an Amil and collects 2.5% zakat and channels the money to the authority after deducting 1/8 of the bank s entitlement. This makes Zakat banking costs of fund equal to zero therefore it can lend money at a zero rate of interest. In other words, to abolish riba depositors must pay obligatory zakat, the third pillar of Islam that will enable bank to lend at zero interest rates. What could be more worthy to a Muslim knowing Zakat banking will collect zakat from his deposited money and from that same pool of money, interest free loans qardan hasana could be given to his fellow needy brothers. In short, when the depositors pay zakat and the borrowers enjoy qardan hasana. Conversely, to make profit Zakat banking would charge on competitive basis for the various value added financial services such as money withdrawal, money transfer, account keeping etc. instead of relying on the riba base interest spread between depositors and borrowers. Keywords; Riba, Zakat, Qardan Hasana, Islamic banking and Islamic economic. 43 P a g e

44 1. INTRODUCTION Life in this modern sophisticated and competitive world requires a person to borrow money from banks so that they can live as others. Without borrowed money, a person will be secluded from the enjoyment and comfort of present life-style. A person needs to have a comfortable house, a car, higher education (Ahmad Hidayat, 2009), or a personal loan to start a business and others. Thus, borrowing sums of money from the banks could not be avoided. Indeed, debt financing becomes a common practice by most people, especially to meet the basic needs in life despite the element of riba. One would wonder why the longest ayat in the Quran is on debt (Al Baqarah: 282). A debt is allowed in Islam but the debtor must pay back the amount he borrowed without interest. It is obligated to a person who borrowed money from another person to pay it back in full. There is a difference between lending money and giving a charity (sadaqah), in which charity is giving money without the obligation to return the same to the giver. However, debtors have to pay back the money they borrowed and currently can t escape from riba practices by Conventional banking. Even adaptive reform approach by Islamic banking some argue might not be the ideal Islamic solution. Therefore, it is proposed that the concept of Zakat banking to abolish riba should be considered to reform interest based debt financing where the depositors gain at the expense of the borrowers. More so when Zakat banking actualy deploying two key Islamic economic fundamentals i.e. zakat and qardan hasana which have been forgotten in the current Muslim main stream monetary economy. In essence, riba is the outcome of Capitalist economis system which believes that right on capital is absolute therefore lenders should have the full right to gain from borrowers by charging riba at the rate determined by the market. The current Islamic banking does manage to circumvent riba technically but trapped is in the pretext of the Capatalist economic system. On the other hand, Islamic economic system believes that owners of capital must pay zakat and it is so important that Allah s.w.t. makes it the third pillar of Islam. We can say that zakat takes precedence over riba. As this paper argues that zakat on money can be syntesise into qardan hasana and therfore able to abolishes riba from the source. As the original Islamic texts on zakat are very much within the context of agricultural oriented society therefore this paper attempts to present the re-evaluation of the original text within the current context of money oriented society. 2. OBJECTIVE This article starts with the re-evaluation on current thinking and proposed Zakat banking as a transformational reform to riba in banking in responding to the theme of the conference. It is also in line with one of the objectives of the conference that is to provide recommendation to the present Islamic banking and financial stakeholders on the future direction of Islamic banking and finance. In conjunction with the conference, this article also intends to presents this new idea to the relevant authorities, jurists, academicians, bankers and NGO s in the possibility of creating Zakat banking for the benefits of the ummah where the depositors pay zakat and the borrowers enjoy qardan hasana. Zakat and qardan hasana are two key fundamentals in the Islamic economy. In other words the implemention of Zakat banking will bring closer to the ultimate objective of Islamic economy as an act of worship and enable Muslim world economy to grow in its own mold. It is the Muslim believe that Islamic economic system is far superior system compared to others. 44 P a g e

45 The objective of this paper is to present the tranformational reform approach on the rationale of Zakat banking and how this new banking system work. As any good idea it will remain an idea untill it is implemented as such this paper will also explain the strategy in chapter 8 on how this reform can be implemented which is also based on the experience of Saidina Uthman r.a. As Muslims, we believe that fresh Islamic economic system will earn barakah in this world which will spur faster and stronger economic growth within the Muslim world when the rest may stanstill. When barakah from Allah comes, know that there is no end to Allah s barakah. We need to promote fresh Islamic economic system encompassing zakat and stop complaining about other systems that are not belong to us. The proposed Zakat banking is indeed a breakthrough idea not only for banking but also within the wider Islamic economic fundamentals by upholding zakat to take precedence over riba in the monetary system. 45 P a g e

46 3. RIBA There are enough definitions for the word riba by scholars. But, for a layman to understand the word riba, one needs to understand these four Quranic words in one go; riba, trade, loan and charity. 3.1 Riba Riba is strictly prohibited in Islam. In the science of jurisprudence (Fiqh), there are three types of riba, which are as follows: a) Riba fadhlu; It is called as usury Buyu, which is riba that arising from the exchange of two similar goods of differences quality or quantity, and similar in terms of the time of giving and taking the goods. 46 P a g e b) Riba An-Nasi ah; It is called as riba Duyun, which is riba that arising from debts that do not meet the criteria of profit appears with its risk, and the result of an effort appears with costs. Such transactions consists of the exchange of the obligation to bear the burden, just because time passes. c) Riba Jahiliyyah; It is a debt which is paid exceed from the money borrowed because the borrower was unable to repay the loan at a predetermined time. In brief, there are ten descriptions about riba from the contents of the Quranic passages mentioned in the Holy Quran; 1) Riba is a type of increase in a loan. 2) Taking riba is zulm on the borrower. 3) Depriving the lender of ra`s al-mal is zulm. 4) Riba often involved doubling and redoubling of the debt. 5) Charity is an alternative or an opposite to riba. 6) Riba is not like trade. 7) Riba leads to destruction and Sadaqah to growth. 8) Dealing in riba is gaining through the wealth of other people. 9) Riba was prohibited earlier for the Jews. 10) Taking riba is a very serious sin. 3.2 Trade Trade or buyu literally means selling (AW Munawir, 1997). R Syafe i (2001) viewed that the trade can also be interpreted as an exchange between two things or two goods or two matters. While technically the trade means a business occurs in where the sale price consists of the price of the goods plus the agreed margin (S Zulkifli, 2003). Riba on the other hand as explained in 3.1 is prohibited in Islam. The Qur an firmly distinguishes the terms of riba and trade, as is in Al-Baqarah, verse 275, Allah s.w.t. revealed: Those who devour usury will not stand except as stand one whom the Evil One by his touch hath driven to madness. That is because they say: "Trade is like usury," but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (The offence) are Companions of the Fire: They will abide therein (forever). (Al Quran [2:275])

47 The verse explained to us that Islam justifies trade, because trade increases wealth. While Islam has forbidden riba or usury because it contains elements of falsehood gain, Islam orders people to do business or trade on the basis of mutual consent which promises a profit to gain. A hadith; Prophet Muhammad s.a.w. asked one of his companions on the job (profession) what is best. He then replied: Business man's own hands and every sale that is good (HR. Bazzar and Hakim). 3.3 Loan Loan means a deal between two parties or more regarding a sum of money. In the context of a bank they give a loan for many purposes such as house loan, capital for a business, study loan, vehicles loan and others. However, under current Conventional banking system one needs to pay back loan with additional amount which is known as interest or riba. Riba is prohibited. If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if ye remit it by way of charity, that is the best for you if ye only knew. (Al-Quran [2:280]) 3.4 Charity Charity is the opposite to riba in which it will be rewarded by the blessing of the Almighty Allah s.w.t. Charity could be defined as two main good deeds ie zakat and sadaqah. So, riba and charity are the opposite of one another. This is explained in Allah s.w.t. s revelation, meaning; That which you give for Riba in order to increase through the property of (other) people, will have no increase with God. But that which you give as charity (zakah), seeking the Countenance of God (will increase); it is these who will get a recompense multiplied. (Al-Quran [30:39]) In another verse: Allah will deprive usury of all blessing, but will give increase for deeds of charity: For He loveth not creatures ungrateful and wicked (Al-Quran [2:276]) Y RETURN $10 TO X SOMETIME LATER LOAN X LOANS $10 TO Y Y UNABLE TO RETURN, X GIVES AS CHARITY CHARITY Y RETURNS $10 PLUS AN ADDITIONAL SOMETHING RIBA X GIVES $10 TO Y Y TRADES SAY 5 KILOS OF RICE TO X THIS IS TRADE OR TRADE 47 P a g e

48 Figure 1.1 A Framework Of The Four Quranic Words 4. CONVENTIONAL BANKING Conventional bank gives loan where the return is based upon the interest, the prohibited riba (interest based lending) and gharar (speculation or uncertainty). Conventional banking is based on riba which is forbidden in Islam. The term normally adopted in Conventional banking is interest rates. Interest rates are intended as a payment for the use of capital borrowed by other parties. In other word, time value of money. The forms of interest rate are the interest rate on the loan, deposit rate, treasury bills, security money and others. In essence, banks take deposit from customers says at 3% deposit rate then lend the money to other customers at 6% lending rate with a gain of net interest spread of 3% as shown in Figure 1.2 below. On both sides, it involves riba. CONVENTIONAL BANKING BORROWER PAYS 6% DEPOSITOR GETS 3% INTEREST SPREAD 3% Figure 1.2 Distribution of interest in Conventional Banks Conventional banks have no other choice but to lend money at a higher lending rate than the deposit rate as they have to pay interest to depositors and to cover its own operating cost and profit. Banks need to pay interest to depositors to attract them to the banks in order to make the system work. Banks conduct their business purely based on profit. From this profit, banks continue to grow in providing various value added financial services by using latest technologies to maintain customer loyalty which led to the depositors gain at the expense of the borrowers. Conventional banking acts as the intermediary between depositors market and borrowers market. In the pretext of Capitalist economic system the owner of capital has absolute right on capital therefore lenders should have the full right to gain from borrowers by charging riba at the rate determined by the market. Bank cost of fund is determined by the amount paid to depositors. The difference between bank interest income from borrowers and bank cost of fund is call interest spread. Banks Interest Income Interest Expense Interest Spread (billion) (billion) (billion) Maybank CIMB Bank Public Bank P a g e

49 Hong Leong Bank RHB Bank Affin Bank Alliance Bank Am Bank Table 1.1 Conventional banking interest spread ISLAMIC BANKING Conventional banking and Islamic banking share the same concept in financing business for the profit that enable the depositors gain at the expense of the borrowers. However, the main difference of Islamic finance and Islamic banking can be attributed to the Islamic idealism where profits come from trade transactions, not from money lending on interest. Islamic scholars claim that Islamic banking is a shariah compliant along their financing businesses. It seems that the current system of Islamic banking is an adaptive reform from Conventional banks. Many critics think that the existing reform which is the adaptive reform is not fully shariah compliance as the outcome of Islamic banking system is similar to Conventional banking where the depositors gain at the expense of the borrowers. Islamic banking promises all their products and services offered are in compliance with the shariah principles which gives justice to both; the banks and customers and meet the spirit of Islam. It offers a list of Islamic products for their customers such as, murabaha (a sale based instrument), the financing of commissioned manufacturing or construction istinaa and the forward-sale salam. Next, lease based instruments ijara are also similar to the traditional leasing with certain distinctions, and equity based financial intermediation which is known as mudaraba takes place through profit and loss arrangements (Warde, 2010). In which, Siti Aisyah Hashim et al., (2012) stated that, from the point of ethics, only Bank Islam Berhad, the Islamic bank which is seen to achieve a stability in the payment of zakat because it shows high performance within three consecutive years. Islamic banking while others are in the middle and lower levels. For financing by qard hassan, only seven banks that offer the instruments to customers, and the Asian Finance viewed as having the highest offer for this instrument as compared with other Islamic banking. As modern banking institutions, Islamic banks operate under Islamic Law (shariah), i.e., the Quran and Sunnah (Van Schaik, 2001), which both strongly emphasise the importance of ethics (Elmelki & Ben Arab, 2009). Islamic banks often described themselves as providers of ethical financial services 49 P a g e

50 (Wilson, 2005; Saidi, 2009); therefore, the implementation of ethics is explicit in the business of Islamic banks (Wilson, 2005). Kassim et al. (2009), claims that the primary reason why Islamic banking may become more stable compared to Conventional banking is that they are not affected by the fluctuations on interest rates. In other words, Islamic banks are expected to be more stable than the conventional banks because it is not influenced by interest rates. Stability in demand for money holds some positive effects in terms of efficiency in monetary policies and the financial stability in the system. On the other hand, Kia and Darrat (2007) refer to two major reasons why interest-free Islamic banks contribute to the stability more than the others. Islamic banking in essence follow Conventional banking format where the depositors gain at the expense of borrowers. However, Islamic banking avoid direct dealing in riba but do a trade following the Islamic principle, Trade is halal and riba is haram. In order to circumvent riba, an interest bearing loan is broken up into two trade transactions even though these two transactions are not independent of one another. For example, it is not possible for an Islamic bank to buy a house from a customer without the customer buying the house back from the bank with a mark-up profit to the bank as illustrated in Figure 1.3 below: 1 st Trade Transaction Bank buys a house from A at RM100k for cash 2 nd Trade transaction A buys back the house from the bank at RM160k on instalment basis Equivalent to Riba at 6% per year in 20 years repayment period Figure 1.3 Two trade transactions equivalent to one riba transaction Figure 1.3 above illustrated the two trade transactions that are equivalent to one riba transaction. Since the two trade transactions are not independent, some argue that an Islamic bank is indirectly involved in riba. In fact, in order to compete with Conventional banks, Islamic banks has to ensure their profit rate is at the same level with interest rate. This is to prevent arbitrage between the two banking system that offer same product yet at at different price point. Again, it just a mere change of label. The two trade transactions create an extra legal document for the second transaction yet Islamic banking justify it by having a 20% discount on Stamp Duty as the government promotes an Islamic banking. 50 P a g e

51 There are criticisms on the present Islamic banking system that some have come to the conclusion that it is just a charade despite being guided by shariah scholars on how to Islamise their products. There are also condemnations out there by some Islamic scholars on current Islamic banking system that devour riba even though they have not offered an alternative. These criticisms and argumentations as well as condemnations should not be taken negatively but as the stepping stone to the proposed Zakat banking. 6. RE-EVALUATION ON THE CONCEPT OF ZAKAT 6.1 Paper Money Has Replaced Dinar (Gold) And Dirham (Silver) As The New Currency Quranic verses mentioned about Dinar and Dirham. In Surah Al-Imran (3; 75) 1, Allah s.w.t. accepts the use of Dinar (gold) as valuably regarded as money for any transaction and businesses. Similarly, Dirham (silver) also is accepted by Islam as valuable as money in any transaction and business dealing. For example, in Surah Yusof (Yusof; 20) 2. Thus some views that paper money is not sunnah money. Gold and silver money are the only sunnah money, therefore people must go back to use gold and silver money. Upon re-evaluation on idea regarding the use of gold dinar and silver dirham, one will realise that the Prophet s.a.w. used gold dinar and silver dirham minted by Byzantine Empire, not by the Muslim. History has showed that gold dinar was not minted by Muslim until about half century after the demise of the Prophet s.a.w. Therefore the reason for not accepting paper money purely on the basis it was created by the western world need to be reconsidered. 6.2 Like Gold and Silver; Paper money as currency are Zakatable Islam has been built on five [pillars]: testifying that there is no God but Allah and that Muhammad is the Messenger of Allah, performing the prayers, paying the zakat, making the pilgrimage to the House, and fasting in Ramadan (Bukhari & Muslim). In these five pillars of Islam, zakat is the third. While gold and silver are two valuable items that are zakatable because they were used as money such as dinar and dirham since ages. Gold and silver were zakatable not because they were merely gold and silver, but rather they were used as currency or as a medium of exchange. The intrinsic value of gold and silver was in their usage. Yet today we don t have zakat on currency in itself (Ringgit, Dollar, Pound, Euro, Yen ect.), despite an innovative formula in calculating zakat for Income on Salary, EPF, ASB Shares etc. that clearly are not currency or a medium of exchange. Based on current view, zakat on currency is not really being promoted. Yet monetary value of shares and investments are made zakatable. Nowadays, all the countries are using paper money which has replaced the every day s use of gold and silver as a currency or as money. Since gold and silver are subjected to zakat therefore paper money is also subjected to zakat. Money in one s pocket and money in the bank are zakatable even if 1 2 Emas dan Perak daripada perspektif Islam Hadis-Hadis Yang Berkaitan Emas P a g e

52 one owned it or as borrowed money. Paper money issued as legal tender by government and used as currency is subjected to zakat. 6.3 Paying Zakat As Frequent As Salat The author in this article is re-evaluating the important subject that is still not been given enough attention which is paying zakat should have been done more regularly instead of once a year. In fact, zakat is mentioned along with salat many times in the Holy Quran repeatedly saying that; This verse shows that these two elements in the five pillars of Islam seems cannot be separated, in which salat (prayer) is not perfect without performing zakat, and performing zakat only without performing salat, is not perfect. And, zakat must be performed by each Muslim as they perform salat in their daily life. Zakat is akin to salat and as salat is performed regularly, so we may want to interpret that we also need to pay zakat regularly instead of performed once a year as we normally practice now. Thus, the author of this article again is re-evaluating about performing salat and performing zakat regularly. The current views that haul is one full year, so Muslims need to pay zakat only once a year. Yet it is not practical nowadays since money in the bank is on-going concerned and continuously fluctuating, we should pay zakat regularly by calculating nisab on month to month of the following year. We need to calculate on the monthly rest basis as the amount is constantly changing. So, as all Muslim know that zakat haul is one year at the rate of 2.5% per annum, yet zakat on money or saving in the bank as shown in table below should be calculated on monthly basis. Month Year 1 Year 2 Year 3 Muharam 20,000 12,000 28,000 Safar 15,000 15,000 23,000 Jamadil Awal 27,000 23,000 12,000 Jamdil Ahkir 28,000 45,000 10,000 Rabial Awal 12,000 34,000 15,000 Rabial Akhir 12,000 18,000 21,000 Rejab 14,000 13,000 13,000 Shaban 18,000 13,000 14,000 Ramadhan 23,000 20,000 23,000 Syawal 15,000 22,000 23,000 Zulhijjah 12,000 13,000 14,000 Zulkaidah 24,000 26,000 26,000 Month to month of the following year one complete year 52 P a g e

53 Table 1.2 Zakat on Going Concern Concept an example Haul is a cycle of one year but since money in the bank is concerned, the costumers should pay zakat on monthly rest by calculating nisab from month to month of the following year. They need to calculate on the monthly rest basis as the amount keep changing, where at the end they found that they are paying zakat monthly. This means that Muslims can pay zakat on monthly rest at the rate of 2.5% per annum divided by twelve (12) months, so zakat is made frequently as performing salat. This idea and suggestion of monthly zakat or even daily basis (by dividing the rate 2.5% by 365 days) is good for Muslim individually in fulfilling their duty and it is also good for the economy especially for Muslims economy. Should he die he knows his zakat has been duly collected that day. 6.4 Loan Create Money Even If Gold and Silver Were Used As Currency Loan is to give ownership of some part of property to others that should be returned similar without any increase. Since lender separates some parts of his property to give it to debtor, here loan means to cut and separate (Alkhan Mostafa, 1982). Loan is mentioned in the Holy Quran in Quran the longest verses. This re-evaluation views the fact that Allah s.w.t. knows that loan creates money, therefore Quran addresses it by deliver it in the longest verses in Surah Al-Baqara; 282, it says that: O you who have believed, when you contract a debt for a specified term, write it down. And let a scribe write [it] between you in justice. Let no scribe refuse to write as Allah has taught him. So let him write and let the one who has the obligation dictate. And let him fear Allah, his Lord, and not leave anything out of it. But if the one who has the obligation is of limited understanding or weak or unable to dictate himself, then let his guardian dictate in justice. And bring to witness two witnesses from among your men. And if there are not two men [available], then a man and two women from those whom you accept as witnesses - so that if one of the women errs, then the other can remind her. And let not the witnesses refuse when they are called upon. And do not be [too] weary to write it, whether it is small or large, for its [specified] term. That is more just in the sight of Allah and stronger as evidence and more likely to prevent doubt between you, except when it is an immediate transaction which you conduct among yourselves. For [then] there is no blame upon you if you do not write it. And take witnesses when you conclude a contract. Let no scribe be harmed or any witness. For if you do so, indeed, it is [grave] disobedience in you. And fear Allah. And Allah teaches you. And Allah is Knowing of all thing 3 Quran, also explained some other characteristic of loan as below; Allah did a foretime take a covenant from the children of Israel, and we appointed twelve captains among them. and Allah said: "I am with you: if ye (but) establish regular prayers, practice regular charity, believe in my messengers, honour and assist them, and loan to Allah a beautiful loan, verily I will wipe out from you your evils, and admit you to gardens with rivers flowing beneath; but if any of you, after this, resisted faith, he hath truly wandered from the path or rectitude. Montesquieu (2004) in his book Rouh al-qavanin stated that Lending interest free loan to others is one of the best deeds, the act that is recommended in different religions, a moral deed, not a law or culture of a country or society. He also added that Interest free loan is one of the recommendations 3 Surah Al-Baqara; P a g e

54 of divine religions. It is recommended by all prophets and its presentation in holy books indicates its ancient history. Although he believes that loaning is a moral not legal deed, but most of us believe that is not only a moral principle, but it can be considered as a part of economic system; along with other parts of a healthy economic, it can help and control needy people of the country and society. This seems to be agreed with the re-evaluation idea of giving loan without riba. Since money has been created in the economy in the form of future obligation, there should be no riba, and this is the reason of why riba is prohibited. Thus, the relationship between riba and loan becomes one of the ideas to rethinking by the author, in which loan has an additional rate of interest according to the length of years of the contract between the borrower and the bank. Allah s.w.t. knows that loan creates money, therefore Quran discussing and elaborating it in the longest ayat. And, since money is created in this way therefore it is prohibited (haram) to charge the interest. One of the verses is as below; If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if ye remit it by way of charity, that is best for you if ye only knew. According to Bank Negara Malaysia publication, as at October 2016 the amount of currency in circulation is only RM 80 billion, yet the report also showed that amount of demand deposit is RM 280 billion, saving deposit is RM 140 billion, fixed deposit is RM 760 billion, foreign currency deposit is RM 130 billion and other deposit is RM 215 billion (this figures have been rounded off for simplicity) respectively. All of these deposits were created through loans by the banking system. One can assume that even the currency in circulation is actually real gold instead of paper money in ringgit denomination but because of loans by the banking system new money in the domination of dinar or dirham will be created by the same amount. Currency in Circulation Demand Deposit Saving Deposit Fixed Deposit Foreign Currency Deposit Other Deposit RM 80 billion RM 280 bilion RM 140 bilion RM 760 billion RM 130 billoin RM 215 billion Table 1.3 Amount of Money Created by Malaysia Total Banking System 7. ZAKAT BANKING 7.1 Social Value of Zakat Literally, zakat means growth, purification and righteousness. Al-Shaukani gives the following definition: linguistically, zakat means growth: One says zakat haz-zar meaning the plant grew. It can also mean purification. In shariah (Islamic Law) it implies both meanings. The first meaning is construed as to cause growth in wealth, or as to cause more reward or as to pertain to increasing wealth, such as the case in commerce and agriculture (A.R. Ansari, N.d). Zakat is the third pillar of 54 P a g e

55 Islam after reciting the shahadah and the five daily prayers. Zakat has started to be compulsory on Muslims since the time of the Prophet s.a.w., which was in the month of Shawwal in the second year of His migration to Medina (Ahmad Syafii, 2005). The benefits of performing zakat are priceless for the development of ummah especially in terms of their economic survival in this modern time. Zakat is used as a mechanism to help Muslims in need and the collection of the zakat becomes as a charity to help the recipients of zakat. Some of the specific property of the persons who entitled to zakat will be taken and distributed to those recipients who deserve it. Here, zakat has a role to nourish feelings of love for the brothers and sisters in Islam and help them to survive. This indirectly reduces feelings of jealousy and envy among the recipients to their rich Muslim brothers and sisters, while the community will live in peace and harmony. There are eight groups of eligible recipients as was decided by the religion of Islam, namely the very poor, poor, zakat collector (Amil), convert (Muallaf), for freeing slaves, those who are in debt, those on the path of Allah (Ibn sabil) and those who are traveling (traveller). 7.2 Economic Value Of Zakat The focus on the aspect of the collection of zakat has received much attention from previous researchers in the field of zakat (Kamil and Ahmad Madzhan, 2002; Zainol, 2008; Ram Al Jaffri, Zainol, Md Kamil & Hairi, 2008). The study by Musa et al. (in the excerpt of Abdul Ghafar & Hailani 2006) has viewed about the measurement of zakat offices performance in Malaysia, in where several states has contributed to the studies in investigating the effectiveness of the governance aspect of the distribution of zakat funds in their respective states. However, this article hopefully to be the first research to focus on the potential value of zakat. It shows the potential value of zakat from monetary sectors are very much bigger than the potential value of zakat from traditional sectors such as zakat fitra, zakat on agriculture and zakat on farming as shown in table below. The statistics are based on Malaysia total figures including ownership by Non-Muslim to see the economic impact. After all Muslim s ownership figures are not available. These figures show that zakat can play a major role in the main stream economy once zakat on monetary element either cash or bank deposit are made zakatable. Relying on tradition sources of zakat will have limited economic impact. Type of Zakat Unit Total Quantity Rate Quantity Zakat Value per unit (RM) Zakat Value (RM) Fitra person 30 mil mil Padi ton 2.6 mil 5% 130,000 1, mil Cattle head 0.9 mil 1 per 30 30,000 5, mil Goats head 0.6 mil 1per 40 15, mil 55 P a g e

56 Money in Circulation ringgit 80 bil 2.5% na na 2.0 bil Demand Deposit ringgit 280 bil 2.5% na na 7.0 bil Saving Deposit ringgit 140 bil 2.5% na na 3.5 bil Fixed Deposit ringgit 760 bil 2.5% na na 19.0 bil Table 1.4 Potential Zakat Value In Malaysia Including Non-Muslims Ownership 7.3 The Role of Zakat Banking Zakat banking has three main roles; 1) Providing the routine financial services First and foremost Zakat banking will continuously provide the routine financial services. Zakat banking would charge on competitive basis for the various value added financial services such as money withdrawal, money transfer, account keeping etc. From these activities, the banks should have made profit without of relying on the riba base interest spread between borrower rate and depositor rate as Conventional banking does. 2) On depositors side Zakat bank acts as Amil of zakat A Zakat bank should act as Amil which is entitled for 1/8 of zakat collection. Here, the bank takes deposit from the depositors whom agree to pay zakat from his deposit as a religious duty. The depositor will not get a return from their deposited money from the bank anymore (which is Riba). Then, the bank will calculate zakat proportion from the deposited money and credit it to the Zakat Authority every month for the distribution to the Asnaf. Almost all Muslims will be happy to give a donation anyway, so why don t they pay zakat through the bank which is easier, secured and comfortable. Although the rate for zakat is 2.5% per annum; but it can be made payable on monthly rest or even daily rest as we are in the digital age in order to make zakat as regular as salah. 56 P a g e It is important at this juncture that that the writer strongly proposed that any amount of zakat paid by depositors are deductible from taxable income within the purview of Income Tax. In this maner zakat paid are considered expenses for either individuals or corporations. 3) On borrowers side Zakat bank give qardan hasana Zakat bank will be able to give interest free loan. The risk management process of loan approval and collection should be continued as the Conventional banking or Islamic banking best practices albeit the interest element. There are many ayat in the Quran mention about qardan hasana. One example is And establish prayer and pay zakat. And loan to Allah a beautiful loan. [Sûrah al-muzammil: 20]. A beautiful loan is a loan that is provided without charging any return or profit or interest. If a return in any form is associated with the loan, it will not be a qardan hasan. The difference between qardan hasaan and sadaqah (charity), is that qardan hasana has to be repaid, although the borrower specifies the time of repayment, while sadaqah is pure charity. It is reported from the Prophet s.a.w. that the reward by Allah s.w.t. for sadaqah is ten times and that of qardan hasana is eighteen times, thus underlining the importance of qard hasana. In the final analysis Zakat Banking will prevent the depositors gain at the expense of the borrowers.

57 8. IMPLEMENTTION STRATYEGY; SAIDINA UTHMAN A WELL STORY Saidina Uthman s r.a. well story is one of the famous stories. Fortunately we can apply and use the logic of this story in our implementation strategy in combating riba in banking by synthesising zakat into qardan hasana which are two of the most important elements in Islamic economic system. The story is; In Medina, water was scarce. There was a well owned by a Jew who charged high price for his water. Saidina Uthman R.A. offered to buy the well but the Jew declined. Because he was a skilful trader and negotiator, he negotiated a price for half the well; he would have control one day and the owner the alternate days. Saidina Uthman R.A. gave out his water to the Muslims freely, leaving the Jew with no customer on the alternate days. The original owner of the well had no choice but to sell his half of the well to Uthman who nevertheless paid a fair price for it Our quest is to find someone or some institution like Saidina Uthman R.A. to start Zakat banking by buying the half the well and gives loan at zero interest. Sooner Conventional banking will lose all of its customers as nobody wants to borrow money with interest. When nobody borrows from Conventional banks then Conventional banks cannot afford to pay interest to depositors, and soon will lose all of its depositors too. Conventional banks then will have no choice but to convert to Zakat banking. By so doing, zakat is placed in the main stream of economy and to fulfil our belief that Allah s.w.t. deprives riba and increases charity. 9. CONCLUSION It is clear from the discussion above that when depositors pay zakat on their deposit in the bank its enable the bank to give loan at zero interst rate qardan hasana. As Muslim we believe that performing zakat will purify, increase and sweeten our wealth. On top of it, Zakat banking system will enable qardan hasana which we know is many times better than the act of charity. Economically, Zakat banking will also the solve the finacial crisis in the long term. Financially, those zakat payers will save their Income Tax by getting tax deduction on the amount paid for zakat as the zakat money will go to the Asnaf. The government budget will also been enhanced as the amount of zakat from currency will be sizeable to play its role in the economy. The vision of this paper is to move the present Islamic banking adaptive reform to Zakat banking transformational reform by year 2020 in a new banking model where depositors pay zakat and borrowers enjoy qardan hasana. CONVENTIONAL BANKING RIBA ISLAMIC BANKING STARTED 1983 TRADE ZAKAT BANKING TARGETED 2020 ZAKAT BEAUTIFUL LOAN 57 P a g e

58 Figure 1.4; Zakat banking In Year 2020 The writer of this article imagines the new and brave change from the present Islamic banking system to the future Zakat banking for the benefits of the ummah. REFERENCES. 58 P a g e Zakat banking is the corner stone in reviving Islamic economic system. Abu Bakar Bin Abi Syibah, Abdullah Bin Muhammad Bin Ibrahim Bin Usman Bin Khawasiti al- Abbasy, kitaabu al-musnaf fii al-ahaadits wa al-atsaar (Riyad: Maktabah al-rusd: 1409 H), cet.1, Jilid 4, 554 Ahmad Hidayat Buang. (2009). Jurnal Muamalat. Pengurusan Harta Keluarga mengikut Islam dan Realiti Semasa Di Malaysia. Bil. 2. Putrajaya: Jabatan Kemajuan Islam Malaysia (JAKIM) Ahmad Syafi'i, K. (2005). Siri keajaiban rukun Islam: Hikmah zakat. Kuala Lumpur: Jasmine Enterprise Ahmad Warson Munawir, Al Munawir Kamus Arab-Indonesia (Surabaya: Pustaka Progesif, 1997), 124. Abdul Ghafar, I. & Hailani Muji, T. (2006). Zakat: Pensyariatan, perekonomian dan perundangan. Penerbit UKM: Bangi Alkhan Mostafa, A., Alfeqh al-monhaji ala mazhab alemam al-shafei, vol. 6, p. 101 Azlina Zainal Abidin, Tamat Sarmidi, Abu Hassan Shaari Md Nor (2013) Jurang pendapatan dan hutang isi rumah. (Tesis Sarjana). Universiti Kebangsaan Malaysia, Malaysia Elmelki, A., & Ben Arab, M. (2009). Ethical investment and the social responsibilities of the Islamic banks. International Business Research, 2, Kamil, M.I., & Ahmad Mahdzan, A. (2002). Peranan sikap dalam gelagat kepatuhan zakat pendapatan gaji. Analisis, 9(1&2), Kassim, K. M., Bahari, A., Kassim, N., Rashid, Nik, R. N. A., & Jusoff, K. (2009). Retaining customers through relationship marketing in an Islamic financial institution in Malaysia. International Journal of Marketing Studies, 1(1), Montesquieu, S. (2004). Spirit of the laws, translated by Mohtadi, A.A., informing and library. Rachmat Syafe i, Fiqih Muamalah (Bandung: Pustaka Setia, 2001), 73 Ram Al Jaffri, S., Zainol, B., Kamil, M.I., & Md Hairi, M.H. (2008). Gelagat kepatuhan zakat perniagaan: Aplikasi teori tindakan beralasan. Kertas kerja dibentangkan di National Management Conference, Terengganu. Saidi, T. A. (2009). Relationship between ethical and Islamic banking systems and its business management implications. South African Journal of Business Management, 40(1), Shafiq (2014). Akaun, Harta Milik Khalifah Saidina Uthman Affan Masih Wujud Hingga Kini. Shafiqolbu.Wordpress.Com. Sunarto Zulkifli, Panduan Praktis dan Transaksi Perbankan Syariah (Jakarta: Zikrul Hakim, 2003), 39. Tafsir Ibnu Kathier Jilid 4, Van Schaik, D. (2001). Islamic banking. The Arab Bank Review, 3(1),

59 Wilson, R. (2005). Parallels between Islamic and ethical banking. Journal of Islamic Banking and Finance, 22(3), Zakah by Abdul Rehman Ansari. Published by IPCI, 481 Coventry Road, Small Heath, Birmingham B10 0JS. p. 5 Zuraini Anang, Roshanim Koris & Roseliza Mat Alipiah (2004). Perbankan Islam Dan Penerimaan Masyarakat Di Terengganu. 4th International Malaysian Studies Conference; 3-5 August 2004, Universiti Kebangsaan Malaysia, Bangi. 59 P a g e

60 Brand Naming Conventions in Pakistan: Islamic Banks and Conventional Banks Prof..Dr.Mehboob ul Hassan, Professor of Islamic Economics, Islamic Banking Center (IBC) King Saud University, Riyadh, Saudi Arabia (Not Presented) Abstract The purpose of this paper is to examine the brand naming criteria in Islamic banks versus conventional banks. A total of 19 banks were examined including 5 Islamic Banks and 14 Islamic Windows of Conventional Banks. These 19 banks are also classified as 7 foreign banks and 13 local banks. Only marketing/brand professionals were interviewed as brand naming experts [N=125]. All brands were examined on six-point criteria for evaluating brand names; these criteria include (a) Memorability, (b) Meaningfulness, (c) Likability, (d) Transferability, (e) Adaptability, (f) Protectability. These criteria were examined on five-point likert scale ranging from very low to very high. Findings indicate that Islamic banks have higher scores on six brand naming criteria as compared to Islamic windows of conventional banks and the difference is statistically significant. Moreover foreign banks have higher score on six brand naming criteria as compared to local banks and the difference is statistically significant. Keywords Brand, Marketing, Brand naming criteria, Islamic banks, Conventional banks 60 P a g e

61 Islamization of the Economy of Pakistan and its Impact on the Material Well-being of the People: A Critical Analysis in the light of the Provisions of the Qur an, Sunnah (pbuh) and World Bank s Criterion Dr. Naseem Razi Associate Professor of Law Faculty of Shari ah and Law, IIUI Abstract This paper aims to analyze critically, the Islamization of the economy of Pakistan and its impact on the material well-being of the People in the light of the economic provisions of the Qur an and the Sunnah (pbuh) and World Bank s designed frame of material well being. This argues that the term material well-being includes all those materials which are necessary to sustain the life and thus, equivalent to the concept of daruriyyat (necessities) introduced by Maqasid al-shari ah (Objectives of Islamic legal System). Pakistan as an Islamic Republic started to Islamize its economic and banking system in the early 1980s. The dogma of Islamization of the economy was taken as the sole solution of all the economic issues of the people arose due to interest based capitalist system. It is however, a matter of great concern that after more than 35 years of Islamization of the country s economy, more than 60% of Pakistani people have no access to the material well-being as aimed by Islamic Legal System and World Bank. This research thus, evaluates the issues relating to the material well-being of the people designed by World Bank such as income, land, home ownership, livestock and durable household goods in the light of objectives of Shari ah. It also addresses the question why Pakistani Islamic economics and finance has failed in providing material well-being to the people while it fulfills the prerequisite as being an Islamic Republic. It concludes that Pakistani Islamic economics and finance could not resolve any of the economic issues of the people and failed to provide any relief to the deprived and poor segment of the society. It further, could not facilitate the poor in achieving material well-being as recommended by Maqasid al-shari ah and the World Bank. In the end, some recommendations are suggested to improve the contemporary situation of the Islamic economics and finance at Pakistan Key words: Modern economies, Islamic economics, Islamization of the economy of Pakistan, Analysis, Conclusions, Recommendations 61 P a g e

62 Introduction The term economic growth refers to increase in a country s production or income per capita (Jeffery, 2006 Global Capitalism: Its Fall 7 Rise, p.2). In the ancient and medieval period, the concept of economic growth remained confined to the living standards at a subsistence level for the majority of the world s population (Clarence, Jr., 1979, Economic Development, p.21). The movement of rapid increase in per capita/ gross national product in the name of economic growth first began in the Western Europe, USA, Canada, Australia and New Zealand one and half century ago (Simon Kuznets, 1971, Economic Growth, p.19). Economic development refers to the rate of change and its level and impact on the economic well-being of the people (Graham Bannock, R.E. and Ray Rees. (1978). Penguin Dictionary of Economics, p.34). Material well-being is defined in the meaning of the utilization of resources for the fulfillment of the necessities of the life of the people such as income, wealth, land, livestock and home ownership (Wayne Nafzigar, 1990, The Economics of the Developing Countries, p. 13). To elaborate the link between the notion of Islamic economics and finance and material well being of the people and to have a thorough study of the movements of economics and its impact on the life of the people, this article is divided into three sections: First section will throw light on the development of modern economies and their objectives. It will throw light on the dogma of Islamic economics in the light of the economic provisions of the Qur an and Sunnah (pbuh). It will also explore the causes of behind the development of Islamic economics and banking system. Second section will discuss the process of Islamization of the economy of Pakistan and the establishment of Islamic banking system in Pakistan. It points out the major economic issues of Pakistani people related to the material well-being of the people that should be resolved through Islamic economics yet could not. In the end, some conclusions are drawn and some recommendations are given to reform the existing structure of Islamic economics in Pakistan. Section One 62 P a g e Modern Economies and Material Well-being: Historical Perspective The roots of the modern economies, economic growth and material well-being can be traced in the economics theories of mercantilism, capitalism and free trade economy (Dr. Naseem Razi, (2016), Transformation of Islamic Economics into a Global Economics,p.266). Mercantilism was a system of economics introduced in Western Europe in the 16 th century and remained in practice until the mid of the 19 th century (Arthur Lewis, 1955, The Theory of Economic Growth, p.267). During the same period, the capitalist system of economy was introduced to invite the people to invest their savings, to earn profit and to gain economic prosperity. To ensure capital growth and material well-being of the people, the financial institutions were set up to provide to the creditors benefit of their capital (Tawner, R. H. (1977), Religion and the Rise of Capitalism, p.234). Later on, in the mid of the 17 th century, economic notion of free trade economy, was introduced. This notion was based on a French term laissez-faire, which means let them do it being business people. Consequently, a movement was launched on the basis of laissez-faire and after the defeat of Napoleon (French wars) in June 1815, the business class got strengthened (Jeffery, Global Capitalism, p.7). The modern banking system is a response to the changed economic phenomenon that led the modern world to the institutional mechanism (Hayek, Friedrich, 1978, A New Studies in Philosophy, Politics, Economics and the History of Ideas, p.28). As Tawner pointed out that to meet the growing needs of the economy, the banks were motivated to play a role as creator of money by utilizing the savings of

63 the people by motivating them to give loan to banks upon a certain rate of profit, terms and condition as prescribed by the banks (p.239). Socialism as an economic system introduced as a reaction to the evils and exploitative measures of capitalism (Dr. Naseem Razi, Transformation of Islamic Economics into a Global Economics, p.271). In the 18 th century, François, Babeuf, presented the concept of shared wealth and resources by holding all private property and wealth for common use. The idea got recognition among the poor and resulted in a revolt in the 1796, under the notion of equals (Ernest Mandel, 1969, Marxist Economic Theory, p.100). Later on, Karl Marks ( ) struggled for the establishment of communist economics in the name of socialism. In this way, after a long theoretical, political struggle The Communist Manifesto of 1848 emerged and implemented on USSR by way of state policies (Friedrich Angels, 1984, Manifesto of the Communist Party, p.78). However, after the death of Stalin in March 1953, most of the socialist countries softened the version of the central planned economy and adopted a mixed economic policy (Ernest Mandel, 1969, Marxist Economic Theory, p.266). However, the prime objective of all the economies was to provide material well-being to the poor segment of the society by eliminating class system and monopolies of the feudal lords and to establish a just social order (Susan & Adrian Webb, 1986, The Economic Approach to Social Policy, p.5). Unfortunately, practically, all the system failed in achieving their goals. For instance, the mercantilist s economic policies started to exploit the poor economies particularly, of the colonized states, in favor of the economic growth of their own economies. The colonial powers started to purchase their crops and raw materials on a very low price (Dr. Naseem Razi, Transformation of Islamic Economics into a Global Economics,p.269). It later on established a belief among the colonial powers that foreign trade producing riches, riches power and power preserve their trade, religion and crown (Tawner, p.234). To sum up, all the modern economic systems like capitalism, free trade economy, capitalist banking sector, mercantilism and socialism could not provide much relief to the people and resulted in the failure of contemporary world economy in the 20 th century (Djermakoyo, IS. The Search for New Economic Order,1979, p.16). That led the economists and the social activists to think about some new World Economic Order (Naseem Razi, 2014, Islamic Banking System and Mode of Leasing, p.357). An economic system that must be free from all types of exploitation and evils of the contemporary practicing systems (Dr. Naseem Razi, Transformation of Islamic Economics, p.270). Talking about the economic aspect of the life in Islam, the issue has taken by the Qur an as one of the most significant aspect of the life of the people. For the benefit of the people, Islam adopted a just and fair socio-economic framework based on universal general principles, and described its pros and cons by itself. A great number of the Qur anic verses throw light on the importance of the economic aspect of the life by providing the solution of the socio-economic issues of the people. Unlike, the fundamental concept of the religion as normative, Islam also acknowledged the positive values of the life along with the normative values. As Prof. Khurshid Ahmad (1976) pointed out that Islam has something to contribute to the positive side of economic analysis (Studies in Islamic Economics, p.7). Allah almighty has created the humankind and has planted in him the love for the world and its adornment by declaring it an exam. It is stated in the Qur an: Beautiful to mankind is the love of lusts-woman, offspring, heaped up heaps of gold and silver, horses of mark, cattle and tillage that is the enjoyment of the present life but Allah with him is the fairest abode (Chapter,3, verse no.14). The Qur an also states: He it is Who has created for you everything on earth (Chapter, 2, verse no.29). 63 P a g e

64 Islamic legal system in fact, adapted the policy of recognition or rejection in the light of the predominant effects of each act/everything that is why the Qur anic legal injunctions describe both desirable and undesirable effects (Al-Shatibi, Al-Muwafaqat, 1979, vol. 2, p.26). For instance, with respect to drinking of wine and gambling, the Qur an states: They ask you concerning alcoholic drink and gambling. Say: In them is a great sin and (some) benefits for men, but the sin of them is greater than theirs benefits (Chapter, 2, verse no. 219). Among His countless blessings, one is that Allah Almighty has declared human kind as His Vicegerent in this world to administer justice, to ensure law and order and to legislate in the light of the changed context. It is this reason that Islam did not introduce some new Economic Order the implementation of which is incumbent upon the Muslims. Rather Islam provided a complete set of general and universal economic principles recognized by all the economic theories and the economists and considered as necessary to establish a Just Socio-economic Order in the world (Naseem Razi, Socio Ethical Dimension of Islamic Economy, 2014, p.29). As economics activity of a man is dependent upon the dynamic principles of culture, religion and ethics of a particular society, so, is the case of Islamic concept of the economy (Friedrich Angels, p.17). The issue that which economic system is suitable to a particular society has left to decide by the people in the light of the revealed economic principles and socio-economic and political circumstances of a society (Allamah Shibli Numani, Al-Farooq: A Biography of Umar, 1987, pp ). The revealed universal economic principles thus, provide a comprehensive economic framework to evaluate the changed socio-economic and political circumstances and to adopt any of the contemporary economic system of the world. The task of the Muslims is to evaluate all existing and practicing economic mechanisms in the light of the revealed economic principles and to decide its rejection or acceptance accordingly Ibn Qayyim, I lam al-muwaqqi een,1976, v.1,p.133). This is the reason that the Holy Prophet (pbuh) declared: If something belongs to the domain of your affairs, then you know all about it. (You are the best judge thereof and have the right and the capacity to deal with it according to the Shari ah (Ibn Majah, Sunnan Ibn Majah,1988, Vol.2, p.34). To ensure social justice and fulfillment of the material well-being of the people, Islamic legal system, discussed the issue with reference to maslahah/public interest (Ramadan al-buti, 2005, Ḍawabit al-maṣlahah fi al-shariʻah al-islamiyyah, p.67). Rather, declared it as the most important objective of Islamic legal system/maqasid al-shari ah (Naseem Razi, Interpretation of Statutes, 2016, p.305). Maqasid al Sharii ah is define din the meanings of intent and objective behind every legal text while maṣlaḥah is defined in the meaning of pleasure (ladhdhah) and happiness (Farah) in this world and the world hereafter ( Izz al-din Abd al-salam, 1982, Qawaid al-ahkam, p.23). Further, Islamic philosophy of economics categorized the material well-being of the people into different categories in the light of their impacts on the life of the people such as daruriyyat (necessities), hajat (needs) and tahsinat/ luxuries (Naseem Razi, Purposive Interpretation, 2013, p.12). Daruriyyat are those materials that are necessary to sustain the life of the people in the manners that if they are not available the life cannot be sustained. These necessary objects are five in number such as observance of Din, life, progeny, intellect and wealth and they are interconnected with each other like to observe and protect din and to enjoy the adornment of the world, we need people thus, protection of life and progeny becomes necessary (Al-Ghazali, Al-Mustasfa, 1976,p.255). The ḍaruriyyat are followed by ḥajat (needs) which are above in degree and access to them makes the life comfortable. The last degree of the material well-being is called as taḥsiniyyat that leads the glory of the life and accessibility to them makes the life luxurious (Imam al-shatibi, Al-Muwafaqat, vol.1, p.67). The issue that when necessities fulfill and needs or luxuries start is decided in the light of the socioeconomic condition of each society (Ibn Khalsun, Tarikh fi al-muqaddimah, 1978, p.188). As Imam Shatibi (1988) pointed out that when the people start to enjoy all basic necessities and needs in order 64 P a g e

65 to smooth their lives in easy manners, the stage of luxury gets start and what is acquired by them in order to beautify their lives, it will be part of taḥsinat (Al-Muwafaqat, p.177). The Holy Prophet (pbuh) once said: Verily! Allah is beautiful and loves beauty (Imam Bukhari, Sahih al-bukhari, v.1,p.355). It thus, leads that the primary function of the Muslim economies should be achieving material well being of the individual (Abu Yusuf, Kitab al-kharaj, 1967, p.433). Talking about the Sunnah of the Prophet (pbuh), the Prophet Muhammad (pbuh) establish the first Muslim state at Madinah where he (pbuh) succeeded to establish a just and welfare economic system that resulted in the prosperity of all the citizens (Abu Bakr Ahmad bin Hussain al- Bahiqi, 1988, Al- Sunan al-kubra, vol.2, p.331). Keeping in view, the changed context, state development, and material well-being of the people, the Prophet (pbuh) introduced the concept of restricted wealth and shared resources and income by way of state policy in form of Muwakhat al-madinah. It is not out of mention here that the Qur anic provisions regarding earning and wealth give the concept of unrestricted wealth and unlimited private ownership if earned through fair means (Ibn al- Arabi, Ahkam al-qur an, 1988, v.1,p.211). The Prophet (pbuh) however, restricted the scope of the Qur anic verses by way of contextual interpretation (Muḥammad Sa id Ashmawi, Uṣul al-shara a, 1989p.367). In this way, Sunnah (pbuh) and restricted the individual freedom of having unlimited wealth and property for the social welfare and to ensure fulfillment of material well-being of all the citizens (Imam al-razi, Al-Tafsir al-kabir, vol.1,p.544). Further, as a political head of the state of Madinah, the Prophet (pbuh) promulgated the first written constitution of the world in which the economic and political protection was guaranteed equally to all the citizens of the state (Muhammad Hamidullah, The Emergence of Islam, 1988, p.115). In the light of the Sunnah (pbuh), the four guided Caliphs continued to practice the principle of shared resources, wealth and property, by way of state-run economic policies (Imam Malik, al-muwatta, 1967, p.263). Thus, function of Islamic economics is to take necessary actions to ensure material well being of the individual such as to ensure religious practices, to provide the people means of fair earning, accessibility to proper food, clothing, medicine, home, education and to establish a system of fair distribution of wealth and resources (Abu Yusuf, Kitab al-kharaj, p.488). All this leads that the term Islamic economics should be understood in its broader meaning as a sound and universal economic framework, the function of which is to evaluate the validity of any contemporary system of economics in the light of its objectives and effects on the material well-being of the individuals. Joan Robinson (1962) stated that a sound economic system is based on a particular ideology and a set of general principles to justify them in the light of the interest and economic growth of the individuals (Economic Philosophy,p.13). In the same manners, Hobson (1929) defined a sound system of economics in the meanings of some general ethical principles to proceed from generality to the specialty to implement scientific objectivities of that system (Hobson, Work and Wealth: A Human Valuation, 1929, P.12). The contemporary movement in the name of Islamic Economics however, is a not a continuation of the economic policies of the Prophet (pbuh) and his companions rather, it was launched as a reaction against the exploitative economic policies of the developed countries (Naseem Razi, Transformation of Islamic Economics into a Global Economics, p.75). After WWII, the capitalist system succeeded to achieve an unprecedented economic growth at its home states yet failed to improve the economies of the oil producing Middle Eastern countries and their Colonies. This phenomenon led the oil producing Arab countries to realize that the capitalist industrial and economic growth intentionally confined to the developed countries by exploiting their economies. That the dogma of free trade economy had failed to develop the poor economies rather caused to restrict the future growth of those economies by imposing certain tariff regulations and preferential agreements (Ibrahim Warde, Islamic Finance in the Global Economy, p.147). Thus, a campaign 65 P a g e

66 was launched to introduce an alternative economic system in the name of Islamic Economics based on both normative and positive values of Islam to get rid of the evils of capitalism. The plea was that that Islamic economics emphasizes humanitarian issues more than material one. To achieve this goal, both Muslim and non-muslim economists and philosophers designed Islamic economic policies for the modern economies, banking sector and other commercial institutions (Naseem Razi, Socio- Ethical Dimensions of Islamic Economy and Issue of Modern Interest and RIBA: An Analysis in the Light of the Economy of the Muslim World, p.34). However, for opening Islamic banking sector, the credit goes to the western bankers who introduced the concept of Islamic banking system in the 1960s as an alternative system free from the exploitative measures of capitalist banks. (Naseem Razi, Socio-Ethical Dimensions of Islamic Economy,p.37). Keeping in view, the harmful socio-economic consequences of the capitalist banking sector, the objectives of Islamic banking sector repeatedly made clear at different platforms. That whatever mode of financing an Islamic bank adopts, must not be against the objectives of Shari ah and benefits of the public (Khir, K., & B. Shanmugam, Islamic Banking: A Practical Perspective,2008, p.12). The focus also put on the establishment of Islamic welfare states as the social justice and welfare-oriented functions of an Islamic banking system are possible only in the states, which are by definition Muslim-majority countries (Atul Huq, p.127). Section Two Islamization of the Economy of Pakistan Pakistan came into being in 1947 as an Islamic Republic. Currently, its population is about 196,174,380 million with a growth rate of 1.49% (2014). It is the only Muslim nuclear weapons country and has best armed forces. The Constitution of Pakistan 1973 declares the feature of Pakistan as an Islamic Republic and consists of many Islamic provisions like Articles, 1 & 2, which declare Islam as the state religion. Through a constitutional amendment, the Objective Resolution has been made part of the substantive provisions of the constitution (Article 2-A). It states: that sovereignty over the entire Universe belongs to Almighty Allah alone and that the authority to be exercised by the people of Pakistan within the limits prescribed by Him. The Constitution of Pakistan lays down two conditions to exercise the authority vested to the people of Pakistan. First the authority shall be exercised as sacred trust and second that the authority shall be exercised within limits prescribed by Allah Almighty (Naseem Razi, Implementation of the Judicial Rights of Mustafa, Vol 16, 2015, pp ). It also guaranteed fundamental rights that aim to provide social, economic and political justice to all in accordance with the law and public interest. Further, the Principles of Policy (Article 29-40) provide details of the responsibilities of the government to ensure rule of law and social justice. Moreover, Islamic provisions have been inserted which describe that all the existing laws shall be brought in conformity with the objectives of Islam (Articles, ). To achieve this goal, a Council of Islamic ideology was established under Articles That declares that the Council will be consisted of the experts of Islamic knowledge and philosophy of Islam as enunciated in the Holy Qur an and Sunnah and have understanding of the economic, political, legal or administrative problems of the society (See, Notification, Gazette of Pakistan 1974, extraordinary, part, II, p.165). During the regime of General Muhammad Zia-ul-Haq ( ) many laws were enacted and passed by the Parliament in the light of the recommendations of the Council particularly, hudood offences like Enforcement of Hudood Ordinance, 1979, Zakat and Ushr Ordinance,1980, Qisas and Diyat Ordinance,1984, Ihtiram-e-Ramazan Ordinance,1984, the Enforcement of Shari at Act 1991 etc. 66 P a g e

67 To Islamize economy of the country, in 1980, Nizam-e-Zakat was introduced. In the same manners, in 1981, the Council reviewed the Interest Act 1839 and by declaring it repugnant to the clear provisions of the Qur an and Sunnah (pbuh), recommended to repeal it. The Council also recommended elimination of the capitalist interest from all the institutions including banks (Annual Report, Council of Islamic Ideology, 1992,pp ). To comply theses recommendations, the then Government of Pakistan ordered the State Bank to take certain steps for the elimination of the interest from financial transactions within three years. Accordingly, the State Bank of Pakistan issued a circular to all the financial institutions to eliminate interest and to adopt 13 substitute methods of business suggested by the Council (Order 13 that issued on 20 th of June However, the target could not be achieved and at the end of three years, a four years relaxation was taken by the government by way a Constitutional amendment. It further, delayed for seven years by another Constitutional amendment that ended on 26 th of June 1990 (See, Council of Islamic Ideology, Report,1992). The council also started to examine eleven Acts of insurance in 1984 and after seven years, the working committee prepared a comprehensive report that declared the existing system of insurance as repugnant to the injunctions of Islam. It was recommended by the Council that a system of Islamic insurance should be introduced and the existing system should be replaced (See, Council of Islamic Ideology, Report,1992). The Federal Shari at Court was established in May and incorporated in the Constitution of Pakistan, 1973 under Chapter 3-A. 4 The task of the Court is to evaluate all existing laws in the light of the provisions of the Qur an and Sunnah (pbuh). Later on, in 1988, the International Islamic University was established to produce experts in comparative knowledge of law and religion. Launching Islamic banking sector in Pakistan is a part of the movement of Islamization of the economy. Currently, Pakistan s financial sector is dominated by commercial banks. In 1990s, the process of privatization of financial sector introduced that gained tremendous success. To create an appropriate environment for Islamic banks to operate in the desired direction, the government, the planners, policy makers and administrators showed their great commitment to ensure the perceived role of Islamic banks not merely like other ordinary financial intermediaries but as the institutions to dispense social justice and material well-being of the people. In 1991, the Federal Shari at Court declared the procedure at commercial banks as un Islamic. Consequently, to pursue the Islamic concept of finance, the first Islamic bank, Al-Meezan Bank was opened in 1997 ( To set a criterion for the establishment of Islamic commercial banks in private sector, and to convert the existing commercial banks to Islamic banking in the country, The Shari ah Supervisory Board was established at Al-Meezan Investment Bank in 2001 to regulate and approve guidelines for the emerging Islamic Banking industry. It was pronounced by the Board that each Islamic bank would perform its tasks as an agent/wakil of the client and would ensure access to the material well being and social justice (Khir, Islamic Banking: A Practical Perspective,p.12). Islamic bank was assigned to perform dual task. It was asked to performs general functions of a conventional bank and at the same time, Islamic recognized financing such as mudarbah, musharka and murabiaha as investment accounts. 5 It also assigned a welfare task to carry beneficial loan 4 The Federal Shari at Court was established as a substitution of the Shari at Benches of the High Court s by virtue of the president s Order No. 1 of Article 203 C (1) states that a Court will be comprised of no more than eight Muslim judges including Chief justice, nominated by the president under Article 175-A. 5 Among the ordinary functions are dealing in money, accepting deposits discounting commercial bills, acting as safe custodians of valuables, correspondents and clearing agents, trustees, executors, attorneys, collectors of dividends, selling 67 P a g e

68 account as Qard-e-hasanah and a welfare account (Ataul Huq, Development and Distribution in Islam, 1991, p.103). Section Three Impact of Islamic Economy on the Material Well-being of the People The objective behind the Islamization of the economy of Pakistan was to act upon the economic provisions of the Qur an and Sunnah, to get rid of the interest based capitalist economy, to provide relief to the poor segment of the society and to achieve material well-being of the people. The contemporary scenario also favor the process of Islamization as it was hope that being an Islamic Republic, Pakistan fulfills the prerequisites for the success of an Islamic economic system. In that particular context, the dogma of Islamization of the economy was taken as the sole solution of all the economic issues of the people faced by them due to interest based capitalist system. It is however, a matter of great concern that after more than 30 years of Islamization of the country s economy, Pakistani Islamic economy could not resolve any of the economic issues of the people and failed to provide any relief to the deprived and poor segment of the society. At present, Islamic economy is busy in opening Islamic banks everywhere throughout the country and is concerned only with its increased assets and deposits in Islamic banks by ignoring the socio-economic condition and material well-being of the people. At present, more than 60% of the population is living below the poverty line while Islamic banks are engage in a competition with conventional banks in terms of market price, exploitation of the clients by way of hidden charges, earning more and more profit and contributing in price hike etc. Like conventional banks, Islamic banks are also working for the rich while poor has no way to get some social relief at Islamic banks. Contrary to its objectives, Islamic banks could not succeed to open a window to provide qard-e-hasanah to the service sector and needy persons. At present, Pakistani economy is suffering from many issues such as budget deficit, inflation, poor tax system, misuse of zakat, poverty, human development and above all IMF and World Bank's conditions for aid. 6 Pakistani society is divided into different classes based on their assets and recourses. The following bar graph shows various groups in the light of their economic condition. foreign currency, and facilitating transfers to and from other countries. Among the Islamic modes of finance are, musharkah, mudarbah, diminishing musharkah, murabahah, salam, istisna, istijrar, ijarah (leasing) and ijarah wa iqtina etc. Likewise, Islamic banking sector also involves in different economic activities such as opening of bank account (bachat), remittance, zakat deduction, sale and purchase of foreign currency, sale and purchase of traveler s checks, etc. 6 IMF and World Bank conditions basically require a country to reduce trade and budget deficit and have a smaller government role in the economy i.e. more privatization 68 P a g e

69 Source: WB Talking about the material well-being of the individuals, at present, people are suffering from many critical issues of their survival however, have no assistance either by way of state-run economic policies or through Islamic banks. The discussion regarding material well-being of the people rather seems irrelevant. The state-run Islamic economy could not contribute in reforming the overall poor economy of the country on the one hand and in providing material well-being to the common person on the other. As this research is focused to explore the impact of Islamization of the economy of Pakistan on the material well-being of the individuals so, only the individual s economic problems are being evaluated here in the light of the World Bank s designed framework of the material wellbeing and Maqasid al-shari ah: 3.1 Individual s income as a source to get material well-being The most important source to achieve material well-being is the income of an individual that is defined as amount of money earned in a specific time in exchange of labor, sale and purchase or services and profit (Hayek, Friedrich, A New Studies in Philosophy, 1978, p.34). The gross national income is derived as the sum of GNP and the terms of trade adjustment and the gross national income of Pakistan was last measured in 2013 (WBR, 2014). The individual or per capita income is derived by dividing the total GNP with the total population of the country (Penguin Dictionary of Economics, p.78). Pakistan is among the low middle-income countries and ranks 140 th economy of the world (WBR, 2016). To become a middle-income country, Pakistan needs to enhance its per capita income to US$4,000 (Pakistan Bureau of Statics Division, 2016). With respect to income, Pakistani people are suffering from some critical issues such as low income, consumption of major portion of income on food items, low saving and income inequality etc. As far as the issue of low income is concerned, in , the GNP of Pakistan was $284 billion and per capita GNP was about US$1,512 (WB, 2016). It leads that monthly income of an individual is only Rs13365, while due to inflation and price hike, this income is unable to meet the necessities of the life of the people. A report reveals that almost 56% of the income is spent on food items and 28% on renting home (WBR,2016). Another issue is low saving as because of inflation, more than 80% of the income is spent and saving capacity is decreased. At present, the average saving rate of Pakistan is only 14%. It is reported that Pakistan has one of the lowest saving rate in the world (Economic Survey of Pakistan, ). The most critical issue is income inequality and unfair distribution of wealth and resources. Involvement of the ruling class in the entrepreneur sector has created a very abnormal situation and led many other associated economic issues like price hike. It is reported (2015) that 66% of the industrial wealth & 87% of the assets of bank & insurance is under the direct control of 22 families of the ruling class (WB,2016 ). In the same manners, since 1970s, Pakistani people are suffering from the issue of income inequality. Particularly, after Islamization of the economy, income inequality got a sharp increased. It is reported, that the poorest 20% lost share while the richest 20% gained in both the urban and rural areas between and While decline in income share of the poorest 20% was marginal because it was already meager, the erosion of income share of middle 60% was substantial resulting in considerable gain of the richest 20% indicating erosion of the middle class. The erosion of income share of middle 60% was more pronounced in urban than in rural areas (Kamel, Income Distribution in Pakistan, 2003,p.6). All this leads that the process of Islamization of the economy was not designed in the light of the true Islamic economic provisions, objectives of Shari ah and material well-being of the people. As Friedman (1962) pointed out that income inequality increases if income is transferred from the 69 P a g e

70 poor to the rich (Capitalism and Freedom, p.233). Unemployment is also a problem of Pakistani people. The unemployment rate has been increasing each year as it was 3.13% in 1990 and got a historical height as 8.27% in The primary objective of Islamic economy was to improve living standard of the common person by providing him necessities of life. Unfortunately, Islamic finance and economy in Pakistan could not find any solution in this regard 3.2 Distribution of Agricultural land as part of material well--being Agriculture contributes more than 21% of GDP and provides employment to 45% of the total labor force of the country (Census, 2010, p.19). About 83% of total agricultural land is in use. According to the estimates of Agricultural Census 2010, there were 8.26 million farms in the country. These farms were operating an area of million acres. The distribution of farm area among small and large farms was highly skewed. Farms with less than 5 acres of land constituted 64 per cent (5.35 million) of the total private farms but they operated only 19 per cent (10.18 million acres) of the total farm area. Whereas, the farms that were of 25 acres and above in size, comprised only 4 per cent (0.30 million) of the total farms but they commanded 35 per cent (18.12 million acres) of the total farm area. The average size of farm in the country was 6.4 acres whereas the cultivated area per farm was 5.2 acres (Census 2010,p.21) NUMBER OF FARMS AND FARM AREA BY PROVINCE Administrative Farm Area in Number of Use of farms by Units Acre Farms % Tenants % Out of 100% Punjab 55% 64% 86 KP % 86 Sind 19% 13% 86 Baluchistan 15% 0.38% 79 This table shows that about 86% of the farms are cultivated by way of tenancy while Islam condemns tenancy (Abu Yusuf, Kitab al-kharaj, p.324). This also leads that land distribution in Pakistan is highly unequal. In fact, after Islamization of the economy of Pakistan, the issue of the land reforms was made a controversial and complex issue. The fatawa issuing authorities interpreted the verses of the Qur an regarding earning and holding property in unscientific manners by way of word-by-word translation & literal meanings and declared holding of unrestricted property as a for granted right of the owner if earned through just and fair means. During the whole process of Islamization, the Muslim economists and muftis totally ignored the practice of the Prophet (pbuh) and four Caliphs, who restricted the scope of related verses by way of contextual interpretation (Allama Shibli Numani, Al-Farooq, p.167). Thus, the issues of the tenants could not be touched upon and left unresolved. Politically, the governments in the 1980s and early 1990s also avoided land reforms, because they drew much of their support from landowners ((Muhammad Mahroof Khan & Others, Land Distribution in Pakistan, 2003, p.65 ). All this led the large landowners to retain their power over small farmers and tenants, especially in the interior of Sind and tenancy continues on a large-scale. It is reported that almost one-third of Pakistan's farmers are tenant farmers, including almost one-half of the farmers in Sind. Tenant farmers typically give almost 50 percent of what they produce to 70 P a g e

71 landlords (Muhammad Mahroof Khan & Others, Land Distribution in Pakistan, 2003, p.65 ). The World Bank Report (2015) reveals that only 5% of the farmers have ownership of 64% of the farming land. In the same manners, 65% of the farmers have less than 2 acre land in their ownership Home ownership as a part of material well-being According to Islamic provisions of economics and World Bank plan of material well-being, home ownership is a necessary part of the material well-being and a necessity of the life. However, Pakistan has been facing housing problems in both qualitative and quantitative measures. The problem is more acute in the urban areas (Government of Pakistan ). According to 1998 Population & Housing Census of Pakistan, there were over 19.3 million housing units in the country in Current level of home ownership in Pakistan is approximately 75% majority of which about 67.7 % is in rural areas while only 32.3% is in urban cities. Contrary to it, every third Pakistani is living in the city (Government of Pakistan, ). It leads that about 78% people of urban areas are living on rent. With the inflation, the capacity of home purchasing is declining day by day. The criteria of home affordability set by World Bank is as if a house worth 4 times (4:1) the average annual salary is considered to be within the purchase capacity/affordable while world average house size is about 1300 sq ft (WBR, 2015). In Pakistan, a house size of 1300 sq ft (= 5Marla) in Pakistan is approximately Rs. 5 million ($50,000) whereas, average annual salary in Pakistan is Rs (Rs monthly salary) or 1000 dollars per year. In the light of above-mentioned formula, a house if cost Rs. 6,41,520 is affordable in Pakistan while the existing market sales this house with a huge difference that is about Rs.43,58,480 (43 lakh). In this context, the task of Islamic banks might be to evaluate the market price in the light of the global criterion to set a balance price of the average size house in the light of the average annual income of Pakistani people to ensure home ownership to the people as recommended by Objectives of Shari ah. Unfortunately, Islamic banking sector adopted the policy of conventional banks, contributed in the competition of price hike and started to sale the house by way of ijarah & diminishing musharakah on the same price and terms and conditions. Islamic Banking and finance neglected the Qur anic provisions, Sunnah of the Prophet (pbuh) and economic policies of Hadrat Umar that is why it is facing lot of objections yet has no logical appraisal. At present, only rich people can do home financing with Islamic banks while middle class and poor people have no way to own even a small house by way of Islamic finance at Islamic banks (Dr. Naseem Razi, Islamic Banking System and Mode of Leasing, p.355). For instance, if a client of 45 years of age applies to bank for leasing of a single story old house worth Rs. 10 million (5 marla), Islamic bank will offer him only 40% of the cost and will ask the client to arrange for remaing 60% in any way. It leads that client must have a saving or amount Rs. 6 million and only a rich can save or produce such a big amount. Likewise, Islamic bank charges rent against its share (units) far greater than market price (Naseem Razi, Mode of Leasing,p.356). The following table draws a sketch of such contract of lease by way of diminishing musharkah made in P a g e

72 PROPORTIONATE RENT ANALYSES Bank Customer Total Investment Share Rs.4M Rs.6M Rs.10M Units Proportion Average Rent charged Rs p/m Rs p/m Rs p/m While the full house was available on rent for rupees per month (See, Islamabad, I-10 sector). 3.4 Livestock as material well-being for the people of rural area Almost 64 % of the population of Pakistan resides in rural areas and earns its livelihood, directly or indirectly, from agricultural activities e.g. crop cultivation, livestock rearing, labor in agriculture, agriculture input supply, transportation of agricultural output to the market etc (Agricultural Census Pakistan Report). For people of rural areas, presence of some animal at each home is a necessary part of the life and a symbol of social status. The livestock sector is considered as a leading sub-sector of the agriculture sector and contributes over 11% to the GDP during which is more than the aggregated contribution of entire crop sector that is 10.3 %. Livestock production is one of the major activities of the people of rural areas. It is reported that about million people are engaged in raising livestock and earns 30-40% of their incomes (Live Stock Census, 2006). According to the Livestock Population Report, 2006, the total Cattle are 24,114,455, Buffaloes are 23,468,154, Goats are 45,738,255, and Sheep are 15,025,659 (Live Stock Census Pakistan Report,p.6) Province wise Distribution of Live Stock Total Animals in million In % 72 P a g e KP Punjab Sind 5.64m 23 Baluchistan Islamic financing and banking sector can play a constructive role in reducing poverty by assisting the poor people of Baluchistan, KP and Sind by way of qrad-e-hasanah or investment on soft terms for production of livestock. However, Islamic financing at Islamic banks has no scheme to help the poor people in raising livestock by way of qard-e-hasanah or by way of financial aid from the profit gaining in the name of Islamic finance. Investment in livestock on soft terms and conditions may increase production of milk, meat and poultry to meet rising domestic demand of ever-increasing population and produce exportable surplus as well.

73 3.5 Durable household goods as material well-being of the people The term durable household is defined in the meaning of valuable household purchased items such as washing machine, iron, computer, A.C and car. ((World Bank Definition). According to The World Bank Report, 2016, provided a data between that the average value for Pakistan during that period was 77.9 % with a minimum of % in 1991 and a maximum of percent in 1975 (World Bank Report, 2016). Talking about Islamic concept of durable household goods, such items are count as needs of the life (hajat) that facilitate the life by removing hardship of daily life (Al- Shatibi, Al-Muwafaqat, p.177). At present durable household goods are determined in the light of the socio-economic conditions of each country. Talking about Pakistan, more than 60% of the population is living below the poverty line that have no access to food, clean drinking water, proper sanitation, medicine, education and housing. In this context, the discussion about accessibility to the durable household goods is not so important. This research thus, concludes the term material well-being includes all those materials which are necessary to sustain the life and thus, equivalent to the concept of daruriyyat (necessities) introduced by Maqasid al-shari ah (Objectives of Islamic legal System). It is also concluded that that Islamic finance and banking sector is symbolic as this sector was launched not only as an ordinary financial mediator but also as an institution to provide opportunities to the poor segment of the society in achieving material well-being and necessities of the life and for the dispensation of social justice. Pakistani economy was converted into Islamic economy just by way of judicial orders without addressing the pinching economic issues of the people and without any scientific study of the root causes behind inflation and poverty. Moreover, Islamic economics and finance also politicized by the stakeholder by ignoring the issue of land reforms upon which almost 70% of the population is dependent. Islamic banks are progressing by leap and bound yet it could not introduce any policy that helps the poor in achieving material well-being that is necessities of the life. In Pakistan, all the organs of the state, the government, the judiciary, the state bank and the public, welcomed Islamic economics and finance warmly. In this context, failure of Islamic banking and finance in reducing poverty, and in achieving material well-being is a big issue to address. It is not out of mention here that Capitalism and Socialism declined just because of their ignorance of the issues of the poor. Due to failure of Islamic economics in achieving its primary goals, a common person does not feel any difference between capitalist system of economics and Islamic economics. The Islamic economy and banking sector in Pakistan is working just as a competitor of the conventional banking and finance sector. It is following capitalist system in terms of price hike, negligence towards the material wellbeing of the people, exploitation of the clients by way of hidden charges, earning more and more profit by ignoring the socio-economic conditions of Pakistani people. Moreover, Islamic economics could not succeed to open a window qard-e-hasanah to the needy person that was one of the primary objectives of Islamic financing and banking system. There is no policy for a poor who has no land, no asset, no credit. The issue how such person can be skilled, trained or provided material well being could not be addressed by Islamic fiancé and economics. This research thus, suggests reforming Islamic economics and finance in the light of its primary objectives. Providing material well being to the people is one of the primary duties of Islamic economics and finance. Islamic banking and finance is based on the Objectives of Shari ah that declares the fulfillment of the necessities/material well-being of the people as primary duty of Islamic economics and finance. It is also suggested that the modern Muslim economists and scholars should evaluate the contemporary economic systems in the light of Qur anic provisions of economics, Economic policies of the Prophet (pbuh) at Madinah (Muwakhat al-madinah) and economic policies 73 P a g e

74 of four Caliphs (particularly, Hadrat Umar) to decide their validity in Islam. For instance, the Holy Prophet (pbuh) found the people of Madinah practicing al-salam (salaf). 7 The Prophet (pbuh) did not introduce some new economic Islamic contract of sale/purchase rather prescribed certain conditions for the validity of al-salam in the light of Objectives of Shari ah such as existence of identified measure/weight, identified cost, and identified period (Ibn Rushd, Bidayatul-Mujtahid, v.2, 151). The objective was to remove the ambiguities and to make the contract just, clear, free from the element of cheating, fraud and exploitation of either party. This is what actually, intended by the economic provisions of the Qur an. The fatawa issued by the traditional Muslim jurists should be studied in scientific manners. What they decided, it was for that particular context. Blind imitation without logical understanding has condemned by Allah almighty in these wording: And when it is said to them: Follow that which Allah has been sent down, they say: Nay, we shall follow that which we found our fathers (The Qur an: chapter, 31, verse no. 32). Reference Jeffery, R., Frieden. (2006). Global Capitalism: Its Fall and Rise in Twentieth Century. New York: W.W.Norton & Co., pp.2-3.clarence Zuvekas, Jr. (1979). Economic Development: An Introduction. New York: St. Martin s,. p.21. Simon Kuznets (1971). Economic Growth of Nations Total Output and Production Structure. Cambridge Mass: Harvard University Press.p.19. Graham Bannock, R.E. and Ray Rees. (1978). Penguin Dictionary of Economics. UK: Penguin Books Ltd. p.344. Wayne Nafzigar. (1990). The Economics of the Developing Countries. USA: Prentice Hall inc. p.13. Dr. Naseem Razi. (2016). Transformation of Islamic Economics into a Global Economics: An Analysis in the Light of Capitalist and Socialist Systems of Economics. International Journal of Sciences: Basic and Applied Research. V. 30, No 3, pp ). W. Arthur Lewis. (1955).The Theory of Economic Growth. Home wood III: Richerd D. Irvin. p.267. Tawner, R. H. (1977). Religion and the Rise of Capitalism. Harmonds worth. p.234. Hayek, Friedrich. (1978). A New Studies in Philosophy, Politics, Economics and the History of Ideas. Chicago: University of Chicago Press.pp.23 34) Ernest Mandel. (1969). Marxist Economic Theory. New York: Monthly Review Press.pp Friedrich Angels. (1984). Manifesto of the Communist Party. London: J.C Burghard. pp Ernest Mandel. (1969). Marxist Economic Theory. New York: Monthly Review Press.p.266. Susan Charles & Adrian Webb. (1989).The Economic Approach to Social Policy.UK: S.T. Charles & Web.p.5 7 In the contract of salaf/salam any of the item, either cost of object or object is submitted in advance. It is narrated from Abdullah bin Abbas that when the Prophet (pbuh) came to Madinah found the people involving in Salam for two and three years (Yaslimuna fi al-tamar sanatyn wa thalath). The Prophet (pbuh) let them contue and did not forbid them from Salam. However, the Prophet (pbuh) said: He who follow Salam should o it for an identified cost, identified weight, and identified period (man aslaf falyuslif fi saman ma lum wa wazn ma lum ila ajlin ma lum) Sahih al-bukhari 74 P a g e

75 Djermakoyo, IS. (1979). The Search for New Economic Order. London: Islamic Council of Europe.p.16. Naseem Razi. (2014). Islamic Banking System and Mode of Leasing: A Comparative Analysis in the Light of Maqasid al-shari ah. Cultural and Religious Studies. V.2.No.6.pp doi: / / Prof. Khurshid Ahmad. edt. (1976). Studies in Islamic Economics. UK: The Islamic Foundation. p.7 Abu Isḥaq Ibrahim bin Musa.al-Shatibi. (1967). Al-Muwafaqat. Misr: Matba al-salfiyyah. V.2.p.35. Dr. Muhammad Muhsin Khan & Taqi-ud-Din Hilali (1985). Interpretation of the Meanings of Noble Qur an. Lahore: Darussalam Publications, 1985, see, also 5:90. Muḥammad Abdul Malik, Ibn Hashsham. (1968). Seerah al-nabawiyyah. Cairo: Matba ah Hijazi. Afzalur Rehman. (1968). Encyclopedia of Seerah of Prophet (pbuh). vol.1. p.544 Muhammad Abu Yusuf. (1956). Kitab al-kharaj, Cairo: Matba ah al-hijazi. p.477. Abu Abd Allah Muhammad bin Abi Bakr. Ibn Qayyim. (1976). I lam al-mawaqqi in an Rabb al- Alameen. Ed. Muḥayy al-din. (4 vols). Miṣr: Matba ah al-sa adah.v.1,p.145 Abdur Rehman, Ibn Khaldun. (1986). Muqaddimah fi Tarikh. Karachi: Nafees Academy. Pp Allamah Shibli Numani. (1978). Al-Farooq: A Biography of Umar (RA). Lahore: Mansoor Book House.p.133. Ibn Majah. (1988). Sunnan Ibn Majah. Cairo: Dar al-halbi.v.2, p.34 Naseem Razi (2016). Interpretation Of Statutes: A Critical Analysis In Perspective Of Islamic Jurisprudence. Vol.24., Amman: Global Society Of Scientific Research And Researchers. Pp ,ISSN (Print & Online): IJSBAR THESIS PUBLICATION, Izz al-din Abd al-salam. (1988). Qawa id al-ahkam fi Masaleḥ al-anam.damishq: Dar Ibn Kathir.p.25. Naseem Razi. (2013). Ijtihad al-maqaṣidi or Purposive Interpretation: A Comparative analysis in Modern legal Context. Al-Qalam. Vol. 18 Issue 1. Lahore: University of the Punjab. Abu Hamid, Muhammad bin Muhammad, Al- Ghazali. (1967). Al-Mustasfa. Damishq: Dar Ibn Kathir. P.433. Tahir bin Ashur. (1988). Maqaṣid al-shari ah al-islamiyyah. Misr: Dar al-baṣir li al-intaj al- Ilmi. P Imam Malik, Malik bin Anas bin Malik. (1388 A.H.). Al-Muwaṭṭa. Beirut: Dar al-kutub al-arabiyah. P.545. Muhammad Abu Yusuf. (1377 A.H.). Kitab al-kharaj. Cairo: Matb a Bulaq. p Ramadan al-buti. (2005). Fikr.p.321 Ḍawabiṭ al-maslahah fi al-shariʻah al-islamiyyah. Damishq: Dar al- 75 P a g e

76 Abu Bakr, Ahmad bin Hussain al- Bahiqi. (1988). Al-Sunan al-kubra. Hind: Taba al-ma arif. V..2.p.361. Imam al-razi. (1997). Al-Tafsir al-kabir. Beirut: Dar Ihya al-turath al- Arabi. vol.1, p.233 Ibn al- Arabi, Muhammad bin Abd Allah. Ahkam al-qur an. ed. Muḥammad al-bajawi. (4 vol). Misr: Dar Ihya al-kutub. V.1.p.322. Al- Amidi, Sayf al-din, Abu al-husyn. (1967). Al-Ahkam fi Usul al-ahkam. Misr: Mu assisat al- Ḥalabi. V.1.p.322 Muḥammad Sa id Ashmawi. (1989). Uṣul al-shara a. Beirut: Dar Iqra. P.112. Ibn Hashsham, Abu Muhammad Abdul Malik, Seerah al-nabawiyyah, Cairo: Matba ah Hijazi, n. d., vol.1,p.433. Joan Robinson (1962). Economic Philosophy. London: C.A. Watts. P.13. J. A., Hobson. (1929). Work and Wealth: A Human Valuation. New York: Macmillan. P.12. Ibrahim Warde (2005). Islamic Finance in the Global Economy. Edinburg: Edinburg University Press.pp Naseem Razi. (2014). Socio-Ethical Dimensions of Islamic Economy and Issue of Modern Interest and RIBA: An Analysis in the Light of the Economy of the Muslim World. Journal of Islamic Banking and Finance, DOI: /jibf.v2n2a3, URL: Khir, K., L.Gupta & B. Shanmugam. (2008). Islamic Banking: A Practical Perspective. Malaysia: Pearson Malaysia Sdn.Bhd. Selangor. P.23. Naseem Razi. (2015). Implementation of the Judicial Rights of Mustafa (PBUH): An Analysis in the light of the Judicial System of Pakistan. Pakistan Journal of Islamic Research. Vol 16, 2015, pp Gazette of the Government of Pakistan Notifications. Extraordinary, part no. II. p.165. President s Order No. 1 (1980). Article 203 C (1) states that a Court will be comprised of no more than eight Muslim judges including Chief justice, nominated by the president under Article 175- A. www,federalshariatcourt.com/decision Khir, K., L. Gupta., & B. Shanmugam. (2008). Islamic Banking: A Practical Perspective. Malaysia: Pearson Malaysia Sdn.Bhd. Selangor. p.12. Hayek, Friedrich. (1978). A New Studies in Philosophy, Politics, Economics and the History of Ideas. Chicago: University of Chicago Press. pp.23 34). Ministry of Finance, Economic Survey of Pakistan. ( ) P a g e

77 Kemal, A.R. (2003). Income Distribution in Pakistan and Agenda for Future Direction of Research, Human Conditions Report. Islamabad: Centre for Research on Poverty and Income Distribution. Friedman. Milton. (1962). Capitalism and Freedom. Chicago: University of Chicago Press. pp Muhammad Mahroof Khan, Jianhua ZHANG, Muhammad Saim Hashmi Muhammad & Saim Hashmi,. (2011).Land Distribution, Technological Changes And Productivity In Pakistan s Agriculture: Some Explanations And Policy Options. International Journal of Economics and Management Sciences. Vol. 1. No. 1. pp html,1994 World Bank Report. ( ). Naseem Razi. (Dec., 2014). Islamic Banking System and Mode of Leasing: A Comparative Analysis in the Light of Maqasid al-shari ah. Cultural and Religious Studies. Vol.2.No.6.pp Doi: / / Agricultural Census. ( 2010). The Household Integrated Economic Survey (2011). Government of Pakistan Statistics Islamabad: Pakistan Bureau of Statistics. P.34. Division. Dr. Naseem Razi. (2014). Socio-Ethical Dimensions of Islamic Economy and Issue of Modern Interest and RIBA: An Analysis in the Light of the Economy of the Muslim World. Journal of Islamic Banking and Finance. DOI: /jibf.v2n2a3 Imam Bukhari (1990). Sahih al-bukhari. Lahore: Mansoor Publications. v.1,p.355. Muhammad Hamidullah. (1988). The Emergence of Islam. Islamabad: Islamic Research Institute.p.115. Ataul Huq. (1991). Development and distribution in Islam. Malasia: Pelanduk Publications. p.127 Annual Report, (1992). Council of Islamic Ideology, Pakistan. Islamabad: Ideology. pp Council of Islamic Pakistan Bureau of Statics Division, http/ Agricultural Census Pakistan Report, pakistan-report The Household Integrated Economic Survey, Government of Pakistan Statistics Division Pakistan Bureau of Statistics Islamabad, 2011 Ibn Rushd, Abu al-walid. (1988). Bidayatul-Mujtahid wa Nihayatul-Muqtasid. Lahore: Islamic Publications. v.2, p P a g e

78 Optimal Islamic Capital Structure - Efficiency Comparison of Profit Sharing and Debt Farah Riaz Lecture (CIIT) Sahiwal Campus Abstract A widely held perception among economists is that sharing arrangements are less efficient compared to first-choice solutions. In general, it is said that revenue sharing arrangements such as equity financing or sharecropping are inefficient. The conflicts between shareholders and managers arise because managers hold less than 100% of the residual claim. Consequently, they do not capture the entire gain from their profit enhancement activities, but they do bear the entire cost of these activities. If the project is financed through a fixed-payment contract, such as debt, then the entrepreneur has to pay a fixed amount r, which does not affect marginal conditions. Thus a fixed-payment contract is superior in terms of efficiency to a sharing contract. This argument represents an essential ingredient in models of 'optimal financial contracts'. Another important ingredient in the presence of asymmetric information is deterministic monitoring, where the financier monitors in some states but not others. Combining a fixed-payment arrangement with deterministic monitoring, it trivially follows that debt becomes the optimal form of financing. It is further concluded that the there is no difference in the efficiency of the debt and the profit sharing financing as both are equally efficient. The capital structure through the Islamic finance tools are also being done and can be made optimal by decreasing the cost of capital of the financing tools. Moreover, the required rate of return in Islamic finance does not depend on the consumption of today s and tomorrow but depends on the today s return and tomorrow return. The new approach in Islamic economics would be to allocate income inter-temporally among savings in real investment. Therefore, in an Islamic economy the choice to the investor is not between today s and tomorrow s consumption, but rather between today s investment returns and tomorrow s investment return. Keywords: Equity financing, sharecropping, entrepreneur s effort, marginal disutility of effort, fixedpayment contract, optimal financial contracts, asymmetric information. 78 P a g e

79 Restructuring the Islamic Financial Institutions and Tools of their Operations: A Real Success Factor Prof. Dr. Ayub Ahmad Professor of Islamic Finance, Director Research at Riphah International University Islamabad Abstract Islamic banking and finance has crossed the milestone of forty years since the Dubai Islamic Bank and the Islamic Development Bank were formally established in But, Islamic finance intuitions (IFIs) use Islamic equivalents of almost all conventional finance products for financing and liquidity and risk management, from over draft to the most toxic derivatives like swaps to compete with the conventional banks in profitability. This, on the one hand, has caused credibility problem for Islamic system of finance, and on the other hand a sense of depression and hopelessness for those pioneers who visualized resolution of the problems facing the mankind by introducing Islamic principles of business and finance. The objective of this paper is to analyze the performance of the IFIs and discuss the opportunities, potential and the challenges, keeping in view the recent developments in global finance and practices of Islamic finance industry. It suggests an international protocol to solve the problems facing global as also national economies and finance by adoption of the Lawthat money can earn return only by way of taking business risk and adding value for the parties concerned. It requires different policy approaches, new structures of finance as a business, new models, procedures and fresh thought to relate banking and finance with the real economy. Ethical and responsible finance is the need of the global economy and finance and the IFIs have to serve as the role model for transition to such finance. The jurists and Islamic finance professionals should explore the Sharī ah rules and real business potentials to find answers to the current Islamic banking conundrum and lead the industry on the right path of developing Sharī ah based ethical products. Keywords: Islamic finance, Maqāsid al-sharī ah, Sharī ah Compliance, Money creation, Role of Shariah Scholars / Boards. 79 P a g e

80 Private Credits and Islamic Finance Mufti Ahsan Waquar Chairman Shariah Board at NBP-Aitemaad Abstract The major objective of the research is to develop the model of totally interest free banking as mandated and emphasized in Islamic laws. At present, even Shariah compliant banks borrow money from the central bank at a fixed rate and then lend the money at different rates off-course after adding the markups. I am not really sure as to how this can be called Sharia compliant or totally a halal way doing banking. From the modern economic stand point since the central bank is not the stake-holder in this only the commercial banks assumes all the risks, the project appraisal is not good at times leading to diverse kind of problems in the banking sector. The idea behind the study is that model be developed and tested where central bank is also the stakeholder(partner) in the borrowing and lending processes of commercial banks. It is suggested that the central bank should not lend money to commercial banks at a fixed rate, instead it should be partner with the commercial in their lending practices. 80 P a g e

81 External Shariah Audit Report Overview Mr. Umer Suleman Global KYC Risk Lead at HSBC, London Abstract The contents of this seminal report is underpinned by insights from a series of over 30 exclusive indepth interviews that have been undertaken with key stakeholders in Bahrain, Oman, Malaysia and Pakistan covering regulators, auditors and financial institutions. The main focus of the report will be on the following areas: 1. Development of International Policies and Regulations A jurisdictional analysis of current external shariah auditing requirements. Content will come from a review of issued guidelines supplemented by regulator interviews to obtain views and experiences (the thinking and challenges) associated with developing their shariah assurance regulatory guidelines. 2. Implementation of External Shariah Audit A focus on implementation issues (analysing the practical experiences) with the objective of providing high level illustrative guidance on key issues associated with the execution of external shariah auditing. The contents of this section will explore the practical considerations in the lifecycle of an external shariah audit for e.g. shariah audit risk assessment and process and management controls self-assessment. 81 P a g e

82 The Impact of Financial Measures, Earnings Management and Sukuk Structure on Sukuk Rating Sana Affandi Mphil Scholar Quaid-i-Azam University, Islamabad Hina Affandi Lecturer, Business and Economics Department, Foundation University, Rawalpindi Abstract This study has revealed the influence of financial measures, earnings management and sukuk structure on sukuk rating in Pakistan. In this research, independent variables are financial measures (financial leverage, profitability and issue size), earnings management (return on assets, firm size and firm age) and sukuk structure (musharakah, murabahah, mudarabah and ijarah) whereas, the dependent variable is the sukuk rating. This study analyses the sukuk issuing firms of Pakistan using regression and correlation via empirical findings. Data has been gathered from annual reports of all those sukuk issuing firms which are listed in Pakistan Credit Rating Agency after nominating them from the security and exchange commission database which has been subject to numerous selection standards. It is hypothesized that financial measures, earnings management and sukuk structure, have significant influences on sukuk rating and these significant influences have been confirmed by the results of the study. The data has been taken for the period of 2011 to Financial measures indicator that is financial leverage has positive influence on sukuk rating whereas profitability and issue size have negative influence on sukuk rating. The indicators of earnings management that are return on assets, firm size and firm age have negative influence on the sukuk rating. Sukuk structure is found to have negative influence on sukuk rating. This study can be further continued by researchers with behavioural finance variables and by keeping control on to the financial measures, earnings management and sukuk structure; sukuk ratings can be improved which would persuade investors to invest in sukuks in Pakistan. Key Words: Financial Measures, Earnings Management, Sukuk Structure, Sukuk Rating Introduction and Background of the Study Practical indications have been found to be documented illustrating that issuance of sukuk play key roles in ratings of Islamic bonds which are known as sukuk ratings. In this modern era, sukuk have become an essential part of financial framework and effectively fulfils the needs of banking sector (Sukor, et al. 1970). Apart from banking sectors, other type of industries are also keeping hands on issuing sukuk in markets for fulfilling their credit requirements. In the early years of 21 st century, Europe has introduced sukuk following seminal shariah-compliant and accelerated the issuance of sukuk in response to increase in real estate investment (McMillen 2007).Mechanics of sukuk market development have been focused in prior studies; particularly in Southeast Asia after occurrence of the financial crisis (Sharma 2001). According to Islamic Economics Project analysis under the title Sukuk Market in Pakistan Set for Take-Off, apart from Muslim countries, non- Muslim majority countries are also taking interest in it. UK treasury is issuing a Sukuk worth of P a g e

83 million. Inadequate researches on this area in Islamic finance provide the inspiration to conduct this research analysing the impact of financial measures, earnings management and sukuk structure on sukuk rating by considering the Pakistani firms offering sukuk securities. The purpose of this research is to deliver empirical and practical findings that whether or not financial measures, earnings management and sukuk structure have significant impact on sukuk rating of sukuk issuing firms in Pakistan with considering year in which sukuk have been issues, industry which is offering these sukuk and corporate governance quality as control variables. This study will investigate the relationship between aforementioned independent variables (i.e. financial measures, earnings management and sukuk structure) and dependent variable (sukuk rating). Moreover, this research is intended to highlight the influence of financial measures i.e. financial leverage, profitability and issue size on sukuk rating, influence of earnings management i.e. return on assets, firm size and firm age on sukuk rating and also the influence of sukuk structure i.e. musharakah, murabahah, mudarabah and ijarah sukuk on sukuk rating. To see whether there is noteworthy significant relationship between financial measures and sukuk rating by considering financial leverage, profitability and issue size, to see whether there is significant relationship between earnings management and sukuk rating by considering return on assets, firm size and firm age and to see whether there is significant relationship between sukuk structure and sukuk rating by considering musharakah, murabahah, mudarabah and ijarah sukuk. This study provides the guidance to the firms issuing sukuk in Pakistan. The findings of this study will redound to the Islamic financial system. Moreover, this study will be helpful to the firms offering sukuk that how the financial measures, earnings management and sukuk structure will influence their sukuk rating. It will also serve as a future reference for researchers on the subject of Islamic financing and companies in different industries can be benefitted by sukuk issuance. Literature Review /Theoretical Framework Sukuk Rating Characteristics in Sukuk Markets With regard to the conservative perspective, sukuk 1 are the bonds which can be described as a contract which is long term in nature offering a bondholder to be made interest and principal payment by the borrower, on pre-specified dates. Sukuk are the debt certificates or documents which are issued not only by governments but also by the organizations through which particular amount of money is borrowed from the bondholders with the promise of paying back the money with interest (Sukor, et al. 1970). However, sukuk are the Islamic notes which follow the shariah compliance and includes the shariah compliant activities. Interest in the case of sukuk refers to the profit and loss that has been shared with the bondholders from investment in some underlying activity. Bond ratings or the credit ratings of a firm are known as sukuk ratings, conventionally and referred to the future cash flows probability distribution to firms and ultimately to the bondholders, which are provided by the rating agencies. There are two types of sukuk ratings found in the literature that are for debt issues called as bond ratings or credit issue ratings and financial obligations for sukuk issuance in sukuk markets and for debt issuers in sukuk markets which refers to the creditworthiness (Huang, et al. 2004). Creditworthiness of a firm refers to the fulfilment of costs related to debt services and principal payment in future (Ashbaugh-Skaife, et al 2006). Study reveals that firms debt policy is influenced by the credit ratings (Graham and Harvey 2001). Moreover, financial 83 P a g e

84 1 Sukuk are the certificates representing an equal worth after closing the subscription and investing the money to use deliberately and have common shares and rights in tangible assets, usufructs and services or equity of a project or equity of special investment activity project (Finance 2008). leverage has an important determinant i.e. bond market access (Faulkender and Petersen, 2006). Counterparty sukuk ratings, default sukuk ratings or issuer sukuk ratings has been identified in literature(huang et al. 2004), in which default sukuk ratings has been identified for short period of time where as sukuk ratings or issue sukuk ratings are considered for extended period of time. Furthermore, rating agencies provide the definition for ratings which do not involve in providing any indication for buying, selling or holding these debt instruments (Altman and Rijken, 2004). Effects Of Financial Measures, Earnings Management And Sukuk Structure On Sukuk Ratings Relationship between Financial Measures and Sukuk Rating The extent to which the utilization of borrowed money is done by investors is referred as financial leverage and is also called debt ratio which is find by dividing the total debt by the total assets (Huang et al. 2004; Vassalou and Xing 2004). Study has indicated that financial leverage and bond ratings are inversely related to each other. Also, antitakeover propositions if found to be strong are related with lower cost of debt financing and if antitakeover propositions are weak then it is related with higher cost of debt financing 2 (Klock, et al. 2005). Mixed relationships have been found between financial measures, which are also referred as financial ratios, and sukuk yields and sukuk ratings in prior studies. Financial leverage has also been found to have significant negative correlation with ratings (Ashbaugh-Skaife, et al. 2006). No significant relationship has also been found between the financial leverage and bond ratings (Purwaningsih, 2013). A study has also illustrated that financial leverage have no effect on the 2 The study was conducted originally on two groups in which difference of about 34 basis points was found. relationship between financial ratios and sukuk yields and sukuk ratings (Kilapong andsetiawati, 2015). Many researchers have used profitability with credit ratings and with its examples(surkan and Singleton 1990, Joh 2003). Profitability has been investigated on the basis of raw and risk adjusted portfolio returns, portfolio returns on the basis of adjusted characteristics, stock returns individually and risk adjusted individual stock returns on the basis of asset pricing models which ultimately illustrated that higher raw, risk adjusted and characteristics adjusted returns have been realized by higher rated stocks relative to lower rated stocks (Avramov, et al. 2009). Negative relationship between credit risks and returns have been showed by previous researches (Dichev, 1998; Garlappi, et al. 2008; and Campbell, et al. 2008). Moreover, the relationship between credit risk and returns are found positive that is between distress risk and returns, which is calculated in a study on distance to default (Vassalou and Xing, 2004). Also profitability has been found to have no effect on the relationship between financial ratios and sukuk yields and sukuk ratings. Numerous studies have shown the firm size significance on working capital performance. Firm size has been found to have positive relationship between financial ratios and sukuk yields and sukuk ratings (Kilapong and Setiawati, 2015). Furthermore, it has been found that issue size has no significant effect on ratings of bonds (Purwaningsih, 2013). 84 P a g e

85 Hypothesis 1: Ceteris Paribas; Financial leverage, Profitability, and Issues Size have significant impact on sukuk ratings. Relationship between earnings management and sukuk ratings Worth of financial reporting has the influence of earnings management via related transactions of third party as preceding studies suggest (Jian and Wong, 2010; Lo and Wong, 2011; Shan, 2014).Earnings management are done for two incentives which drive the shareholders to involve in earnings management which are inflating earnings to avoid the losses reported and for maintaining listing status and funds raising (Jian and Wong, 2010). This in turn affect the securities demand and ultimately the listings of firms. It has been mentioned in a study that earnings management do not improve the financial reporting quality as the manipulations done by the management through transactions of related party can be observed (Lo and Wong, 2011).It has been argued that operationalization of accounting quality has been done by earnings management and value relevance Lang et al. (2006), Barth et al. (2008) and Paananen and Lin (2009). A study conducted previously has provided an insight into the earnings management model made on the accrual basis. The findings of this research have shown earnings management correlation with the financial performance that is in terms of significance of the financial performance (Dechow, Sloan and Sweeney, 1995). Earnings management tool has been used by firms in which expected and unexpected core earnings are estimated by shifting decreasing income to special items from operating expenses for the purpose of inflating the core earnings (McVay, 2006). Security valuation and investors perceptions have been affected by the line item placement in the income statement which is consistent with the behaviour of managers provided by evidences (Bartov & Mohanram, 2014). Moreover, once this shifting has been done it is difficult to unscramble them and this learning makes the investors on shifted operating expenses reappearance from the original place next year, to penalize these securities by not investing in them (McVay, 2006). Previous studies have illustrated that quality of financial reporting is influenced by related party transactions via earning management (Jian and Wong, 2010; Lo and Wong, 2011; Shan, 2014).This ultimately impacts the ratings of the credit issued in the financial markets. Earnings management has been operationalized in terms of return on assets, firm size and firm age (Shan, 2015).The hypothesis formulated on the basis of aforementioned literature is as follows: Hypothesis 2: Ceteris Paribus; Return on assets, firm size and firm age have significant impact on sukuk ratings. Relationship between Sukuk Structure and Sukuk Ratings Financial certificates are known as Sukuk which are regarded as equivalent to bond Islamically (Yean 2009). Sukuk 3 are not the conventional shares or bonds but are defined as the equal value shares which represent ownership of undivided shares in tangible assets, services, specific projects and in the activity related to special investment (Anass 2015). Generally, partial ownership in a debt refers to sukuk murabahah, partial ownership in asset is referred as sukuk al- ijara, project partial ownership as sukuk al musharakah and ownership which is partial in investments made is termed as sukuk al- istithmar.sale of debt with exclusion of selling at its face value has not been acceptable by scholars and has been considered that receivable of debt has been a noticeable proportion (Lahsasna and Lin 2012). Hypothesis 3: Ceteris Paribus; Musharakah, Mudarabah, Murabahah and Ijarah Sukuk have significant impact on Sukuk Ratings. 85 P a g e

86 Control variables Control variables are year, industry dummies, and corporate governance quality which includes state ownership concentration, foreign ownership concentration and the supervisory board. Year dummy reflects the particular year in which the sukuk have been issued.according to the perspective based upon the theory, companies with good corporate governance are projected to have abetter credit ratings.industry dummy (INDUSTRY) reflects the company's industry code in accordance with the industry classification of the Security and Exchange 3 These are defined by the AAOIFI standard norm number 17. Commission of Pakistan (Shan, 2013). From competitive advantage it has been found that companies with poor corporate governance, in which the level of corporate governance can be measured by corporate governance ratings or indices, have low credit ratings (Shan, 2015).By considering the corporate governance quality as control variable, the relationship between the other variables of this study can be better understood. The conctual model of this research is as follows: Control Variables: Year Industry Corporate Governance Quality (State Ownership Concentration, Foreign Ownership Concentration Research and Supervisory Methodology Board) The study has been made by taking data from the annual reports of all sukuk issuing firms listed in Stock Exchanges of Pakistan i.e. Pakistan, Lahore, Karachi and Islamabad. Ratings data of companies has been collected from Pakistan Credit Rating Agency from 2010 to 2015 period. After mining them from the security and exchange commission database, data has been subject to several selection criteria. First, balance sheets of the firms must have at least twelve consecutive monthly return observations. From the population, those companies that are rated by Pakistan Credit Rating Agency from 2010 to 2015 period have been selected as sample for the study. Ratings are available 86 P a g e Figure 1: The Conceptual Model

87 on annual basis. The companies which are not listed on Stock Exchanges of Pakistan that are privately owned companies have been excluded from further analysis and this study have focussed on looking publicly listed companies only. So, data from total of five companies have been available for the analysis. Rating has been assigned as AAA, AA, A and so on in which higher numerical value Variable Obs Median Mean Std.Dev Min Max assigned in this study corresponds to the lower credit rating or higher credit risk and vice versa which is similar to a previous research (Hovakimian, et al. 2009).For this study, correlation and ordered logit model has been used(torres-reyna 2012). Institutional theory has been utilized for the analysis purpose as a prior study has also used (Abulgasem, Muhamed and Ramli, 2015). Conjecture of Model on the Basis of Conceptual Framework It has been found in empirical studies conducted previously that market reactions are influenced by the ratings which bring changes to bond ratings. There have been observed more strong reactions of market to low graded bonds (Goh and Ederington, 1999)which are known as below investment grade bonds as have more risk of default and are considered poorly rated firms(hull, et al. 2004) and Purda 2007). So, in this study ordered logit regression model has been used. Ordered Logit Regression model The regression model as specified above has been used in which there are categories of dependent variable and by using ordered logit regression model (Torres-Reyna, 2012), the linear equations have been formed, with inclusion of control variables in brackets that are not undergone any operation, which are as follows: SUKUKR it = B o + B 1 FL it + B 2 PR it + B 3 ISSU it + e it (Year it, Industry it, CGQ it ) SUKUKR it = B o + B 1 ROA it + B 2 FS it + B 3 FA it + e it (Year it, Industry it, CGQ it ) SUKUKR it = B o + B 1 SS + e it (Year it, Industry it, CGQ it ) Where, firm is mentioned i and time period is given t. Moreover, e it refers to error terms in a specific model. SUKUKR is the sukuk rating influenced by FL (financial leverage), PR (profitability) and ISSU (issue size) referred as model 1. In model 2, ROA (return on assets), FS (firm size) and FA (firm age) have been taken. Model 3 is comprised of SS (sukuk structure). B o is the slope which refers to the constant term. B 1 to B 3 refers to the coefficients related to the variables of interest. Empirical Results, Analysis and Discussion Table 1 summarizes and describes the data gathered for this research. The following table illustrates the descriptive statistics of sample size used which includes, financial measures, earnings management and sukuk structure that can describe sukuk ratings. Table 1: Descriptive Statistics of Research Variables 87 P a g e

88 Financial Variables Financial Leverage Profitability Issue Size Earnings Management Return on Assets Firm Size ,500 Firm Age Sukuk Structure Musharakah, Mudarabah, Murabahah, Ijarah Sukuk Control Variables Year Industry Corporate Governance Quality State Ownership Concentration Foreign Ownership Concentration Supervisory Board Sukuk Rating Table 1 represents the descriptive statistics for this research study in which for financial variables influence, the average (median) percentage of financial leverage is 89% (113%). The standard deviation is 80% and the lower and the upper quartile value is 8%and 329% respectively. The average (median) percentage of sukuk rating held by profitability is 57% (39%), standard deviation is 63% and the lower and upper quartile is 0% and 201% respectively. The average (median) percentage of sukuk rating held by issue size is 4% (583%), standard deviation is 304% and the lower and upper quartile is 230% and 990% respectively. For the influence of earnings management, return on assets mean (median), standard deviation and lower and upper quartile values are 30% (88%), 50%, 0% and 199% respectively. For firm size, mean (median), standard deviation and lower and upper quartile values are 5698%, 48%, 2752%, 20% and 105% respectively. For firm age, mean (median), standard deviation and lower and upper quartile values are 36% (42%), 1689%, 12% and 60% respectively. For sukuk structure i.e., for musharakah, mudarabah, murabahah and ijarah sukuk the values of mean (median), standard deviation and lower and upper quartile are 240% (200%), 111%, 100% and 400% respectively. The descriptive statistics for control variables are quoted in the table above. Turning to the sukuk rating, mean (median), standard deviation and lower and upper quartile values are 56% (100%), 50%, 0% and 100% respectively. Correlation among Variables Table 2 presents the correlation among different variables of this research study.the spearman rank order correlation has been determined in this study which are depicted as follows. The correlation among the independent variables i.e. financial measures, earnings management, sukuk structure, certain control variables and the dependent variable which is sukuk rating has been shown. 88 P a g e

89 The significance level has been taken at 0.01 level. Different characteristics of the variables have been taken for each variable as mentioned in the table 2. Variables also have inter-correlations suggesting that presence of certain standard errors of coefficients on variables in the ordered logit model Table 2: Correlation FL Profit IS ROA FS FA SS Year IND SOC FOC SB SR FL 1 Profit -0.17* 1 IS -0.30* -0.07* 1 ROA -0.13* 0.36* 0.08* 1 FS -0.20* 0.09* 0.31* 0.27* 1 FA -0.39* 0.04* 0.47* 0.05* 0.50* 1 SS -0.07* 0.22* 0.50* 0.19* -0.28* -0.32* 1 Year -0.06* 0.40* 0.01* 0.18* 0.11* 0.08* 0.07* 1 IND 0.47* 0.08* 0.81* 0.01* -0.12* -0.70* 0.25* 0.00* 1 SOC -0.17* -0.07* 0.15* 0.01* 0.55* 0.87* -0.35* 0.01* -0.29* 1 FOC 0.09* -0.10* 0.17* -0.33* -0.50* 0.31* -0.15* 0.04* -0.10* 0.40* 1 SB 0.13* -0.03* 0.54* 0.11* 0.22* -0.33* -0.40* 0.04* 0.00* -0.39* -0.56* 1 SR 0.30* -0.09* -0.02* -0.09* -0.18* -0.11* -0.26* -0.05* 0.17* 0.02* 0.27* 0.18* 1 *,**,*** indicate significance at the 0.01, 0.05, and 0.10 level or better, respectively Research variable of financial leverage only has seen to have positive effects i.e which is significant at 0.01 level or below on relationship between financial measures and sukuk rating. Whereas, profitability and issue size ae found to have negative effects on the relationship between financial measures and sukuk rating with and values. Return on assets, firm size, firm age and sukuk structure are also found to havenegative relationship between earnings management and sukuk rating with values of -0.09, and and sukuk structure and sukuk rating with value of However, control variables are also found to have significant relationship with sukuk rating as illustrated in the table above. All the aforementioned variables are seen at 0.01 level of significance. Ordered Logit Regression Model Resultsand Discussion This section discusses the effects of financial measures, earnings management and sukuk structure on sukuk rating with inclusion of control variables. Interaction terms have been added in the standard model with the bivariate methodology. In this research, marginal effects has been seen. In the general model, empirical tests for sukuk rating are derived from the determinant functions of financial measure, earnings management and sukuk structurewhich is adapted from a prior study (HollisAshbaugh, 2004): Sukuk Rating= f (financial measure, earnings management, sukuk structure) The following table illustrates the ordered logit regression model results with inclusion of control variables from which following empirical models are extracted of which theoretical models have been mentioned above: Sukuk Rating = 0.31(FL) (PR) (ISSU) Sukuk Rating = -0.00(ROA) 0.07(FS) (FA) 89 P a g e

90 Sukuk Rating = 0.07 (SS) McFadden R squared value is 0.36 which shows the good model fit and p value is 0.00 which shows influence of independent variables on dependent variables for all the above three empirical models. All the independent variables that are, financial measures, earnings management and sukuk structure are found to have influence that is impact on the dependent variable on the basis of coefficients which are significant at 0.01 levelor better as illustrated in the following table that is sukuk rating with incorporating the control variables. Moreover, positive relation has been found between financial leverage, profitability, firm age and sukuk structure on sukuk rating. However, negative relation has been found between issue size, return on assets and firm size. Table 3: Ordered Logit Regression Model Predicted Estimated Coefficient Variables Sign Model-1 Model-2 Model-3 Financial Measures Financial Leverage *** (0.36) Profitability *** (0.53) Issue Size *** Earnings Management (-0.82) Return on Assets *** (-0.00) Firm Size *** (-0.37) Firm Age *** (0.16) Sukuk Structure *** Control Variables (0.08) Year Included Included Included Industry Included Included Included Corporate Governance Quality State Ownership Concentration Included Included Included Foreign Ownership Concentration Included Included Included Supervisory Board Included Included Included McFadden R-Squared 0.36 Mean 0.17 Log Likelihood Median 0.16 Skewness 0.07 Jarque-Bera 1.98 Kurtosis 1.62 Probability 0.00 *,**,*** indicate significance at the 0.01, 0.05, and 0.10 level or better, respectively Conclusion 90 P a g e

91 The basic objective of this research study was to dig out that whether financial measures, earnings management and sukuk structure have significant influences on sukuk ratings or not. Also, control variables that are year, industry and corporate governance quality are taken into consideration for this research study. The sample of this study is the 5 publicly listed Pakistani firms in the stock exchanges of Pakistan for the period of 2011 to The findings of this study suggests that financial measures indicator that is financial leverage has positive influence on sukuk rating whereas profitability and issue size have negative influence on sukuk rating due to the reason that investors intention and perceptions play major role in buying sukuk from markets and ultimately which impact the ratings. The results document that the indicators of earnings management that are return on assets, firm size and firm age have negative influence on the sukuk rating. Sukuk structure is found to have negative influence on sukuk rating. The results of this research has contribution to the vast knowledge of sukuk rating in literature associated to Islamic finance. The current study has definite limitations of simply studying certain variables with sukuk rating. This research study can further undertaken with incorporation of investors behaviours and other external and internal factors for more accurate results. On the basis of ordered logit, the three models which are mentioned above fit with the data and the results are found significant. However, longitudinal study can be done by undertaking the data for ten years which can be robust as well. References Altman, Edward I and Herbert A Rijken "How rating agencies achieve rating stability." Journal of Banking & Finance 28: Anass, PATEL "Channeling Asset-Managed Sukuk towards SMEs financing: a case study for Sukuk Mudaraba (asset finance) applied to a French SME." European Journal of Islamic Finance. Ashbaugh-Skaife, Hollis, Daniel W Collins, and Ryan LaFond "The effects of corporate governance on firms credit ratings." Journal of accounting and economics 42: Avramov, Doron, Tarun Chordia, Gergana Jostova, and Alexander Philipov "Credit ratings and the crosssection of stock returns." Journal of Financial Markets 12: Dechow, P. M., & Schrand, C Earnings quality. USA: The Research Foundation of CFA Institute. Dechow, P. M., Ge, W., & Schrand, C Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journalof Accounting and Economics, 50(2 3), Dechow, P., M., Sloan, R., G., and Sweeney, A., P Detecting Earnings Management. The Accounting Review, Vol. 70, No. 2 (Apr., 1995), pp Elhaj, M., A., A., Muhamed, N., A., and Ramli, N., M The Influence of Corporate Governance, Financial Ratios, and Sukuk Structure on Sukuk Rating. Procedia Economics and Finance Gunny, K. A The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earningsbenchmarks. Contemporary Accounting Research, 27(3), P a g e

92 Huang, Zan, Hsinchun Chen, Chia-Jung Hsu, Wun-Hwa Chen, and Soushan Wu "Credit rating analysis with support vector machines and neural networks: a market comparative study." Decision support systems 37: Jordan, J., L., Carlson, C., N., and Wilson, J., R Financial indicators measure fiscal health. Journal (American Water Works Association), Vol. 89, No. 8, Optimizing Treatment Processes, pp Kilapong, Greacee Janly Victoria and Lulu Setiawati "The Effect of Accounting And Nonaccounting Information To The Rating Of Company s Bond." Lahsasna, Ahcene and Lee Sze Lin "Issues in islamic capital markets: Islamic bond/sukuk." Pp in 3rd International Conference on Business and Economic Research (3rd ICBER 2012) Proceeding. McMillen, Michael JT "Asset securitization sukuk and Islamic capital markets: Structural issues in these formative years." Wis. Int'l LJ 25:703. McVay, S Earnings management using classification shifting: An examination of core earnings and special items. The Accounting Review, 81(3), Purwaningsih, Septi "Faktor Yang Mempengaruhi Rating Sukuk Yang Ditinjau Dari Faktor Akuntansi Dan Non-Akuntansi." Accounting Analysis Journal 2. Roychowdhury, S Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), Shaikh, S.,A. & Saeed, S. SUKUK BOND: The Global Islamic Financial Instrument. MPRA Paper No , posted 16. November Shan, Y.G., Can internal governance mechanisms prevent asset appropriation? Examination of type I tunneling in China. Corp. Gov. Int. Rev. 21 (3), Sharma, Krishnan "The underlying constraints on corporate bond market development in southeast Asia." World development 29: Sukor, M.E.A., Rusnah M., and Alwin, Y.G., "Malaysian Sukuk: issues in accounting standard." International Journal of Mechanical and Materials Engineering 16(1): Torres-Reyna, Oscar "Getting started in Logit and ordered logit regression Princeton University, princeton. edu/training/logit. pdf. Vassalou, Maria and Yuhang Xing "Default risk in equity returns." The Journal of Finance 59: Weston, J.,F. & Brigham, E.,F : Essential of Managerial Finance, Op.Git, P.48 Yean, Tan Wan "Sukuk: Issues and the way forward." International Legal News P a g e

93 Appendix Following table shows the measurement of each variable. Variable Measurement Financial Measures (Financial leverage, Profitability and issue size) Earnings Management (Return on Assets, Firm Size and Firm Age) Sukuk Structure This variable data has been taken from annual reports. Financial leverage has been measured from the formula i.e. FL= Total Debt/ Shareholder Equity. Profitability has been measured from the formula i.e. Gross Profit Margin= Sales- Cost of Goods sold/ sales The issue size of a bond offering is the number of bonds issued multiplied by the face value. The data for this variable has also been taken from annual reports. Return on Assets has been calculated from the formula i.e. Net income/ Total Assets Firm Size has been calculated by gathering the data that how many employees are working in a firm. Firm Age has been taken as number of years of a company working in a specific industry. Sukuk Structure has been operationalized as Musharakah=1, Mudarabah=2, Murabahah=3 and ijarah=4. Sukuk Rating Sukuk Rating has been operationalized as AAA=1, AA=2, A=3 and BBB=4 Control Variables Year and type of industry, to which these firms belong to, have been taken as control variables. Corporate Governance Quality indicators are state ownership concentration, foreign ownership concentration and supervisory board which have been taken as control variable. The data for these variables were not available in annual reports and website properly. So, the data has been gathered on telephone from the company. This is the reason for taking this variable as control variable in this study. The following table illustrates the name of five firms included in this study. Total No. of observations wer as five years data has been incorporated in this study. Name of Firm Pak Elektron Limited Engro Fertilizers Amreli Steels Pakistan Telecommunication Authority TPL Trakker Limited Website P a g e

94 Islamic Finance, in a the age of Black Swans and Complexities, for a Multipolar World Mughees Shaukat Head of Islamic Finance, College of Banking and Financial Studies, Oman Abbas Mirakhor Abstract The recent financial developments have given rise to a developing consensus that the unipolar economic growth regime dominated by U.S, Japan and few European centers, is under great stress. The consensus takes into consideration the present financial complexities, stresses and strains, and the ensuing uncertainty surrounding the sustainability of the unipolar regime, which has given way to a shift towards a multipolar economic setup. Scholarship has already hinted on not only better trade and investment opportunities, but also on a much more resilient global economic growth that such a shift can bring. However, there are some major obstacles that need to be overcome in order to reap fully the desired benefits of multipolarity. Continuation of debt-based financing regime (the hallmarks of which are risk transfer and risk shifting) will not necessarily allow the benefits of emerging multipolarity to accrue to the world economy. The new system can be more effective with a new regime of financing. Indications are that almost all emerging countries in Asia are actively considering risk sharing via Islamic finance as a possible alternative. Key Words: Multipolar regime, Debt stress, Complexity, Black swans, Risk Sharing, Islamic Finance 1. Introduction By 2025, Brazil, India, Indonesia, Korea, Russia are expected to join China as new growth poles in the global economy, according to a recent World Bank Global Development Horizon report, (2011). The size, dynamism and dominance in forward and backward linkages in trade and investment of an economy are the criteria for selection. However, the central rationale for this fast developing consensus is supported by the fact that the present unipolar regime dominated by U.S., is under ever increasing debt stress; creating serious doubts about its sustainability. This has led to developments where (i) The balance of global growth is shifting from developed to emerging market economies leading to the emergence of a new global economic order; (ii) there will be a shift in the drivers and sources of global trade and investment flows; and, (iii) the international reserve currency structure will move from a unitary to multicurrency regime. The evidence for the premise includes the fact that: (i) the emerging markets are leading the global growth; (ii) these economies have been a major source of origination of cross-border mergers and acquisition with a significant increase from US$27 billion in 1997 to US$254 billion in 2011 and from 576 deals to 2,447 over the same period; (iii) emerging market economy corporates have increased the strength of their presence in the global financial markets as their borrowing increased from US$123 billion in 2000 to US$461 billion by the 94 P a g e

95 end of 2010; and (iv) their borrowing costs have reduced. It is for the first time that the emerging markets have gained the status from being plain borrowers to becoming plain creditors (sheng, 2009). There are indications that the shift in the global economic growth drivers which began in the 1990s has accelerated. During the period of , twenty-nine countries had achieved sustained growth rates of 7 percent or higher for 25 years or more, thus cushioning global growth performance. Eleven of the 29 countries were African. Among these, the Asian economies were the best performers. The United Nations Economic and Social Commission for Asia and Pacific 2011, considers the region as the most dynamic in the global economy, growing at 8.8 percent in 2010 and forecasted to grow at 7.3 percent in This compares well with the anemic growth performance of the countries at the center of the present unipolar system. One of the most important implications of the shift is the potential for the emergence of multiple international reserve currencies. The Global Development Horizon, 2011 suggests three possible scenarios for the future: (i) continued dominance of the US$ as the international reserve currency; (ii) possibility of the SDR as the international reserve currency; and (iii) emergence of at least three international reserve currencies. In the first scenario, evidence suggests that the US$ is being used less and less as official reserve in invoicing of international transactions, as an anchor for other exchange rates, and in denominating international claims. The SDR, while originally designed with the intention of serving as the international reserve currency, has never been allowed to serve that function and it is not likely now. What is more likely, according to the report, is that Chinese currency will emerge as the third international reserve currency alongside the US$ and the euro. China is now the largest exporter in the world. As Chinese corporates and banks increase their activities across the world, they are likely to settle their trade, track accounts, and book their profits in renminbi. Chinese sovereign wealth funds are now among the largest in the world, China has large international reserves, and debt and equities are being issued in renminbi. Consequently expectation of its emergence as an international reserve currency is well founded. However, there are few major obstacles which if not confronted, may not only threaten the emergence of a multipolar regime, but could lead to a failure in reaping the full benefits from such a development. 2. Obstacles to the emergence of multiple growth poles The emergence of multiple growth poles in the global economy has potential benefits, the most important of which is greater resilience of emerging market economies and developing countries to idiosyncratic shocks similar to what triggered the 2007/2008 crisis. Additionally, greater trade and investment opportunities between the emerging markets of the South and low-income developing countries can be enormously helpful and effective in accelerating growth, development and poverty reduction in the latter. China has been doing that effectively since the early 1990s particularly in the low-income countries of Africa. There are, however, major obstacles to overcome. These include, inter alia, the architecture and governance of global finance. The former is woefully inadequate in providing requisite infrastructure of supervision and regulation to accommodate balanced growth of global finance. The fact is that years after the beginning of the global crisis, there is no global agreement on cross-border financial flows, there is no internationally agreed sovereign debt workout mechanism and there is no effective representative global structure for policy coordination. Moreover, the existing structures are non-representative and suffer from high democratic deficit. They make policies; impose standards and codes of conduct and international best practices on the rest of the world without an effective representation of much of the world s most dynamically growing economies. 95 P a g e

96 Last but not least, one of the obstacles to the global economic recovery and emergence of multiple growth poles is the important structure of global finance, which is overwhelmingly dominated by debt-creating flows. As the latest financial crisis suggested, this structure is imposing anew a great deal of burden and stress on the recovery and growth of the global economy. Perhaps, the stresses and shocking financial events of recent months in Europe and as well as its break down, the US are signs of regime uncertainty. The regime of interest rate-based finance is the source of much of the economic and financial uncertainty tightly gripping the global system. Moreover, the continuing adverse economic and social consequences, as well as the failure of significant policy actions to elicit the desired response, seem to provide evidence that the global financial system displays the characteristics of a complex system. Added to the shock of occurrence of fat tail events, increased poverty and worsening distribution of income and wealth in individual and collective economies have intensified regime uncertainty. 2.1.Complexity of the Interest Rate Based Debt Finance. Discussions on the complexity of the present system and its connections with the forces which render the system uncertain and unstable seem to have surged. Complex systems are dynamical and are characterized by non-linearity (Lorenz, 1993). These systems are governed by feedback loop mechanisms where small, marginal changes in the system have significantly large impact on the overall behaviour. Such arrangements are all characterized by bifurcation points at which system can either move to more stability and order or to chaos (Prigogine, 1997). There has to be zero defect policy for the system to work in an ordered way. Unavoidably, complex systems are uncontrollable and innately carry with them large elements of uncertainty and ambiguity (Wheatley, 1992). It appears that the complexity of the system is playing an added role in intensifying the system s fragility. As a result, the nexsus becomes a worthy exploration. However, it would help to first note what is meant by a system and indicate differences between simple, complicated and complex systems. A system is defined as set of elements standing in interrelations to one another (Von Bertalanffy, 1969: 38). Or, as Meadows (2000: 2) elaborates: A system is a set of things people, cells, molecules, or whatever interconnected in such a way that they produce their own pattern of behavior over time. How predictable that own pattern of behavior over time may be, depends on the nature of the system in terms of the degree of simplicity or complexity of the rules governing the interrelationship among its elements. A simple system is quite predictable because of the simplicity of its operational rules. For example, old cars had simple starting operations: placing keys in the ignition to start the engine. This represents a simple and predictable system. Complicated systems contain subsets of simple systems. Their complicated nature is often related not only to the scale but also to issues of coordination of specialized expertise. Complicated systems are also predictable (Holland, 1995). In contrast to the old cars, newer and more technically advanced automobiles represent complicated systems. Instead of a key in the ignition, push button remotes are used to start an engine. Despite considerably more complicated technologies, modern automobiles still represent predictable systems. Complex systems contain both complicated and simple subsidiary parts, but are not reducible to either (Goodwin, 1994) since they too have special requirements, including an understanding of unique local conditions (Stacey, 1992). Such systems are dynamical and are characterized by nonlinearity. Interdependency and interconnectedness of all the heterogeneous elements that build up such a system, where each part is doing its own thing, carry ability to create emergent phenomenon 96 P a g e

97 (crowding effect) with scaling, criticality and self-organization capacity; all in the absence of any central controller or coordinator (Johnson, 2007). These systems are operated, ruled and governed by feedback loops. Such arrangements are all characterized by bifurcation points at which system can either move to more stability and order or to chaos (Prigogine, 1997). There has to be zero defect policy for the system to work in an ordered way. In such a system a small marginal change is capable of creating large impact on the global behaviour of the system (Holland, 1995) with the added attribute of non-linearity (Lorenz, 1993). Unavoidably, complex systems are uncontrollable and innately carry with them large elements of uncertainty and ambiguity (Wheatley, 1992). It is impossible for the system to have a stable equilibrium (Buchanan, 2002). Over the last several decades the view that economic reality is somehow fundamentally complex has increasingly taken hold among economists, not only those focused on abstract theory but even policymakers as well (Greenspan, 2004). There are non-linearities: This can be clearly observed from an increasingly volatile nature of the financial markets and frequents booms and busts. The market is not governed by assumptions of normal distribution and Brownian motion. Instead it is irregular and non-linear (Mandelbrot and Hudson, 2004). Extreme events, involving collective phenomena (resulting from the iteration of nonlinear interactions), such as herding or alignment (as seems to occur in bubbles and crashes), are an integral part of scaling theory (itself a feature of complexity). Speculative bubbles then correspond to scaling; criticality and a self-organization process (Lux, 1996). Econophysicists argue that stock market crashes, and other economic phenomena (that are often puzzling from the perspective of standard economic theory, outliers in fact) are an entirely natural consequence of the view that economic systems, such as financial markets, are complex (Bookstaber, 2011). Hence, extreme behavior (non-linearity) and self-organization in a system is a strong indication that complexity is involved. Econophysicists argue that stock market crashes, and other economic phenomena (that are often puzzling from the perspective of standard economic theory, outliers in fact) are an entirely natural consequence of the view that economic systems, such as financial markets, are complex (Bookstaber, 2011). Hence, extreme behaviour (non-linearity) and self-organization in a system is a strong indication that complexity is involved. Prigogine (1980, 1989 and 1997) who used the notion of point of bifurcation suggests that there comes a point at which the system can proceed to more order or to disorder. Interconnectedness: (i) on a macro level each financial subsystem is interlinked to create the whole financial sector which itself is a subsystem of the whole economic order. (ii) The web of counterparties and common exposures, containing multiple agents of different types (producers and consumers; risk averse and risk takers; firms and individuals, etc.), and interacting in such a way as to generate the emergent properties and dynamics of economic systems and subsystems in the absence of any central controller (Johnson, 2007). However, what necessarily sets the dynamics of these interactions and the emergent properties towards disorder and chaos is a third interconnection termed as the complex debt structure (Askari et al. 2011). Many have conceded to the complexity and the resulting non-linearity of the financial system. While talking about the complexity and non-linearity dynamics of the financial system, where small shocks anywhere in the system are having contagious effects on the global behavior of the system, Paulos (2003: ) suggests: 97 P a g e Certainly, economists and financial experts appear to take too little notice of the complicated connections among the economic variables, even the more clearly defined ones. Interest rates, for example, have an impact on unemployment rates,

98 which in turn influence revenues; budget deficits affect trade deficits, which sway interest rates and exchange rates; corporate fraud influences consumer confidence, which may depress the stock market and alter other indices; natural business cycles of various periods are superimposed on one another; an increase in some quantity or index positively (or negatively) feeds back on another, reinforcing or weakening it and being reinforced or weakened in turn. Few of these associations are accurately described by a straight-line graph or linearity assumptions. Nonlinear dynamics more popularly known as chaos theory doesn't deal with anarchist treatises or surrealist manifestoes but with the behaviour of so-called nonlinear systems. The systems that depict non-linearity may be thought of as any collection of parts whose interactions and connections are described by nonlinear rules or equations. That is to say, the equations' variables may be multiplied together, raised to powers, and so on. As a consequence the system's parts are not necessarily linked in a proportional manner as they are, for example, in a bathroom scale or a thermometer; doubling the magnitude of one part will not double that of another nor will outputs be proportional to inputs. Not surprisingly, trying to predict the precise long-term behaviour of such systems is often futile this non-predictability is the result not of randomness, but of complexity too great to phathom.in early 1940s, a British mathematician, Alan Turing, was perhaps the first modern scientist to formulate complexity. The hallmark of his contribution was a paper he wrote about the growth of biological system in which he put forward the idea of morphogenesis (Turing, 1952). He showed that a biological system described by two simple equations with feedback loops among the variables was capable of behaving in totally unpredictable, complex patterned behavior. A decade later, an American meteorologist, Edward N. Lorenz, tried to predict the weather with computers but instead gave rise to the modern field of chaos theory, developed models with feedback loops to increase the accuracy of weather forecast (Lorenz, 1963). In another paper (Lorenz, 1964) he showed how a small twiddling of parameters in a model could produce vastly different behavior, transforming regular, periodic events into a seemingly random chaotic pattern. In summary, his models showed two things: unpredictability of weather systems and the significantly large impact of small, marginal changes in local individual element s behavior on the global behavior of the system. This last point made famous The Butterfly Effect also known as "sensitive dependence on initial conditions"8. However, Benoit Mandelbrot while reaching the same conclusion using a relatively simple equation with feedback interaction claimed further that all the theories in finance were wrong because they relied on Gaussian (normal) probability distributions and the Brownian motion, both of which assume regularities. He pointed out that nearly all economic and financial variables, particularly stock prices and commodity prices, behaved irregularly9. Their behavior, Mandelbrot argued, was better described by Fractal Geometry and mathematics than by Gaussian distribution and Brownian motion (Mandelbrot and Hudson, 2004) as they are instead characterized, Mandelbrot 8 The butterfly effect was a phrase discovered in Edward Lorenz's talk for the 139th meeting of the American Association for the Advancement of Science in Titled, Does the flap of a butterfly wing in Brazil set off a tornado in Texas. 9 Louis Bachelier (1900), in his thesis, the theory of speculation, developed the notions of stochastic process characterizing financial variables. Two main stochastic processes have become known in finance: the random walk and the martingale processes. A more encompassing approach to uncertainty uses Levy processes that allow for both jumps and smooth motion. 98 P a g e

99 99 P a g e suggested, by jumps rather than smooth motion. Since finance theories were wrong so would be their predictions; the recent financial crisis has vindicated his claims. Peters (1996) argued the need for a new way of looking at markets behavior. He claimed (similar to Mandelbrot) that the assumptions of efficient markets and rational investors in mainstream theories are a fallacy. On the basis of chaos theory he showed that in fact markets are non-linear dynamic systems with feedback effects, criticality levels as well as fractal in nature. He further argued that such a system is always far from equilibrium. Chorafas (1994) echoes both Mandelbrot and Peters and suggests that neither linearity nor the hypotheses of normal distribution can provide the right support in understanding markets. Financial analysts have to turn their attention to non-traditional means of research and analysis in figuring out financial market behavior. These new tools, he argues, come under the heading of Complexity Theory and include tools such as non-linearities, bifurcations, chaos theory, fractals and other fuzzy engineering techniques. Johnson (2007) while conferring the complexity of the financial markets suggests that complex systems have a tendency to move from order to disorder and vice versa. While arguing that such movements cannot be predicted, for financial markets, crises are actually a move towards an ordered state; sufficing that the ordered state of such a complex system is actually disorder. Similarly George (2012: 4) in the latest book titled: Nonlinearity, Complexity and Randomness in Economics, argues: Those of us who have marvelled at the non-linear feedback loops between asset prices in illiquid markets and the funding illiquidity of financial institutions exposed to these asset prices through mark-to-market accounting, margin requirements, calls for additional collateral, etc. will appreciate what is lost by this castration of the macroeconomic models. Threshold effects, critical mass, tipping points, non-linear accelerators they are all out of the window. Those of us who worry about endogenous uncertainty arising from the interactions of boundedly rational market participants cannot but scratch our heads at the insistence of the mainline models that all uncertainty is exogenous and additive. The first lesson to draw from the current crisis within Economics is clearly that our models must embrace non-linearity: linearized models with their saddle point dynamics and jump variables no longer serve any useful purpose (See George and Oxley, 1999/2008 for a detailed discussion of this point). Schweitzer et al. (2009) argue that the current economic crisis illustrates a critical need for new and fundamental understandings of the structure and dynamics of economic networks. Economic systems are increasingly built on interdependencies of both behaviour and information, leading to a global economy where credit and investment, trade and input-output flows, research and innovation all occur at a truly world scale that gives rise to a hugely complex system that is difficult to predict and control. Moreover, some inter-dependencies become obvious only during and after the crisis such as tight global credit couplings developing as self-fulfilling phenomena, without precursory signatures. The complexity of the modern global economy is exacerbated among others, by the speed and scope of credit spread across national and globally networked markets, with variable intensity of ties and of scale. A small shock in the debt repayment- through either endogenous or exogenous means can lead to mass scale effects; making the attempts to understand or control the emergent and volatile networks very difficult indeed. In particular, the danger of cascading

100 failures or the spread of opportunistic behavior through the economic networks is greater today than ever. Self-feeding effects, reinforcing each other through a co-evolving network, can lead to large-scale and abrupt consequences that may be hard to anticipate and tackle Ilya Prigogine (1980, 1989 and 1997) suggested that for a complex system, there is a point of bifurcation, a moment of truth, for the system to choose which path it follows. Chaos Theory suggests that a complex system approaching a bifurcation point becomes so sensitive that it can amplify small changes into large feedbacks. Decisions made at such a point lead the system either toward greater chaos or toward higher order (Mirakhor and Hamid, 2009, p. 231). It appears that the point of bifurcation has been operating to increase regime uncertainty. At every bifurcation point reached, policy makers seem to have made decisions that have rendered the system highly risky and more unstable; heightening the system s sensitivity to register events that can be termed as the black swan events. Hence, there is increasing uncertainty regarding the stability and sustainability of the interest rate based debt financing regime. 2.2.Unipolar regime, Debt Stress and the Black Swans. A serious problem facing the global economy today is the situation of debt over hang which has made the present system to reach a point of criticality and bifurcation; creating debilitating fears of contagion and recurrence of full-fledged global crisis. Krugman (1988) coined the term debt overhang and asserted it as a situation in which A country has a debt over-hang problem when the expected present value of potential future resource transfers in less than the debt. The fall of the Soviet Union consolidated the power of the dollar-based unipolar international trade and financial system until the 2007/2008 global crisis. The stress and strain in the unipolar system and its associated arrangement were becoming apparent in the 1990s as Japan, followed by The Asian Tigers, Russia, Argentina, and Brazil were sending distress signals. Neither the signals nor the lessons of these crises made any significant impact on the way the centers of the dollar-based unipolar system were conducting policies. The regime was quick to impose policy and structural reforms, standards and codes through the International financial institutions (IFIs) in which the US- Western Europe-Japan held major sway. However, the center of the system itself was slow to adopt the prescriptions it was writing for the emerging market economies and developing countries. The case in point was the diagnostic device: Financial Sector Assessment as well as other best international practices and codes which the IMF required from all its members. The US were one of the last to adopt them but much too late to prevent the idiosyncratic trigger of the global crisis. Consequently, The Global Risks Report 2014 analysed 50 global risks in terms of impact, likelihood and interconnections, based on a survey of over 1000 experts from industry, government and academia. The report highlights wealth gaps severe income disparity followed by unsustainable government debt chronic fiscal imbalances as the top two most prevalent global risks. IMF (2013) suggest that failure to deal with old and new risks, risked propelling the five-year old crisis into a fresh chronic phase. 100 P a g e

101 Figure 1: Top Five Risks by Likely hood and Impact Source: World Economic Forum, 2014 It can be asserted that when risks become high, so does the lack of ability to understand, control and mitigate the risks. This is a situation where risks get transformed into their stronger cases of uncertainty and ambiguity. Frank Knight explained that, at times, decisions are made based on available probability distribution of expected events. This is decision making under risk. Unlike risk however, uncertainty describes a situation where a known probability distribution is not available but it is still possible to make decisions with some subjective estimates of probability of outcomes of actions or decisions (Knight, 1921). In the 1960s this view was modified to cover circumstances under which human cognitive ability and information availability are so constrained that even subjective assessment of outcomes was not possible. Ambiguity arises under such circumstances where the intensity of ignorance can create paralysis in the decision making (Ellsberg, 1961; Erbas and Mirakhor, 2007). The result is an ideal recipe for the occurrence of those events which were deemed as highly improbable or never occurring. As a result an important concept has been added to the economic vernacular; termed as Black Swan events. Taleb (2007/2010) the inventor of the term refers to them as those events which (i) usually lie outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. As a result, the probability of the occurrence of such events is extremely low (ii) even though they have a low probability of occurrence, however, when they do occur, the events carry an extreme impact (iii) lastly, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. Recently, the global system has experienced events that would have been thought of as low probability events not long ago. These include, inter alia, the down grading of U.S from its AAA rating, the collapse of the much hailed Eurozone, the effort by Switzerland to convince the world that Swiss franc is not a safe haven, the Brazilian suggestion of bailout of advanced economy by emerging markets, China s contemplation of buying Italy s debt, and the Libor rate fixing. Cyprus s provocation of removing deposit guarantees on certain amounts of deposits. The list can go on. However, looming in the back ground of the present uncertainties in the global economy, there is a potential event termed as the mother of all black swans the effects of which may be chaotic to global economy: contagion-riddled events of sovereign default. 101 P a g e

102 It can be observed that the increasing complexity and the ensuing occurrence of black swans and nonlinearity of the debt dynamics is a pure demonstration of the Quranic concept of YAMHAQ. Allah swt tells us about the debt dynamics in Verse 276 of Chapter 2 of the Quran: Yamhaqhu Allah o arribawayurbiassadaqat (Allah swt annuls, obliterates arriba and increases Sadaqat). The part that is most relevant here is the first part of the verse Yamhaqhu Allah o arriba. Reference, for example, to Al-Mu'jam Al-Waseet, Maqayees al-lughah and Mufradaat al-quran reveals that Yamhaq that makes the Mahq of riba meansto Decrease, to Destroy completely, to take away the blessings from a thing, to negate or cancel out the positive impact of a thing, or to erase suddenly. It is thus a state of sudden and rapid decline, with the speed of destruction picking up acceleration (Shaukat et al, 2014). In order to give evidence of the adverse and non-linear debt dynamics, that is to signify the Quranic Mahq in full operation in the global economy, the findings of Reinhart and Rogoff (2008, 2009a, b, 2010a, b, 2011, 2012) and Kaminsky and Reinhart, (1999) put forward among the most finely textured, historical, analysis of the financial crisis 10. The data covers seventy countries in across all regions. The range of variables encompasses external and domestic debt, trade, GNP, inflation, exchange rates, interest rates, and commodity prices. The coverage spans eight centuries, going back to the date of independence or well into the colonial period for some countries. The authors showed that crises whatever label they carried exchange rate crisis or banking crisis have been at root debt crises (Reinhart and Rogoff, 2009a). The authors refers to the non-linearity of such consequences as the Deadly Ds : Sharp economic downturns follow banking crises; with government revenues dragged down, fiscal deficits worsen; deficits lead to more debt ; as debt piles up rating downgrades 11 follow and defaults ensue; the result of a vicious debt circle (see also Mauldin and Tepper, 2011). The studies revealed that three years after a financial crisis, central government debt increases, on average, by about 86 percent; implying that the fiscal burden of banking crisis extends far beyond the common cost of the bailouts. Moreover, real housing price declines average 35 percent, stretching out over six years. Equity price collapses on average 56 percent with the downturn spanning around 4 years. Similarly profound are the unemployment rates which rises an average of 7 percent, lasting over four years. In some cases these unemployment levels reach as high as in the range of 20percent to over 50percent including youth unemployment. Such scenarios are presently pervasive in a number of European centers, for example, the case of PIIGS nations 12 (Table 2.1). Real GDP per capita falls (from peak to trough) an average of over 9 percent or more, the duration of the downturn averages at least two-three years and production levels decline exponentially. 10 The authors introduced a comprehensive new historical database for studying banking crises, inflation, currency crashes and debasements unsurprisingly, currency and inflation crisis go hand in hand. Default through inflation has been more prevalent since World War I, as fiat money became the norm and links to gold eroded. Median inflation rates before World War I were well below those of the more recent period: 0.5 percent for and 0.7 percent for versus about 5 percent for (see Reinhart and Rogoff, 2011). 11 For a detailed discussion based on historical evidence on how a debt defaults translates into increasing country risk and eventually rating downgrades see Reinhart et al., (2003). 12 Eurozone as a whole has an unemployment rate of 12% (World Economic Report, 2013). 102 P a g e

103 Country Youth Unemployment (Jan 2012) Overall (Jan 2012) Unemployment Greece 55% 26% Spain 50% 26.5% Italy 32% 9% Portugal 35% 15% Ireland 32% 15% Table 1. Source: Author s own In another study, Reinhart et al., (2012) demonstrates the large adverse impact of debt overhang on economic growth. A study of 26 episodes of past overhangs revealed that: (i) the duration of an average overhang episode is 23 years; (ii) during the overhang period, growth declines by 1 percent over the period; and (iii) the loss of growth and the long duration of the overhang imply that cumulative shortfall in output from debt overhang is potentially massive 13 (see also Shaukat et al, 2014). Similarly, Arcand et al., (2012) while using different empirical approaches also showed that there can indeed be too much finance. In particular, similar to Reinhart and Rogoff (2011), their results suggested that finance starts having a negative effect on output growth when credit to the private sector reaches on average 60%-100% of GDP. However, Reinhart et al., (2003) while introducing the concept of debt intolerance which manifests itself in the extreme duress many economies experience at seemingly manageable debt argue that "safe" external debt-to-gdp thresholds for debt intolerant countries could be as low as 15 percent. A central and overwhelmingly cause of the Asian crisis was debt in all its dimensions. The global financial crisis has been analysed voluminously, and a variety of reasons have been given for the crisis. By far the most comprehensive has been the study by Reinhart and Rogoff (2009) which conveys a central message that all financial crises, whether currency or banking crisis, are at root debt crises. IMF had already focused on this issue in its post-asian crisis diagnostics and had recommended that emerging markets and developing countries must avoid debt-creating flows and rely on foreign direct investment. The safe level of government debt-to-gdp was less than 25 percent according to these recommendations. Reinhart and Rogoff 2010 study; Growth in a Time of Debt, confirmed that a government debt-to-gdp ratio beyond 30 percent begins to stress growth. They studied 44 countries for which data was available over a period of 200 years, dividing debt categories into: under 30 percent; percent; percent; and over 90 percent. They showed that growth comes under stress in all these categories but becomes quite seriously impaired at higher levels so that when the ratio reaches 100 percent, interest payments equal the nominal GDP. The above can be further supported by the findings of Frank Ramsey who in 1920s analysed the interaction of the rate of population growth, the growth of market determined interest rate and the growth of economy to deduce the following: if the rate of economic growth exceeded the other rates i.e. the market determined rate of interest and the rate of population growth, the economy would grow. A steady state was when all the three rates were in equilibrium; however when the market 13 Russia s default following the revolution holds the record, lasting 69 years. Greece s default in 1826 shut it out from international capital markets for 53 consecutive years, while Honduras s 1873 default had a comparable duration (see Reinhart and Rogoff, 2011). 103 P a g e

104 determined interest rate growth surpassed the growth of the economy and the growth of population, economic activity would begin a downward spiral. He found that whenever the interest rate growth surpassed the other two rates, economic progress was dampened (Ramsey, 1928). In this context it is worth noting that the artificially low interest rates contrived by central banks easy monetary policy may have disrupted economies, financial markets, and spread financial chaos as recent debt crises have clearly established. There seems to be an adverse debt dynamics at work in the global economy presently where, even at artificially low interest rates, the rates of growth of economies is not sufficient to validate the growing debt 14. Whilst the emerging economies learned the lessons of 1997/98 crises, put their macroeconomic policy house in order, reduced their exposure to sudden stops, and accumulated reserves, most advanced economies went in the opposite direction. They reduced their savings, increased consumption, ran fiscal deficits and accumulated large debts. Empirical research suggests that debtto-gdp ratio of the richest members of the G-20 will reach 120% mark by 2014 while by 2020 the U.S and the other major European centres would amass a ratio of at least 150%, with Japan and U.K going to 300% and 200% respectively. Even more disconcerting is the projected interest rate paths on their debts which would increase from 5% to 10% in all cases, and as high as 27% in U.K (BIS, 2010). These countries suffer from high unemployment, fiscal instability, low capacity utilization and high debt and leverage. Accordingly, growth is unlikely to provide a source of debt relief. Rogoff, (2011) suggests that there are now $200 trillion of financial paper in the global economy, nearly 75 percent or US$150 trillion is in interest-bearing debt. The picture becomes more disconcerting when the ensuing disequilibrium is realized. While the global GDP is growing at 3%, the debt is increasing at 7%. It would take 24years for the global GDP to double itself while a mere 10 years for the global debt to get twice as large. It is thus difficult to imagine how this massive debt volume can be validated by the underlying productive capacity of the global economy. It is Yamhaqhu Allah o arriba. It appears that the debt dynamics in global financial system has again made the system reach a point of criticality and bifurcation, where a sovereign default by one country can prove chaotic to global economy. According to John Mauldin and Jonathan Tepper (2011): When things are unstable, it isn t the last grain of sand that causes the pile to collapse or the slight breeze that causes the ruler on your finger tip to fall. Those are proximate causes. They are the closet reasons at hand for the collapse. The real reason though, is the remote cause, the farthest reason. The farthest reason is the underlying instability of the system itself. Thus far the search for ways and means of reducing the instability of the interest-based debt system has focused only on improving regulatory/supervisory structure and few reforms of financial system. Much less effort has been devoted to finding an alternative paradigm. Askari et.al, (2012: ix) suggests: reforms are little more than a bandaging of the current financial system: higher levels of capital; breaking up of financial institutions; regulation to include all financial institutions; measures to limit risk taking and to increase transparency, and more. But it is difficult to see how any of these changes will eliminate the likelihood of future financial crises. Higher capital requirements would reduce bank lending, money creation and leveraging, but there is always a chance that bad loans could still wipe out a bank s capital. Similarly, limiting the size of financial institutions would reduce, but not 14 Mauldin and Tepper (2011) contend that Clearly, we are looking at a watershed event in public spending in the United States, United Kingdom, and Europe. Because of the Great Financial Crisis, the usual benefit of a sharp rebound in cyclical tax receipts will not happen. It will take much longer to achieve any economic growth that could fill the public coffers. 104 P a g e

105 eliminate, systemic risk and the need for bailouts. Increasing transparency in the packaging, pricing, and settling of derivatives would afford investors more information on pricing and reduce, but again not eliminate, systemic risk. And on and on. Question arises as to whether there is such an alternative to the present dominant global finance system that could suit well the prospects of Economic Multipolarity. Perhaps a more practical alternative would be to step back from targeting the interest rate mechanism and focus on the incentive structure that has rendered the interest rate based debt financing such a destabilizing force in the global system. This can be accomplished by reorienting the system from relying on risk transfer and risk shifting to risk sharing- the essence of Islamic finance. Risk-sharing finance regime as an alternative Risk sharing the essence of Islamic finance, has a number of desirable characteristics that endorse it as the ideal method of financing in the age of information superhighway. It weakens the rationale for existence of age-old debt financing, i.e. lack of information and all associated informational problems (Mirakhor, 2011). Classical Arabic Lexicons of the Qur an define contracts of exchange (al-bay ) as contracts involving exchange of property rights claims in which there are expectations of gains and probability of losses, see, for example, Al Tahquiq Fi Kalamat Al Quran Al Karim; Lisan Al Arab; Mufradat Alfaz Al Quran, Arabic Lexicon, among others. These sources define al-bay as mubadalati al-maali bi al-maal. In English this can be rendered as the exchange of one set of property rights claim for another. By entering into contracts of exchange, parties improve their welfare by exchanging the risks of economic undertakings, thus allowing division of labour and specialization (see Mirakhor, 2011a). Since in the Verse the contract of exchange (al-bay) appears first and the prohibition of riba thereafter, it can be argued that requiring contracts to be based on exchange constitutes a necessary condition and no-riba the sufficient condition of existence of an Islamic financial system. Together, these conditions constitute the organizing principle of that system. The necessary condition (al-bay ) and sufficient condition (no riba) must be met for a contract to be considered Islamic. A careful consideration of all the permissible contract modes that have reached us reveals them to be basically risk sharing contracts. The instruments designed to financially empower them must also be risk sharing instruments. Historically, the proposition asserted by Muslim scholars and layman has been that prohibition of riba contracts renders Islamic finance a potent alternative to conventional finance. This is valid only when Islamic finance operates on risk-sharing basis rather than risk transfer which is the hallmark of conventional finance whose operations have culminated in repeated and, at times, devastating crises. In brief, basic value propositions of risk sharing finance are: (i) close correspondence between the real sector of the economy and its financial sector, as a result of which the rate of return in the real sector determines the rate of return to the financial sector rather than the reverse; (ii) increase resilience and stability of the financial system and the economy; (iii) financial inclusion, poverty reduction, and shared economic growth and prosperity; (iv) expanded opportunities for entrepreneurship and innovation; and (iv) greater efficiency of resource allocation. These propositions have been argued in detail elsewhere and will not be elaborated here due to focus constraint. Those interested can refer to relevant published books and research papers on this topic 15. Research has demonstrated sizeable potential welfare benefits of risk sharing (see for example, van Wincoop, 1999; Kim, S., et.al. 2005; Lee Imbs, 2006 and Shin, 2008). Analyses of the pre-crises data shows a fast growing, debt-creating process in the global financial system with increasingly tenuous 15 See, for example, Shaukat et al (2014, 2015) Shaukat and Al Habshi (2015), Mirakhor and Shaukat (2015), Askari et al (2012) and Mirakhor (2010 and 2011). 105 P a g e

106 links with the growth of the real economy. Although equity portfolio and foreign direct investment flows were growing at a more rapid pace than debt-creating flows before the global crisis, their magnitudes were not significant enough to make a dent in the low level of risk-sharing coefficients in the empirical studies. For example, study by Kim, s., et.al. (2005) showed that even in the fast growing East Asia-10 countries the size of the coefficient of risk sharing was very small and some were negative (Indonesia and Malaysia). Increased debt-creating flows, a characteristic of financial globalization in the run up of 2007/2008 crises, does not improve risk-sharing, as they either transfer or shift risk. More importantly, risk-shifting or risk-transfer financial transactions led global finance toward decoupling from real sector activities with the growth of the former outpacing that of the latter by double-digit multiples, intensifying the risk of sudden stops Mirakhor., et.al.(2012). Even the emergence of a multipolar global economy may not improve risk sharing across the globe. Perhaps the most important reason for this state of affairs is the reliance of global finance on debt-creating flows. Islam is a rules-based system in which a network of prescribed rules governs the socio-economicpolitical life of the society. Compliance with these rules renders the society a union of mutual support by requiring humans to share the risks of life (Mirakhor, 2011b).The epistemological roots of risk sharing as an organizing principle of Islamic financial system is discernible from the verse 275 of chapter 2 of the Quran. This verse, in part, decrees that all economic and financial transactions are conducted via contracts of exchange (al-bay ) and not through interest-based debt contracts (al-riba). Since in the Verse the contract of exchange appears first and no-riba thereafter, it can be argued that requiring contracts to be based on exchange constitutes a necessary condition and no-riba the sufficient condition of existence of an Islamic financial system. Together, these conditions constitute the organizing principle of that system. The necessary condition (al-bay ) and sufficient condition (no riba) must be met for a contract to be considered Islamic (Mirakhor, 2011). The method of finance that renders pay offs to financial assets contingent on the outcome of economic activities rather than on ex-ante fixed rates that must be paid as contractual obligation of the debtor regardless of the outcome of the project for which it was borrowed is technically known as state-contingent financing. Arrow-Debreu, (1971) proof of existence of a stable equilibrium for a competitive economy required that all assets must be state-contingent, i.e. their pay-offs depended on the outcome of economic activities. Residual payments to equity shares of modern corporations are the best examples of state-contingent claims. One justification for rapid globalization was that it would increase interaction in the human community and create a global village. Risk-sharing will do just that since it would require a familiarity among partners to a risk sharing contract to make it work. As demonstrated by the recent crisis, dealing at arms-length, a much-heralded characteristic of debt financing has made shifting risks from financiers to taxpayers, without their knowledge or consent, a much easier task. Because of its contingent character, a risk-sharing contract requires close coordination between maturities, values, and pay offs of assets and liabilities sides of the balance sheet. These would move simultaneously in the same direction in response to changes in asset prices. In an economy dominated by state-contingent, risk-sharing finance, there would have to be a close correspondence between the real sector activities and the financial sector, as the rates of return to the former would determine the rate of return to the latter. This alone would impose limitation on credit expansion and leverage since these would increase only to accommodate growth in the real sector. These and other characteristics assure the stability of the financial sector Askari. et.al. (2010). Risk Sharing as Value Preposition of Islamic Finance It can be argued that the notion of risk sharing financing could be framed as the value proposition of Islamic finance. Envisioned as real sector driven, the system is predominantly equity based where 106 P a g e

107 real saving are placed in the real sector, for example, in private or public projects. A pivotal feature of the dynamics is that the Islamic financial system is protected from un-backed credit expansion since banks do not contract interest bearing loans and do not create and destroy money 16. It is thus assumed that in an Islamic bank there will be a maturity match between deposits and investment (with no need for asset and liability management). Short-term deposits may finance short-term trade operations, with bank purchasing merchandise or raw materials and selling to others companies; liquidity is replenished as proceeds from sales operation are generated. For longer-term investment, longer-term funds are used. There is hence greater interdependence and close relationship between investment and deposit yields, since banks primarily accept investments on the basis of profit-loss sharing. The funds to the enterprise are also provided on the same basis. The dynamics would also in turn translate into a coordinated asset/liability maturity structure, as well as value matching. In addition the prospect of instantaneous equilibrium between the asset and liability sides of the financial/banking system, there would also be Asset/liability risk matching. While the individual financial institutions engaged in investment activities face the given risks, in and of themselves, these are not systemic and do not impact the overall stability of the financial system, as this system is immune to speculative mania, liquidity expansion, and instability of returns. The latter is assured via the same coordinated asset/liability value or maturity structure of the institutions. If asset prices decline, so will the liabilities, unlike what happens in a system dominated by interestbased debt contracts 17. Apart from providing the above ingredients of financial resilience and stability, the risk sharing based Islamic finance would also serve better the objectives of financial inclusion, poverty reduction, and shared economic prosperity via efficient resource allocation. The objective of efficient resource allocation is central to growth and stability of any financial system, allowing financial resources to receive their true opportunity cost. In an interest based debt system, the financial resources appear not to be receiving their opportunity cost. This has led to misallocation of financial resources through financial repression, a term coined in the 1970s. Risk sharing (Islamic finance) corrects this inefficiency. Repression occurs when the prices of resources do not reflect their opportunity cost. It was thought, in the 1970s, that developing countries suffer from financial repression since interest rate was administered by the governments and directed lending. Consequently the price of financial resources did not reflect the true opportunity cost of financing. As a result, the mantra that developing countries needed to get the prices right became the corner stone of financial liberalization movement later enshrined in the Washington Consensus. Liberalization meant removing barriers on prices of all resources to achieve their opportunity cost, defined as the next best alternative use of a resource. Opportunity cost of financial resources was however an exception since its opportunity cost was not the next best use of funds in the productive sector of the economy but the market rate of interest. Hence a distortion in the use of financial resources were created because of what James Tobin termed deviation between market valuation of capital and its replacement cost. Tobin further argued that this deviation is policy induced since monetary policy had significant impact on the market rate of 16 There is no credit creation out of thin air in Islamic finance. Under conventional fractional reserve banking, deposits at one bank can be instantaneously loaned out or used to purchase a financial asset and become reserves and a basis for a new loan at a second bank. The credit multiplier is determined by the reserve requirement and could be high. In case of securitization and over-leverage, the credit multiplier is theoretically infinite, leading to violent asset and product price fluctuations. 17 It is also to note that since interest rates are an economy-wide variable and therefore systematic, their risk does not get diversified away like other idiosyncratic risks of a stock would. This would also translate into a higher portfolio beta (see Bacha and Mirakhor, 2012). 107 P a g e

108 interest, meaning that, just as in developing countries, the market rate of interest in advanced economies was also administered leading to financial repression. The phenomenon of financial repression created a wedge between return to equity reflecting the rate of return to productive activities and the rate of interest. Islamic finance avoids this inefficiency given the rate of return to finance would be the real sector driven where financial resources are ultimately deployed. Immediately, the system renders a tight coupling between the financial and the real sectors and the financial sector is found fulfilling its real aim i.e. serving the real sector. It will hence be the returns to the real sector driving the economic outcomes. In this sense, Islamic finance is true financial liberalization. Data reveals that, globally, the average rate of return to the real sector is about 15% to 20% a sizable multiple of the rate of interest ranging from negative to zero to 5-7 percent. Given the importance of credit in the current financial and economic model, if credit supply is constrained by increasing its price i.e. increasing interest rates, then a reverse of the above dynamics is achieved. High interest rates lower investments which in turn lower consumption leading to a build-up in inventories and lowering growth in national output. Fallout is an increase in unemployment. If the decline in employment is more pronounced, consumption and investment decline further which further affects the national output. In case this decline continues for more than two consecutive quarters, then an economic recession is upon us. The dynamics helps recall Keynes s criticism of capitalism. In his article published in Economic Journal Symposium in 1932, Keynes explicitly associated two evils to capitalism. First is capitalism's inability to create full employment and second its ability to create highly skewed income and wealth distributions, both of which he attributed to interest rate as the villain of the piece. It can be observed that the economic functioning will be in complete contrast if the same is driven by rate of returns to the real sector. The one to one mapping of both the real and financial sector would increase investments, consumption, employment and hence economic growth in direct proportion with the increase in the returns to the real sector. As a result, credit growth is tied closely to the expected growth rate of the real economy (Shaukat et al, 2014). Accordingly, a risk sharing/equity based Islamic system would not be expected to experience deep boom and busts cycles. Moderate and brief booms and recession may be generated by good crops, productivity, technical change, or by adverse shocks. They cannot be generated by the financial system itself. Equilibrium in an Islamic economy thus structured will be stable and the rate of return to the financial sector will be fully aligned with the profit rate in the real sector of the economy. A number of influential scholars, in the past, proposed reforms that would abolish the credit system and replace it by an equity-based investment system. For instance, Walker (1873); von Mises (1976); Carrol (1965), Simons (1948); Friedman (1969) and Rothbard, (1994), opposed fictitious credit creation by banks and favoured the creation of joint stock companies which use savings to buy equities. Among the most celebrated proposals along these lines was the plan formulated in the University of Chicago, Chicago Memorandum in 1933 which called for 100% reserve money and for an equity-based investment system. Irving Fisher (1933) claimed the following advantages for this plan: (i) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money (ii) Complete elimination of bank runs. (iii) Dramatic reduction of the (net) public debt (iv) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. 108 P a g e

109 A recent IMF paper titled the Chicago Plan Revisited, studied the claims made by Fisher and others in favour of the Chicago Plan. By embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. They found robust support for all of claims made in support of the proposed plan (Benes and Kumhof, 2012). Moreover, Kotlikoff (2010) also made a proposal on similar lines suggesting Limited Purpose Banking. LBP would essentially transform all financial intermediaries with limited liability into mutual fund companies, with a single regulatory agency the Federal Financial Authority taking care of the regulatory and supervisory roles. LBP would maintain a close link between the real and the financial sector where the former will drive the later. It is often claimed that risk-sharing, or Islamic finance, increases risks in the economy. There appears to be a conceptual confusion in cognition of the justification for finance. If finance is conceived as intermediating and facilitating the link between demand for finance emanating from the real sector and the supply of finance, then there must be a close link between the real and finance sectors of the economy. In this case risks are taken in the real sector. When it comes to financing, the modality can be risk sharing, risk transfer or risk shifting. But the overall risk of the activity seeking financing does not increase. The exception is when finance is decoupled from real sector activities as it happened during the run up to the recent crisis. For a number of years during the 1990s, observers, including Hans Tietmier, the then President of Bundesbank, warned in international fora that financial decoupling was increasing the risks in global finance Menkoff, L. and Tolksorf (2001). These warnings were not attended to and consequences followed Epstein, G. (2006). Continuation of a debt-based financing regime will not necessarily allow the benefits of emerging multipolarity to accrue to the world economy. The new system can be more effective with a new regime of financing. Indications are that almost all emerging countries in Asia are actively considering risk sharing via Islamic finance as a possible alternative. Quite a few are leveraging the first-mover status of Malaysia in education, manpower training and instrument innovation in Islamic finance to introduce their own brand of risk-sharing method of financing. If these efforts succeed, the benefits of emerging multiple growth centers will be buttressed further with greater stability and resilience in the supporting financial transactions through enhanced risk sharing. Even now, risk sharing could be an effective alternative to the debt-based ways and means of helping European countries facing sovereign debt crises. For example, Eurozone could issue long-term securities with pay offs based on the GDP performance in these countries. Similarly, China could buy Italian GDP-based securities rather than the consideration reportedly being given to purchase of Italian debt. This type of risk-sharing instruments has been proposed by analysts such as Shiller, (2003) for some time now. Recently, Farmer suggested central banks purchase of equity shares to stabilize the equity markets Farmer, R. (2010). Perhaps the present regime uncertainty has created a valuable opportunity to seek alternatives to the debt-based finance regime. 109 P a g e

110 References: Andrew Sheng (2009). From Asian to Global Financial Crisis, Cambridge University Press. Arrow, K.J. (1971). Essays on the Theory or Risk-bearing Chicago: Markam. Askari, H. et.al. (2010). Stability of Islamic Finance Singapore: John Wiley. Askari, H, Iqbal, Z, Krichene, N. Mirakhor, A. (2012). Risk Sharing in Finance: The Islamic Finance Alternative. Singapore: John Wiley and Sons (Asia). Bachelier, Louis, (1900). The Theory of Speculation,. Gauthier-Villars BIS (2010). The Future of Public Debt: Prospects and Implications. By Stephen et. al, (2010). Monetary and Economics Department, Working Papers No CARROLL C.H. (1965), Organization of Debt into Currency and Other Papers, Princeton (NJ): D. Van Nostrand Company. Chorafas Dimitris N. (1994). Chaos Theory in the Financial Markets: Applying Fractals, Fuzzy Logic, Genetic Algorithms, Swarm Simulation & The Monte Carlo Method To Manage Market Choas and Volatility. IRWIN Professional Publishing. U.S.A Christina and Rother, (2010). The impact of high and growing Government debt on economic growth An empirical investigation For the euro area. ECB Working Paper series No Epstein, G. (2006). Financialization and the World Economy. New York: Edward Elgar. Farmer, R. (2010). How the Economy Works: Confidence, Crashes, and Self-Fulfilling Prophecies. New York: Oxford University Press. FISHER I. (1933), "The Debt-Deflation Theory of Great Depressions", Econometrica, vol. 1 n. 4, pp Friedman, Milton (1969). "The Optimum Quantity of Money." In M. Friedman, The Optimum Quantity of Money and Other Essays. Chicago: Aldine Goodwin, Brian. (1994). How the Leopard Changed Its Spots: The Evolution of Complexity. New York: Touchstone. Imbs et. al, (2005), The Overhang Hangover. World Bank policy Research Working Paper No John Mauldin and Jonathan Tepper (2011). End Game: The End of Debt Super Cycle and How It Changes Every Thing. Published by John Wiley & Sons. New Jersey, U.S.A Johnson, Neil (2007). Simply Complexity: A Clear Guide to Complexity Theory. One World Oxford Publications. Kim, s., et.al. (2005). Regional versus Global Risk Sharing in East Asia. KOTLIKOFF L.J. (2010), Jimmy Stewart Is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking, New York: John Wiley & Sons. Lorenz, Edward N. (1963). "Deterministic non-periodic flow". Journal of the Atmospheric Sciences, vol. 20, pages (1993), The Essence of Chaos. Seattle, Washington: University of Washington Press, P a g e

111 Mandelbrot, Benoit B.; Richard Hudson (2004). The (Mis) behaviour of Markets: A fractal view of Risk, Ruin & Reward. Perseus books group. New York. Menkoff, L. and Tolksorf (2001). Financial Market Drift: Decoupling of the Financial Market from the Real Economy? Heidelberg-Berlin: Springer-Verlag. Mirakhor,A. and I. S. Hamid (2009). Islam and Development. New York: Global Scholarly Publications.. (2011). Risk Sharing and Public Policy. Paper presented in the 5 th International Islamic capital Market Forum. Security Commission of Malaysia. Kuala Lumpur, 10 th November Mirakhor., et. al.(2012). Regime Uncertainty: Interest rate based debt financing system. Journal of Islamic Business and Management. Vol.2, Issue 2. December, Mirakhor. A. (2010). Whither Islamic Finance? Risk Sharing in an Age of Crises. Paper presented at the Inaugural Securities Commission Malaysia (SC) Oxford Centre for Islamic Studies (OCIS) Roundtable. Developing a Scientific Methodology on Shariah Governance for Positioning Islamic Finance Globally March 15, (2011). Epistemological Foundation of Finance: Islamic and Conventional. Keynote address presented at the Foundations of Islamic Finance Conference Series, Kuala Lumpur, March 8- Paul Krugman, (1996) The Self-Organizing Economy, Oxford: Basil Blackwell, This book is also a delightful introduction to the application of complexity to economics. Mirakhor, A, Krichene, N and Shaukat, M. (2012). Unsustainability of The Interest Rate-Based Debt Financing. ISRA International Journal of Islamic Finance Vol.4 issue 2. December Mirakhor, A and Shaukat, M. (2012). Survival of The Interest Rate Based Debt Financing Regime. Journal of Economy and Money Vol.6 No.2 December ). Regime Uncertainty: Interest Rate Based Debt Financing System. The Journal of Islamic Business Vol.2, Issue 2 December, (2011). Islamic Finance in the Multi polar World. Presented at the Asian Institute Finance Distinguished Speaker Series. Kuala Lumpur, 13 September Peters Edgar.E, (1996). Chaos and Order in the Capital Markets: A new view of cycles, prices, and market volatility. Second Edition. John Wiley & Sons. Progogine, Ilya (1980). From Being to Becoming. San Fransisco: W. H. Freeman And Company. Progogine, Ilya (1989). Exploring Complexity. New York: W. H. Freeman and Company. Progogine, Ilya (1997). The End of Certainty. New York: The Free Press. Reinhart, C. and K. Rogoff (2009). This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press. Reinhart, C. and K. Rogoff (2010). Growth in a Time of Debt. NBER working paper no Rogoff, K. (2011). Global Imbalances without Tears. Project syndicate, Shaukat, M. (2013). Humpty Dumpty Capitalism: The Fragility of the Interest rate based Debt System. INCEIF Research Bulletin. Available at (2014). Financing Economic Growth with Stability from Islamic Perspective. Journal of Islamic Business and Management. Vol. 4, No P a g e

112 , (2016). On The Financial and Moral Superiority of IslamicFinance. The International Journal of Financial Management (IJFM), March, 2016, IASET, India. Shaukat, M, and Alhabshi Syed Othman. (2015). Instability of Interest Based Debt Financing and The Islamic Finance Alternative. IRTI-IDB Journal of Islamic Economics Studies, Vol. 23, No. 2, October, 2015 (29-84). ROTHBARD M.N. (1994), The Case Against the Fed, Auburn (AL): Ludwig von Mises Institute. Shiller, T. (2003). The New Financial Order. Princeton : Princeton University Press. SIMONS H.C. (1948), Economic Policy for a Free Society, Chicago (IL): University of Chicago Press. Steven L. Schwarcz, (2009). Regulating Complexity n Financial Markets. Washington University Law Review. Vol 87 No.2. Taleb, Nassim Nicholas (2007/2010). The Black Swan: The Impact of the Highly Improbable. New York: Random House and Penguin. Turing. A.M (1952). The Chemical Basis of Morphogenesis. Philosophical Transactions of the Royal Society of London. Series B, Biological Sciences, Vol. 237, No (Aug. 14, 1952), pp Van Wincoop., E., (1994). Welfare Gains from International Risk Sharing, Journal of Monetary Economics, vol. 34, October, pp Van Wincoop, E., (1999). How big are Potential Welfare Gains from International Risk Sharing? Journal of International Economics, vol. 47, February, pp Walker A. (1873), The Science of Wealth, Philadelphia (PA): J.B. Lippincott & Co World Bank Report on Global Economic Prospects, World Bank, Global Development Horizon, Washington, D.C.; see also Justin Yitu Lin and Mansoor Dailami: Are We Prepared for a Multipolar World Economy? Project Syndicate, Syndicate.webarchive. 112 P a g e

113 The Interaction Effect of Trust towards Profit and Loss Sharing Element In Musharakah Financing for SMEs Prof. Dr. Dzuljastri Abdul Razak Nur Hasnida Abdul Rahman IIUM, Malaysia Kulliyah of Economics and Management Sciences International Islamic University Malaysia Abstract An Islamic equity financing, namely Musharakah financing, which operates based on profit and loss sharing (PLS) principle seems to be idle in the Islamic banking operations. Even though Islamic banks was founded based on the idea of equity financing or PLS, in reality, its application in Islamic banking operations is very minimal as the current operations of Islamic bank are dominated by the debt based financing system. This gives difficulties to a certain market segment of borrowers, especially small and medium enterprises (SMEs) in getting access to financing due to their difficulties in fulfilling debt financing requirement, mainly in providing collateral and high interest payment. Despite the resilience of Musharakah financing in the financial market, many past studies put emphasis on the need to utilize Musharakah financing for the development of SMEs. This study therefore, aims to examine the potential of Musharakah as an alternative financing for SMEs. To fulfill this objective, the main attributes of Musharakah financing, namely profit and lost sharing together with its moderating factor, namely trust were examined and tested among SMEs in Malaysia. Using survey by way of a questionnaire, this study found that the main attributes in Musharakah financing have potential in providing SMEs with greater access to financing. Furthermore, the moderating factors also play a significant role in strengthening the impact of PLS in Musharakah financing towards SMEs access to financing. The results demonstrate the viability of Musharakah financing as an alternative financing for SMEs which need crucial attention from the Islamic banks. Keywords : Musharakah, SMEs, Profit and Loss sharing, Trust 1.0 Introduction Musharakah financing, which operates based on the profit and loss sharing (PLS) principle gains less attention from the Islamic banks, particularly in financing Small and Medium size enterprises (SMEs). Most of the financing products offered by the Islamic banks for SMEs are in a form of debt, which is difficult to access by SMEs due to their inability to provide collateral and oblige high interest payment (Berger & Udell, 1998). Such limitations prevent the growth and expansion of SMEs, which is the important segment in the economic growth of many countries around the world. Thus, alternative financing, which can enhance their access to financing need to be explored. In relation to this, past studies have discussed that Musharakah has potential to function effectively in enhancing SMEs access to financing as it operates based on PLS which does not put a heavy burden on SMEs with high interest payment and collateral requirement (Veelaiporn Promwichit, Shamsher Mohamad and Taufiq Hassan, 2013; Fara Madeha, 2007; Usmani, 1999; Chapra, 1992 and Al Harran, 113 P a g e

114 1990). Nevertheless, the application of Musharakah financing is very minimal as it is commonly associated with high agency problem which exposes the banks to high financing risks (Dar & Presley, 2000). In response to this problem, this study was conducted with objectives to examine the potential of profit and loss sharing element in Musharakah financing in providing SMEs' with greater access to financing. Moreover, the interaction effect of trust in implementing PLS was also examined. This study is divided into six sections which the literature is discussed in section two, followed by research methodology in section three. The results are presented in section four and discussed in section five. Finally, section six concludes the study. 2.0 LITERATURE REVIEW Islamic banking industry shows its tremendous growth around the world including Malaysia. However, past literatures have argued that the current practice of Islamic banking has departed from its theory which is to establish justice by providing a profit sharing based financing (Siddiqui, 2001). Most of the Islamic bank's operations are dominated by Murabahah financing which creates debt. Thus, access to financing is subject to the credit worthiness of the borrower which is determined by their ability to serve high interest payment, provide sufficient value of collateral and the ability to adapt with credit rationing (Berger & Udell, 1998). Even though Murabahah financing does not charge interest, it involves high profit rate which is determined using the same benchmark with an interest rate based on conventional financing. Furthermore, the banks also imposed a collateral requirement which serves as a second way out for the banks in securing the financing in the event of default when the borrower fails to oblige principal and interest payment timely. This requirement gives difficulties to SMEs to obtain financing to assist their growth and development. Furthermore, it has also been argued that financing in Islamic banks are not fairly distributed as it is qualified only for those who has collateral and strong financial back up to oblige high profit payment (Chapra, 1992). With this, Islamic banks are seen as not supportive towards the development of SMEs which is the important segment in the economic growth of many countries around the world. This situation becomes crucial in Muslim countries where SMEs functioned as a mechanism to alleviate poverty problems faced by them. While the problems in debt financing have been long discussed in SMEs studies, there is an Islamic equity financing, namely Musharakah which seems to be ignored by the Islamic Banks. Musharakah financing for SMEs gains a very minimal attention from the Islamic bank evidencing by the non-availability of Musharakah financing products in the financial market for SMEs. Despite its resilience in the financial market, many past studies emphasis on the need to put Musharakah or PLS in place so that it can be utilized for the development of SMEs (Siti Khadijah 2010; Fara Madeha, 2007; Jalaluddin, 1999; Chapra, 1992; Al Harran, 1990 and Siddiqui, 1981). In Musharakah financing, the banks become partners in the business ventures. As a partner, the banks need to contribute capital to the business and return is based on the actual outcome of the business. The profit is shared based on the predetermined profit sharing ratio (PSR) while loss is shared based on the capital contribution ratio (CCR). As the actual outcome of the business is shared between the partners, SMEs are not burdened with predetermined high interest and principal payments as practiced in the debt financing system. They are also not constrained by the collateral requirement as a condition for financing. When the outcome of the business is shared between the financier and SMEs, the banks will put more concern on the viability of the business instead of the collateral value and ability to pay interest/ profit payment. This will provide assistance to SMEs which usually has small capital and lack of collateral to pledge to the banks. With these characteristics, Musharakah is seen as a potential financing to enhance SMEs access to financing to facilitate their growth and 114 P a g e

115 development (Veelaiporn Promwichit, Shamsher Mohamad and Taufiq Hassan, 2013; Fara Madeha, 2007; Chapra, 1992; Al Harran, 1990; Siddiqui, 1981). From the Islamic finance perspective, there is a fair distribution of financing in Musharakah financing as it is available to all business entities instead of to those who have collateral (Chapra, 1992). Furthermore, Musharakah gives fair distribution to both partners during the profit and loss period (Usmani, 1998). Many Muslim scholars such as Chapra, Siddiqui, Usmani and Al Harran are of the opinion that Musharakah financing is based on true spirit of Islamic financing using the PLS mode and thus bring justice to the contracted parties. It is against the principles of injustice when the business incurs losses; the entrepreneur bears the entire loss in spite of his hard work and entrepreneurship, while the financier gets a positive rate of return without doing anything (Chapra, 1998). Even though past studies have long discussed the viability of PLS for SMEs financing, in reality, Musharakah financing is not widely offered by the banking institution. Past studies have also discussed this happens due to Musharakah financing is more vulnerable to agency problems which expose the banks to high financing risks (Farooq, 2007 and Dar & Presley, 2000). Agency problems which happen due to the principal-agent relationship put the banks at high risks position as the customers (SMEs) have more information and knows more about the operations of the business. Thus, with the PLS in Musharakah financing, there is a probability of the customers to act in their own interest which leads to the moral hazard problems. In this situation, the element of mutual trust between the partners plays an important role in implementing Musharakah financing (Chapra, 2002). In reviewing the potential of implementing Musharakah financing effectively, Chapra has brought out a discussion on the successes of Musharakah financing in the past. In the early stages of Islamic history, the system was based largely on the PLS modes (Musharakah financing) and also interest-free loans (qard hasan). These types of financing worked quite effectively during the heyday of Muslim civilization and for centuries thereafter. Chapra has further highlighted that the main factor contributed to the success of PLS at that time was due to the climate of mutual trust among the contracted parties. There are few factors that created mutual trust at that time such as the existences of Islamic values such as honest and hard working, less complex economic environment, availability of legal instrument and the judicial system. Based on this experience, Chapra has further highlighted that in order to implement successful PLS, it is necessary to create a new environment which is compatible with modern conditions to help minimize the risks and to create a climate of trust and confidence among all the bankers in the Islamic financial market. Wilson (2000) shared the same views and argues that with Islamic values customers are more likely to disclose the true levels of their profit. This behavior creates higher levels of trust between the partners. As a result, there will be lower monitoring costs for Islamic banks. Thus, the element of trust in implementing PLS will moderate the impact of PLS towards SMEs access to financing. The above discussion which relates the potential of PLS in Musharakah financing in providing SMEs access to financing and also the interaction effect of trust in PLS is as illustrated in Figure 1. Profit & Loss Sharing (Independent Construct) H2 H1 Access to financing (Dependent Construct) Trust (Moderating Construct) 115 P a g e Figure 1 : PLS, trust and SMEs' access to financing

116 Based on the above, it is hypothesized that: - H1: Profit and loss sharing principle in Musharakah financing will positively enhance SMEs' access to financing. H2 : High level of trust will significantly moderate the effect of PLS in Musharakah financing towards SMEs' access to financing. 3.0 Research Methodology To answer the hypothesis as developed in section 2.0 above, data from SMEs in Malaysia was collected by way of survey questionnaires using a five point Likert scale. Data was collected from 411 SMEs which was analyzed using Statistical Package for Social Science (SPSS) version 23. Subsequently, to answer the hypothesis, this study used Structural Equation Modelling (SEM) with Analysis of Moment Structures (AMOS) software. SEM examines relationships between independent constructs and dependent constructs. Furthermore, the interaction effect of moderating can also be tested using SEM AMOS (Zainuddin, 2012). Thus, SEM is a suitable method to achieve the objective of this study. The results are discussed in the following section. 4.0 Results 4.1 Demographic Analysis Most of the respondents are the business owners who are also the operators of the business by 42.1%, consistent with the characteristics of SMEs which is mainly operated and managed by its owners. In terms of gender, it is observed that respondents in this research are quite balanced between males (45.5%) and females (54.5%). Most of the companies that participated in this survey have been in operation between 1 to 5 years (36.5%) followed by 29.5% (more than 10 years), 20.7% (6 to 10 years) and 13.6% (less than 1 year). In terms of sales, most of the firms recorded sales below than RM300,000 by 53.3%, indicating that most of them are micro business. This is in line with SMEs' population in Malaysia which is dominated by micro business by 77%. The remaining 46.7% of the firms recorded sales between RM300,001 to RM50 million and falls under small to medium scale SMEs. Most of the participants have less than 5 employees (53.8%) while only 4.1% of the firms have between 75 to 200 employees. Summary of the demographic information is as presented in Table 1 below: - Table 1: Demographic Information Business owner/ manager/ owner and manager Demographic Information Frequency % Business Owner Business Manager Business Owner and Manager Total Sex Male Female P a g e

117 Years in Operations Total < 1 year years years > 10 years Total Annual Sales < RM300, RM300,001 - Number of employees RM2,999, RM3,000,000 - RM14,999, RM15,000,000 - RM20,000, RM20,000,001 - RM50,000, Total < 5 employees employees employees employees Total Measurement Model Once the demographic information has been analyzed, this study proceeded to examine the relationship between PLS towards SMEs' access to financing using Structural Equation Modelling (SEM) with AMOS which involves measurement and structural modeling. First, this study assessed the validity of the measurement model followed by the good-fit of the model. Finally, the model is cross-validated to assess the moderating effects of trust and PLS towards SMEs access to financing. The study adopted maximum likelihood estimation in generating estimates of the model. The convergent performed and the results are as shown in Table 2 below. Table 2 : Convergent Validity CONSTRUCTS ITEMS STANDARDIZED LOADING CRONBACH ALPHA CR AVE PLS C C C C C Access to financing C C P a g e

118 C Structural Model Structural Equation Modelling (SEM) with AMOS was used to examine the relationship between PLS towards SMEs' access to financing. Furthermore, the interaction effect of trust in implementing PLS towards SMEs' access to financing was also tested. Figure 2 below illustrates the relationship between PLS (labeled as PL) and SMEs' access to financing (labeled as Acc). Figure 2 : Structural Model Overall, the model achieved most of the cut point of the fit indices indicating the model is fit to the data (chi-square/ df = 3.946, CFI = 0.974, RMSEA = 0.085, GFI = 0.959, AGFI = 0.922). In order to confirm H1, results of standardized estimates are observed. As shown in Table 3, the value of C.R is greater than 1.96 indicating that the probability of getting a critical ratio as large as in absolute value is less than PLS in Musharakah financing in the prediction of SMEs access to financing is significantly different from zero at level. Thus, it can be concluded that PLS has a significant and direct effect on SMEs access to financing and therefore, H1 is supported. Thus, PLS in Musharakah financing provides SMEs with a greater access to financing. Table 3 : Results of Standardize Estimates Hypothesized Path Estimate S.E C.R P Notes H *** The hypothesis is supported After direct relationship between PLS and SMEs' access to financing is examined, this study continued to examine the moderating effect of the moderating construct namely trust towards SMEs' access to financing. According to Baron & Kenny (1986), the moderator is a construct that alters the direction or strength of the relation between the independent construct and dependent construct. The moderating effect was examined using AMOS as illustrates in Figure 3 below. The model below illustrates the causal effect between profit and loss sharing labeled as (ZPLS), trust (ZTru) and access to financing (labeled as ZAcc). 118 P a g e Figure 3: Interaction Effect for PLS and Trust

119 To test the causal effect of the constructs in the above model, three hypotheses were developed as below: H1 : PLS in Musharakah financing has significant causal effects on SMEs' access to financing. H2 : Element of 'trust' has a significant causal effect on SMEs' access to financing. H3 : Element of 'trust' moderates the causal effects of PLS on SMEs' access to financing. The results show that, for H1, the probability of getting a critical ratio as large as in absolute value is less than In other words, the regression weight for PLS is significantly different from zero at the level. In this case, the hypothesis that the causal effects of PLS on SMEs access to financing are significant and supported. For H2, the probability of getting a critical ratio as large as in absolute value is less than In other words, the regression weight for PLS is significantly different from zero at the level. In this case, the hypothesis that the causal effects of trust on SMEs access to financing are significant and supported. For H3, the probability of getting critical ratio as large as in absolute value is less than In other words, the regression weight for "PLS and trust" in the prediction of SMEs access to financing is significantly different from zero at the level. Table 4: Result of Hypothesis Testing for PLS (Standardized Estimates) Hypothesis Relationship Estimate S.E. C.R. P Label H1 ZAcc <--- ZPLS *** Significant H2 ZAcc <--- ZTru *** Significant H3 ZAcc <--- PLS_x_Tru *** Significant The above results show that the moderating effects of trust on the relationship between PLS and SMEs access to financing are significant and supported. Furthermore, it is also found that the type of moderation occurs, in this case, is partial moderation since the hypothesis for the main effect is also significant. As shown in Figure 3, the regression co-efficient of "PLS and trust" on SMEs' access to financing is negative, indicates that the moderating construct (trust) weakens the causal effect of PLS on SMEs' access to financing. Once the moderating effect has been determined, this study proceeds to inspect the particular form of the interaction. Following a suggestion by Frazier, Tix and Barron (2004), this study conducted a simple slope test to examine the specific relationship between the independent construct and dependent construct at a particular level of moderating constructs. The 119 P a g e

120 Access to Financing simple slope test provides information regarding the significance of the relations between the independent construct and dependent construct at different levels of the moderator. As presents in Figure 4 below, the simple slope test demonstrates that the relationship between PLS and SMEs' access to financing is always positive, but the two slopes become closer when there is high level of trust (as shown by line with small squares) than a low level of trust (as shown by line with diamond shape). This indicates that a high level of trust dampens the positive relationship between PLS and access to financing. It can be concluded that even though the element of trust have a significant effect towards the potential of PLS in enhancing SMEs access to financing, too high trust in sharing profit and loss of the business will dampen the relationship. Thus, the element of trust in the relationship needs to be controlled at an acceptable level to ensure effective relationship between PLS and access to financing. Figure 4 : Simple Slope Test for PLS and Trust Moderator Low Trust High Trust Low PLS High PLS 5.0 Discussions The results of this study proved that the element of profit and loss sharing in Musharakah financing, which supported by the element of trust as the moderating factors has a potential to provide SMEs with a greater access to financing. The element of PLS in Musharakah financing is found to have a significant causal effect towards SMEs access to financing, which supports the previous theoretical studies of Chapra, Siddiqui and Khan with regards to the potential of Musharakah financing. Furthermore, the element of mutual trust is found to have a moderating effect towards SMEs access to financing. This finding empirically supports previous studies of Chapra (2007) and Wilson (2000) 120 P a g e

121 which emphasize the importance of trust in promoting equity based financing. In this regards, the banks need to identify a suitable mechanism to establish their trust on SMEs. Interestingly, when the effect of trust is further examined, it is found that high level of trust dampens the relationship between PLS and SMEs access to financing. This result signifies that even though there is a need to build trust between the parties in Musharakah financing, it need to be observed and controlled at an acceptable level. This finding further supports the previous study by Manigart, Korsgaard, Folger, Sapienza and Baeyens (2002) which found that trust and control complement each other. According to Manigart et al (2002) if the level of trust is not reciprocated in some observable ways by the financiers, it may lead to a deterioration of the financing relationship. When the entrepreneur has a high level of trust on the financier, they are willing to accept a high level of control imposed by the financiers. When the level of trust is too high with a high level of control, the entrepreneur may later believe that they have given too much and gotten too little in return for their trust. If this were to happen, then they would likely retaliate by withholding effort or information, exactly the opposite effects of what investors want (Sapienza & Korsgaard, 1996). 6.0 Conclusions The main objective of this study is to examine the potential of Musharakah financing as a viable financing model for SMEs. Findings from this study confirmed the main attributes of Musharakah financing, namely PLS has a significant effect in providing SMEs with a greater access to financing. It is also confirmed that for the bank to share profit and loss of the business, there is a need to establish the element of mutual trust between both parties. The suitable mechanism needs to be established in determining the banks' trust on SMEs which opens for further study in this area. This study contributes to a better understanding of how Musharakah financing can operate effectively when the main attributes of Musharakah namely PLS interact with the element of trust as a moderating factor. As the findings imply, Islamic banks need to consider structuring Musharakah financing for SMEs. References Al-Harran, Saad A. S. (1990). Islamic finance: the experience of the Sudanese Islamic Bank in partnership (musharakah) financing as a tool for rural development among small farmers in Sudan (Doctoral dissertation, University of Durham). Berger & F Udell, G. (1998). The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking & Finance, 22(6), Chapra, M. Umer (2007). Challenges facing the Islamic financial industry. Handbook of Islamic Banking, 325. Chapra, M. Umer (2002). Alternative visions of international monetary reform. Islamic Banking and Finance, 219. Chapra, M. Umer (1992). Islam and the Economic Challenge. United Kingdom: The Islamic Foundation and The International Institute of Islamic Thought. 121 P a g e

122 Dar, H. A., & Presley, J. R. (2000). Lack of profit loss sharing in Islamic banking: management and control imbalances. International journal of Islamic financial services, 2(2), Fara Madehah Ahmad Farid (2007). The Potential of Musharakah as an Islamic Financial Structure for Venture Capital Funding in Malaysia. Unpublished doctoral dissertation. Durham University Farooq, M., Ahmed, M. M. M., & Muhammad, M. (2013). Musharakah Financing: Experience Pakistani Banks. World Applied Sciences Journal, 21(2), of Jalaluddin, A. (1999). Attitudes of Australian small business firms and financial institutions towards the profit/loss sharing method of finance. Unpublished doctoral dissertation. Durham University. Manigart, S., Korsgaard, A., Folger, R., Sapienza, H., & Baeyens, K. (2002). The impact of trust on private equity contracts. Vlerick Leuven Gent Working Paper Series, Sapienza, H. J., & Korsgaard, M. A. (1996). Procedural justice in entrepreneur-investor relations. Academy of management Journal, 39(3), Siddiqi, M. N. (1981). Rationale of Islamic banking. International Centre for Research in Islamic Economics King Abdulaziz University. Siti Khadijah Ab Manan (2010). Study on Financing and Financial Performance of SME in Malaysia. Unpublished doctoral dissertation, International Islamic University Malaysia, Kuala Lumpur. Veelaiporn Promwichit, Shamsher Mohamad and Taufiq Hassan (2013). The Viability of Profit and Loss Sharing Based Financing for Malaysian SMEs. International Business Management, 7: Wilson, R. (2002). 10. The interface between Islamic and conventional banking. In Munawwar Iqbal and David T. Llewellyn (eds), Islamic Banking and Finance: New Perspective on profit Sharing and Risk, Edward Elgar, UK. Zainudin Awang (2012), Research Methodology and data Anaysis.2nd ed. UiTM Press. 122 P a g e

123 Challenges for New Product Development in Contemporary Islamic Banking Mufti Zubair Usmani Shariah Advisor,MCB Bank Abstract What matters? Taxation laws How matters? As per existing tax laws if Islamic Banking Institutions get the assets/ goods in their own names then they require to pay taxes. Consequently, when they sell the assets/goods to customers, r ecovery of additional cost of registration makes then incompatible with conventional banks. What matters? How matters? Liquidity Management Due to Shari ah prohibitions, Islamic Banking Institutions cannot invest into conventional Government papers. This limitation creates demand for Shari ah compliant liquidity management instruments which badly lack. This pushed them to rate of return risk and affect their market competitiveness. Banking laws and practices As per existing banking laws, Islamic Banking Institutions perform the role of financial intermediary. This limitation stops them to own assets/goods without getting purchase requisition from their customers. Consequently, they have to focus developing replica of conventional banking products only, instead of their active role as trading house. Recovery procedure through competent courts of law If financing extended by Islamic Banking Institutions get stuck up, then recovery procedures are not clear to distinguish between loan recovery and financing recovery. lack differentiating between loans and financing. 123 P a g e

124 Innovation in Islamic Finance Myth or Reality? Farrukh Raza CEO, IFAAS, UK Abstract Islamic Finance is growing rapidly, within and outside the Islamic world. Whilst all key performance indicators are showing strong growth, the burgeoning industry is also accused of being short on product range that it offers. Calls for innovation are multiplying and becoming louder by the day that the practitioners are struggling to respond to, satisfactorily. The presenter will analyse the challenge from a practitioner s point of view and assess whether innovation in Islamic Finance is a myth or reality. The objective of the discussion will be to identify the key issues and propose practical solutions to the industry. The presentation will be finalised soon and will be sent to you prior to the event. Meanwhile, you may proceed with printing the abstract in the programme. 124 P a g e

125 Risk Management Practices of Islamic Banks in Pakistan Masood Ahmad Khan University of Agriculture Faisalabad Abstract Purpose: The purpose of this research study is to investigate the extent to which banks are using risk management practices in dealing with various risks and to evaluate risk management practices of Islamic banks operating in Pakistan. Methodology: This is an empirical research study which has employed quantitative research methods. Secondary data is collected by using content analysis through annual reports of five Islamic banks for the six year time period from 2008 to The data was analyzed by using descriptive statistics, regression analysis. Findings: Risk identification, risk assessment and analysis, and credit risk analysis are most influencing and contributing variables in risk management practices of Islamic banks operating in Pakistan. Also liquidity, market and operational risk are found to be the most important risks faced by Islamic banks. Practical Implication: Considering the importance of risk management practices in Islamic banks; Bankers, investors, regulators, and policymakers are likely to benefit from the results of the study as a guide, when developing and reforming the existing risk management practices. Study Contribution: This study will add value to literature and will be useful for Islamic banks, conventional banks, practitioners as well as for academic point of view. Key Words: Islamic banks, Risks, Risk Management Practices, risk management process, Pakistan 125 P a g e

126 Role of Islamic Microfinance in Humna Capita Development: Ascertainment from Pakistan Syda Asma Ibrar; Graduate Student COMSATS Institute of Information Technology,Lahore. Dr. Hafiz Zahid Mahmood COMSATS Institute of Information Technology,Lahore. Abstract This study is aimed to observe the impacts of Islamic microfinance institutions on investment in human capital development (Education and health). In this regard, data was collected from two Islamic microfinance institutions working in Lahore by interviewing 100 respondents each from Akhuwat Foundation and NAYMAT (Nazeeran Yousaf Memorial Trust), totaling 200 respondents. Concerning data analysis, paired Sample t test is used to analyze the impact of Islamic microfinance on investment in human capital development. The results shows that lending through Islamic microfinance institutions plays significant role on investment in human capital developments by investing more in children education / schooling and getting quality health services as compared to pre borrowing scenarios. Therefore, it is strongly suggested that lending through Islamic microfinance institutions should be encouraged in developing countries like Pakistan to boost up investment in human capital development. Keywords: Islamic Microfinance institutions, poverty, Human capital development, Health and education. 126 P a g e

127 Sukūk Al-Ijārah: Need of a New Model Umal Khair Fatima Visiting Lecturer, Faculty of Law International Islamic University, Islamabad Advocate District Courts Rawalpindi Abstract Sharīʽah legitimacy of sukūk has been a subject of intense debate and discussion among the religious scholars. Their major objection on sukūk al-ijārah is that the real ownership is missing and it heavily relies on hiyal i.e. stratagems to legalize ribā, which frustrate the higher objectives of the Sharīʽah. The purpose of the research is to scrutinize the Sharīʽah compliance and legal analysis of sukūk. The research is divided into three sections. Section-I introduces the study by elaborating the structure of sukūk al-ijārah as given by AAOIFI. Section -II deals with the critical analysis of sukūk. Section -III contains the result and recommendations of the study by suggesting a new model to serve the purpose of fund raising by complying Sharīʽah requirements. The Instant research is crucial in nature because it will aid in improving the sukūk al-ijārah structure and endow with an alternative for it, which will be beneficial for public at large. The main conclusion drawn from the study indicates that there are several elements which are rendering sukūk un-islamic and are stratagem to legalize ribā. It is suggested that the removal of these un-islamic elements can render sukūk truly Islamic. Keywords: Sukūk al-ijārah, Sharīʽah legitimacy, Sukūk un-islamic, Ribā, Hiyal, Islamic Finance, Sharīʽah compliance 127 P a g e

128 1: Introduction 1.1.Sukūk Al-Ijāra 18 AAOIFI in its Sharīʽah standard defined the kinds of sukūk and elaborated rules to trade in them. Ijārah sukūk are the latest product in the market that is gradually increasing its roots in society. They are used by the governments and corporate entities for mobilizing funds. (Ali, 2005) AAOIFI defined ijārah certificates as: These are certificates of equal value issued either by the owner of leased asset or a tangible asset to be leased by promise, or they are issued by a financial intermediary acting on behalf of the owner with the aim of selling the asset and recovering its value through subscription so that the holders of the certificates become owners of the assets. 19 The certificates can be issued in ownership of usufruct of existing assets, ascertained future assets, services of the specified party and ascertained future assets. The structure originates with a party who is in need of financing, here known as the originator. The originator will set up an SPV, a separate legal body with the exclusive rationale of facilitating this transaction. Next, the SPV buy definite concrete assets from the originator at an agreed pre-determined purchase price, which will be equal to the principal amount of the sukūk. In order to finance the purchase of the assets, the SPV issues sukūk to sukūk holders. These sukūk holders are investors looking for Sharīʽah compliant securities. The SPV uses the sukūk profits to pay the originator the purchase price of the tangible assets. The SPV will also assert a trust over the tangible assets and grab the assets as a trustee for the sukūk holders, who are the beneficiaries. Next, the originator and the SPV will enter into a lease agreement for a fixed period of time. Under this lease agreement, the SPV (lessor) leases the assets back to the originator (lessee). (J.T.McMillen, 2013) Consequently, the SPV receives periodic payment (i.e. rentals) from the originator for the use of the underlying tangible assets. 4. SPV pays the originator the purchase price of the tangible assets 18 The term ijārah begin from Arabic word meaning remuneration for service rendered by an individual. It is defined as the money paid in utilization of definite assets for a period of time. See, (Rehman, 2003). Ijārah can be for specific, general, financial and operating lease (Mansoori, Islamic Law of Contract and Business Transaction, 2003). 19 3/1, Sharīʽah Standard No. 17, AAOIFI. 128 P a g e

129 ORIGINATOR SPV INVESTOR 1.sells assets to spv on purchase price 2.issue sukuk to investor that represents the ownership of the assets 3.sukuk holder (owner in assets) 6.Rental payments 5. lease the asset to originator 7.Distribution of rental payments 9.At maturity spv sells back the assets to originator 8.recieve rentals 10. Proceeds of sale of assets will be re paid to investor Figure 1.1 Ijārah Sukūk The SPV uses these amounts to pay the periodic return to the sukūk holders, since they are entitled to these payments as the beneficial owners of the tangible assets. These rentals are received by sukūk holder through SPV till maturity date. Here the Sharīʽah standard made the resale of assets on market value permissible, that the originator can buy the asset at the market price, not on its face value, which itself is a buy back agreement and against Sharīʽah norms. 20 Ijāra sukūk is subjected to gravest criticism over the world. Numerous issues are prevalent in it. The Sharīʽah compliance of ijāra sukūk will be discussed in the next section of the dissertation. In Pakistan ijāra sukūk were firstly issued by WAPDA. (Khan, 2013) Later on sukūk al ijāra by national highway authority worth 500 was launched in 2005 in which the asset was the M-2 Motorway and %20CIFE17-18%20UNDERSTANDING%20SUKŪK.pdf, Last accessed 20 may P a g e

130 Pakistan International sukūk company limited performed the functions of SPV, wholly owned by GOP, here on completion of contract GOP bought it on agreed price THE PARADOX OF OWNERSHIP IN SUKŪK Sukūk being a revolutionary product in Islamic finance has underlying assets, involving the issue of ownership. The issue arises when there is a gap between real ownership and beneficial ownership. The principles of Islam lay great importance on ownership rights. In Arabic, the word milkiyyah or milk (Ba albaki, 1980) is used for ownership: meaning holding a thing and ability to exploiting it. Technically, ownership is defined in a wider horizon (Ghani & Lahsasna, 2015). The chapter will analyze the Sharīʽah definition of ownership, the rights originating from it, as well as the real and beneficial ownership. It will also focus on the co-ownership, as in sukūk: the sukūk holders have an undivided share in the ownership. Subsequently, it will evaluate the annexed issues related to ownership in sukūk, by piercing the veil of sukūk. For Sharīʽah analysis of ownership in sukūk, it is mandatory to comprehend the concept of ownership in Islam comprehensively. The Issue of Sukūk Regulations, 2015 is a current development in the history of sukūk in Pakistan. Before appraising these regulations, there is a need to comprehend the issues in the existing model of sukūk. The chapter will explicitly explain the Sharīʽah issues in sukūk. Is ownership a complicated issue or became complex in sukūk? For this, one must consider the definition of ownership in Islam by four eminent schools of thought. Hanafī scholars laid emphasis on the right of disposal in ownership and declared it essential unless, there is any legal barrier (Al-Humam, 1990) (Nujaym & Ibrāhim, 1968).Some Hanafīs described it as: exercising the right of exclusive freedom over property including right to put a restriction on others (Al- Sharī ah).whereas Al-Qarafi, an eminent scholar of Mālikīs described it as: an authority to get the benefit over an asset and to accept any compensation for it (Al-Qarafi, 1998).Al-Subki also defined it in terms of getting usufruct over asset (Al-Subki, 1991). Some Shāfīs such as Abu Shuja has defined it as a legal exclusivity over a useable item. Ibn Taymiyyah defined it as a legal ability justifying the right of disposal of the asset (Taymiyyah, 2002). By analyzing all the above-mentioned definitions it is evident that ownership requires the right to use and right of disposal. The Profound analysis shows that ownership is linked with the right to possess, use, sell, donate and to give it as a gift. If there is any legal obstruction then only these rights can be delayed. Otherwise, the owner has and can exercise all of these rights. It is also obvious that right to use and disposal is the primary purpose of ownership. These rights will later on be analyzed in sukūk (Ghani & Lahsasna, 2015). Ownership can be of Private property 22 as well as public property 23 which can be acquired by buying, inheriting, accepting as a gift and through work or by manufacturing (Abdullah). In Islam, the word milkiyah is used for ownership and the word qabd is used for the possession (Abdullah). Ownership and possession are different in spirit. It is possible that someone has possession but not ownership, 24 which will be discussed in later section in detail. Transfer of ownership is germane in 21 Last accessed 18 may Private property is that property which is owned by the people such as land, building etc, Last accessed 13 April, Public Property is that property which is owned by the government on behalf of the people for providing the services to the public such as electricity, water, administration of justice etc, Ibid. 24 For instance children are possessing thing but their parents are legal owner. See, Ibid. 130 P a g e

131 every sale contract. 25 It is essential for buyer to acquire possession (qabz) of sale object although it can be an actual or constructive possession (Ghani & Lahsasna, 2015). The Sale is an ordinary way of transfer of ownership recognized in Sharīʽah. Sale of valuable thing requires recording as a deed and registering in public documents as per law. A valid sale requires the transfer of ownership of an asset to the buyer. After transfer of the ownership, the seller cannot claim the asset. Sharīʽah recognizes only real sale in which all the rights in an asset should be transferred from the seller to the buyer. These rights also include a right to sell the property to the third party. In real sale the buyer becomes the legal owner of asset sold. The controversial issue here is beneficial ownership which is originated from the common law, 26 is practiced now a day. It is also known as a sale that falls short of a real sale, (Abdullah). In beneficial ownership, some of the rights are not transferred from the seller to buyer such as: the right to get revenue, right to get possession, right to sale etc. Right of sale to the third party which is attached to the ownership of property will be profoundly scrutinized here. A sale that falls short of a real sale is defeating the primary purpose of law i.e. the transfer of ownership. It could be used for the fraudulent purpose i.e. the buyer understands himself as an owner which in fact, is not a legal owner (Abdullah). From a long time, it is criticized that Islamic banking replicates conventional banking (Ayub, 2007) (Beck, Demirgüç-Kunt, & Merrouche, October 2010). The focus of criticism is often on beneficial ownership in financial products. The criticism emphasize that in sukūk, Sharīʽah concept of ownership is violated and consequence in contradicting maqāsid-al-sharīʽah (Al-Amine, 2012). 2.1.Beneficial ownership restricts the right of disposal of an asset. Is it complying with Sharīʽah? The issue will be investigated by Fiqh analysis. By takyif fiqhi 27 of moveable property, it is observed that beneficial ownership is allowed in rahn. 28 On the other hand, some Hanafīs allows it as bayʽ al wafā whereas, others don t allow it. There is a difference of opinion on al-shurut altaqyidiyyah, 29 three different views 30 are observed. The majority of fuqaha disapprove al-shurut altaqyidiyyah on the ground that prophet (PBUH) disapprove sale with a condition and it is not in line with original repercussion of contract of sale i.e. muqtada al-aqd. By takyif fiqhi of immoveable property, it is found that the core theory revolves around the possession (qabd) 31.In moveable property, possession is efficient when buyer takes goods by hand (i.e. tanawul bi al-yad in fiqh) but in immoveable property it is effective when he can access and use the goods, devoid of restrictions (i.e. takhliyyah wa tamkin).here in immovable property, the concept of a beneficial ownership is observed in trust. Whereas, in Islamic finance it is recommended that it should be observed by case to case in designing Islamic financial products i.e. by deeply investigating 25 Islamic Scholars of all madhaib are agreeing on transfer of ownership (Ghani & Lahsasna, 2015). 26 Common law is defined as the English law, derived from the customs and precedents. Last accessed 5 May, It is defined as a fiqh analysis of new transaction to check its permissibility in Islam. Last accessed 22 July, Rahn is defined as to pledge a tangible property against debt; in case of default, the creditor has right to recover the debt by selling the property. Last accessed 24July, Al-shurut al-taqyidiyyah means impositions such as restriction on ownership (Ghani & Lahsasna, 2015). 30 Mālikīs and Ibn tamiyyah allows minor restrictions with a condition that it shouldn t be harmful to buyer. On the other hand Ibn Shubrumah allows all forms of conditions on basis of hādīth that Muslims are bound by their stipulations. Ibn Shubrumah view shouldn t be views in restricted terms but it should be taken in issues of maslaha only. Ibid. 31 Possession (qabd) is further classified into qabd haqiqi and qabd manwi (Nyazee, 2010). 131 P a g e

132 every contract and issue (Ghani & Lahsasna, 2015). Therefore, the instant research will focus deeply on investigating the issue in line of Sharīʽah. Not only real sale but beneficial sale is also exercised in sukūk. In asset-backed sukūk there is real sale whereas in asset-based sukūk there is a beneficial ownership (Abdullah). IFSB explain that in asset-backed sukūk, the sukūk holders have a right of recourse to the asset in event of default and have to bear the losses in case of destruction of the asset. The legal ownership of the assets exists in asset-backed sukūk in which the originator has no right of recourse to asset (Hasan, 2013). All of 3 conditions i.e. Profit and loss structure, real sale requirement and real ownership, are prevalent in asset-backed sukūk. Therefore, these are considered as Sharīʽah complaint (Hasan, 2013). Whereas, high transaction costs, legal and regulatory challenges, lack of suitable asset classes, lack of trained and skilled personnel in structuring are some of the issues faced by financial institutions in assetbacked sukūk. Nomura Sukūk Ltd issued ijārah sukūk for the period of 2 years, worth of USD 100 million involving the physical asset of two aircrafts. The case study shows that there was transfer of real ownership of the asset to sukūk holders which renders it Sharīʽah compliant. On the other hand, sukūk issued in Pakistan lacked the transfer of ownership to sukūk holders (details of case study will be explained in next chapter). Asset-backed sukūk also attract little criticism upon it that there is no direct transfer of ownership to investors but these are transferred indirectly as contrast to securitization. Here the assets are considered as the mere receivables (also known as debts) in Sharīʽah principles. So, there is mere trading in debts rather instead of assets which consequence in exploitation of asset. Here the recourse lies to SPV and its assets rather than originator. At this point, it is recommended that measures should be taken to implement AAOIFI standard in real sense (Kamali & A.K. Abdullah, 2014). On the other hand, in asset-based sukūk, the sukūk holders have recourse to the originator or to the issuer not asset and have no real ownership of asset. The dividend is measured by the ratio of investment rather than the ratio of profits attained. Hence asset-based sukūk are replicating the conventional bonds on the above-mentioned grounds as well as from the viewpoint of taxation in law. Still the investors do prefer the asset-based sukūk for the reason that it is easy to understand the structure of asset-based sukūk. Lastly, these are well-known to investors than asset-backed sukūk. Sharīʽah scholars criticizes asset-based sukūk as there is no interest of sukūk holders in underlying asset, restriction lies on disposal of asset and sukūk holders have no right to exercise due diligence on the asset (Hasan, 2013). Scholars are of view that asset-based sukūk are in fact a duplicate of conventional bond because rights of investor are not protected in it (Kamali & A.K. Abdullah, 2014). Moreover, the investors are getting the cash flow 32 instead of the asset which can generate the cash flow. AAOIFI resolution in 2008 was against the asset-based sukūk (Kamali & A.K. Abdullah, 2014). The transaction is not through underlying assets then the money which is generated here is simply against money. Some issues are raised in relation to real sale vs. beneficial sale: A transaction in which the asset termed as sold remains intact with seller. Can it be termed as sale? Whether the objective of sale is the transfer of ownership from buyer to seller? If ownership is not transferred to buyer, can one claim with realistic degree of authority that sale has taken place? 32 Cash flow is incomings and outgoings of cash, representing the operating activities of an organization. Available at, Last accessed 1 st May, P a g e

133 If sale is not done in real then what is the rationale to come in this transaction in the first step? (Abdullah) As discussed above the Sharīʽah analysis depict that the sukūk holders should deal freely with the asset including the right of disposal. Hanafīs scholars and Ibn Tammiyyah specifically mentioned the right to disposal in defining the ownership. So, sukūk should transfer all the rights of ownership. Restricting the right of disposal doesn t comply with Sharīʽah. After criticism of Sheikh Taqi Usmani on ownership, AAOIFI held resolution in 2008 in which it is recommended that all of the rights of ownership (including right to use and sell) necessitate in sukūk to be transferred. 33 The documentations should also be maintained and the manager shouldn t keep it as his own assets in harmony with Articles (2) and (5/1/2) of the AAOIFI Sharīʽah Standard (17) on Investment sukūk. 34 One of the objectives of Sharīʽah 35 is the protection and preservation of property. Islam recognizes all the rights attached to the ownership of property and adopts all the means for preservation of property (Abdullah). All the crimes relating to property are punishable under Sharīʽah such as theft 36 (Punishable with hadd) (Ali M. M., 2011) (Nyazee, Outlines of Islamic Jurisprudence, 2010). Islam recognizes the right of people to own property. The Property is enjoyed as a convenience of life. It brings facility and ease (taysir). Property and its protection is one of the objectives (maqāsid) of the Sharīʽah. Applying the real rights of ownership on ijārah sukūk, it is illustrated that the ijārah sukūk involves real sale of the asset rather than generating mere fictitious right to get rents. Risk also transfers with ownership complying with hādīth al-kharaj bi al- damān. It is further explained that in case of any destruction the loss is equally divided in co-owners up to their share in ownership. If it is truly used by the market players then the profit and loss ensure compliance with Sharīʽah. 37 As in beneficial ownership, there is certain restriction including the right to sell the asset to the third party. It has gravest implications to the buyer in case of bankruptcy of originator. The buyer will have no recourse to asset in such case. Investor faces this issue in asset-based sukūk unlike assetbacked sukūk (Abdullah). Moreover, it generates the issue of liquidity. The buyer is unable to liquidate the asset (Abdullah) that makes the instrument less tradable in market, hence lacking investor s confidence to invest in it. Global financial crisis in which number of sukūk defaulted gave evidence that number of people were not aware of the fact that they were not the legal owners. In fact, they were beneficial owner. Moreover, they couldn t differentiate between legal and beneficial ownership. Therefore, investor s protection was vague (Kamali & A.K. Abdullah, 2014) Musha and Sharikāt Al Milk The ownership is further linked with co-ownership. Therefore, it is necessary to understand the rules of co-ownership in light of sukūk. Modern scholars linked the ordinary shares with the concept of musha (means undivided share in the joint property). By analogy, they allowed the sale of shares in corporation because each co-owner is stranger with respect of other; hence, they can sell their shares. In co-ownership each owner is holding each and every particle of property jointly. The khalt or mixing of capital is prerequisite in every form of partnership. Moreover, all rights go back to your old way in sharikah al milk when partnership comes to an end or becomes fāsid (Nyazee, Islamic Law of Business Organization Corporations, 1998) Last accessed 10 May Articles (2) and (5/1/2), Sharīʽah Standard (17), AAOIFI. 35 There are five objectives of Sharīʽah: 1) protection of deen 2) protection of life 3) protection of Nasl 4)Protection of Intellect 5) Protection of wealth See, (Nyazee, Islamic Jurisprudence, 2000). 36 Property stolen without permission of other see, (Nyazee, Outlines of Islamic Jurisprudence, 2010) Last accessed 10 May P a g e

134 Co-ownership is categorized into ayn 38 and dayn. 39 The jurists agree with respect to ayn but disagreement exists with respect to dayn. The proponent including Hanafīs permits dayn on the ground that gift is permitted in it whereas the opponents are of view that there is metaphorical partnership because in reality, it is abandonment of right to claim. The Hanafīs view is preferred mostly (Nyazee, Islamic Law of Business Organization Corporations, 1998).The only kind of this type of sharikah is khalt or where there is mixing of two ayns or two dayns. This mixing can happen by the act of owner or by the act of others. If it is done by the act of other then it cannot be revoked leading to mandatory co-ownership. The first case involves ownership by choice (sharikah al ikhtiyar) but later involves mandatory co-ownership (sharikah al jabr). Following are the necessary conditions for co-ownership: 1. Each co-owner can only use and dispose of his own share. He is stranger with respect of other co-owner and cannot use and dispose of the share of co-owner. The only exception is house which can be used by both. 2. In case of khalt where the capital is mixed the co-owner cannot sell the co-owner cannot sell his own joint share without the permission of other. If the share is not mingled properly then the co-owner can sell his own joint share without the permission of other. The logic behind this condition is that ownership is undivided (musha) and every co-owner owns property in each and every particle. This opinion is held by Majallah whereas modern scholars permit selling of such shares without partition (Nyazee, Islamic Law of Business Organization Corporations, 1998). 3. The rules of wadīah (deposit) are applicable here in co-ownership (Nyazee, Islamic Law of Business Organization Corporations, 1998). In wadīah, the one who is holding the trust property is liable only if the property is destroyed by him by negligence (Ashraf, 2006). The same rules will be applied here in co-ownership, if one co-owner deposits the property to any third person without obtaining or seeking the permission of co-owner then liability is borne in case of destruction of property. 4. Joint receipt of revenue amounts to sharikāt at milk in such revenue. 5. If someone has taken debt then the co-owners can demand it jointly or severally. 6. Rules of sharikāt-al-milk are applicable to an ayn if the debt is possessed by one partner. Moreover, period of debt cannot be postponed without the permission of co-owner. In law, sharikāt-al-milk is referred as co-ownership. The Law doesn t categorize it under partnership but clearly, differentiate in both of them. From the point of view of Islamic law, the following distinction is drawn between co-ownership (sharikāt-al-milk) and partnership (sharikāt-alaqd). 38 Ayn is defined as the corpus or substance of a thing. Hanafīs renders it things measurable during sale transaction. See, (Nyazee, Islamic Law of Business Organization Corporations, 1998).Majallah elaborated the coownership of ayn as the joint and exclusive ownership of two or more persons resulting from one of the causes of ownership, like purchase, gift, acceptance of a bequest, inheritance, or by the mixing (khalt) or their property in a manner that doesn t accept distinction or separation. See, (Nyazee, Islamic Law of Business Organization Corporations, 1998). 39 Dayn is defined as receivables. The term doesn t apply on qard. See,Nyazee, 193. Majallah elaborated the co ownership of dayn occur when two or more persons are owed a debt attached to a dhimmah (liability) of another person, and that has arisen from a single cause. This is common debt and is held in co-ownership between them. If the cause is not common, the debt is not a co-ownership. (Nyazee, Islamic Law of Business Organization Corporations, 1998). 134 P a g e

135 (Sharikāt-al- Partnership aqd) (Sharikāt-al- Co-ownership milk) Element Mixing of shares (Khalt) Offer and acceptance (Sīghah) Profit sharing No necessity in ascertained property Necessity Division of usufruct On basis of ratio of shares Ratio may be changed Agency Co-owners are strangers but if agency establishes it will lead to wages rather than profit sharing Establishes agency and requires profit sharing Apportioned share Can sell without permission of other co-owner if share is ascertained. Requires permission Termination On destruction of Khalt Formal Termination of Contract (Nyazee, Islamic Law of Business Organization Corporations, 1998) 1. In sharikāt-al-milk the germane element is the mixing of share i.e. khalt on basis of which it is formed whereas partnership (sharikāt-al-aqd) is formed by sīghah 40 consequence in mingling of capital. 2. When the property under sharikāt-al-milk is ascertained then the sharing of profit is not necessary. On the other hand, the basic purpose of establishing partnership is sharing of profits. 3. Al-Kasani says that there is consensus of ijmā on fact that the division of proceeds will be according to ratio of shares in sharikāt-al-milk but in sharikāt-al-aqd Hanafīs and Hanbalī jurists says that the division of revenue can be changed. 4. In general, every co-owner is stranger with respect to the share of other in sharikāt-al-milk but if they establish any contract of agency then they have to pay wages for it rather than profits. On the other hand, partnership itself establishes the contract of agency and necessitates the division of profits. 5. The co-owner can sell his share without the permission of other only if his share is ascertained and apportioned but partnership always requires permission from the other (Nyazee, Islamic Law of Business Organization Corporations, 1998). The rules of sharikāt-al-milk are very germane to understand because on sharikāt-al-milk joint ownership is created which is relevant to sukūk. 2.3.Criticism on Corporation 135 P a g e 40 Sīghah means offer and acceptance (Mansoori, 2003).

136 According to Arab scholars, corporation 41 is formed under a contract or sharikah. It is criticized that at the time of sale of share they used the rules of co-owner that the co-owner can sell their share without the permission of other if their share is ascertained. They do not apply the rules of partnership. It is argued that there is no joint ownership in capital of corporation. It is only owned by the legal person i.e. the corporation. Modern scholars firstly rendered corporation as legal person 42 but later on overlooked the rules of legal personality and renders it contract of sharikah. In event of sale of share, they ignored the ruling of sharikah and allowed it on ground of concept of musha (co-ownership). All this logic is capricious (Nyazee, Islamic Law of Business Organization Corporations, 1998). 2.4.Critical Analysis of Sukūk Despite gravest criticism on ownership in asset-based sukūk focusing on ijārah sukūk, the sukūk (particularly ijārah sukūk) is further criticized on other vital issues which are discussed below: Guarantee in Sukūk The issue arises when the guarantee is given by the originator against any shortfall (Al-Amine, Sukūk Market: Innovation and Challenges, 2008). AAOIFI Sharīʽah standard depicted that the third party guarantee is allowed 43 but it should be given without any consideration. Following issues arises in guarantee in sukūk that are analyzed in dissertation: What if the guarantee is given by public unit for sake of encouragement of investments in a country? Is it allowed? Whether guaranteeing the capital amounts to ribā? There are two opinions by contemporary Muslim scholars on this issue: 1) The first group is of view that in sukūk al ijārah, sukūk al mudārabah and sukūk al mushārakah, guarantee the principal pave the road to ribā. As it is also against the mudārabah contract where guaranteeing is prohibited by all schools of thoughts. As for as guarantee by government is scrutinized, the group is of view that such guaranteeing is impermissible because the property of government belongs to community and is trust in hands of government. It shouldn t be open to financial risks for some entities. Moreover, from practical point of view, benevolent guarantee by any individual or entity is impossible because no one will give guarantee without any specific interest or consideration (Al-Amine, Sukūk Market: Innovation and Challenges, 2008). 2) The other group argues that the guarantee by the third party is permissible. They gave the following arguments in this regard: As Islamic law prescribes everything is permissible except prohibited. So, guaranteeing by the third party is not prohibited in the text. Moreover, they argue that as long as the third party 41 Corporation is defined as a joint stock company where the liability of the members is different from the company. In Pakistan the term of corporation is associated with the companies sponsored by state through ordinances (Nyazee, Islamic Law of Business Organization Corporations, 1998). Guthman and Dougal defines corporation as The formation of an association of persons into a autonomous legal unit with a distinct legal personality that enables it to carry on business, own property and contract debts through its agents and officers (Guthman & Doughal, 1952). 42 The word person communicates with the word mukallaf but mukallaf is used for human being. An additional attribute personality (Shakhsiyah) is given by law. Here fictitious personality is given to the corporation. See Further, (Nyazee I. A., 1994) 43 See, Clause 5/1/8/7, Sharīʽah Standards No.17 on Investment Sukūk, and Clause 7/6, Sharīʽah Standards No. 5 on Guarantees, AAOIFI. 136 P a g e

137 possesses independent personality to contracting party he can guarantee the capital. If this guarantee is from partner of mudārabah then it is not allowed. Two global sukūk models are practically observed in ascertaining the instant issue. Trust certificates issued by Solidarity Trust Services Limited (SPV) which is wholly owned and subsidiary of IDB (originator here). Malaysia Global (SPV) wholly owned by Ministry of finance, Malaysia issued sukūk al ijārah where the originator was the Government of Malaysia. (Here IDB and government of Malaysia are guarantors). Here the proponents argue that the in both of these cases SPV are autonomous legal entities in terms of financial liability from guarantors. Therefore such guarantee by a third party is permissible whereas the opponents stated that it is ribā al-duyun on basis of following arguments: By this guarantee the money which is invested in the trust certificate will be fully redeemed on date of maturity. Moreover, the certificates holders are getting here fixed periodic returns regarding trust certificates. The proponents argue that all such transactions are interest based where the guarantee is given by the issuer or any interested party and sukūk holders are getting fixed periodic returns. In both of these cases the guarantors are not mere third parties and haven t given the gratuitous guarantee but they have vested interests in issuance of these sukūk. From the consequences of this guarantee the fund is collected for purchase of sukūk which otherwise will not be achievable (Al-Amine, Sukūk Market: Innovation and Challenges, 2008) Sale and Lease Back Structure I. Sharīʽah Compliance of Sale and Lease-back Arrangement: Is It Permissible? Here the dissertation focuses on the vital issue i.e. sale and lease back arrangement. This deal is evident in sukūk al-ijārah where the arrangement is made i.e. the customer is in need of finances, he has ownership in asset, and therefore, he sells the asset. After sale, the asset will be lease back to originator against rentals for usufruct of assets. Here the issue is about the permissibility of this arrangement. The arrangement is permissible in Islam only in cases of dire need but generally, this practice should be evaded. Moreover, in major business and Islamic finance, there is restriction that they should not adopt it for key approach of business. Besides, it is said that the Islamic banks can accommodate the customer who wants to get free of ribā and doesn t have any further substitute. The ruling evidently depicts that sale and leaseback arrangement should be used in exceptional cases which should conform to the Sharīʽah rules. As discussed earlier sale and lease back is allowed in dire need, can be used for investment in new assets as well as converting the conventional instruments involving elements of ribā into Islamic financing. The sale agreement should be made prior to lease agreement in such transaction. It is recommended by some scholars that for avoidance of Bay-al-Inah the lease assets can be sold back after some reasonable time in which the value of property has altered. II. Sale by Lessor 137 P a g e

138 Lessor can sell the asset to any third party, in that case, the sale will be valid and the ijārah may carry on. It necessitates the ownership should be transferred, a mere right to receive rentals is not allowed because in that case the money is sold for money. The new lessor can fully exercise all the rights attached to asset and has to bear the liability. It ensures the secondary market on basis of ijārah. The market risk is involved in ijārah Sukūk i.e. price, maintenance of asset and Takaful costs, ability of lessee to pay the rent etc. The risk is borne here by the lessor for the reason that ownership requires it. III. Destruction of Assets In case of overall destruction of assets, the sukūk holders are bound to bear the losses as per share in the ownership of assets. Hence, ijārah sukūk may generate a quasi-fixed return since there might be default or some unexpected expenses that could not be envisaged in advance. As such, the amount of rent given in the contractual relationship represented by ijārah sukūk represents a maximum return subject to deduction on account of unexpected expenses (Ayub, 2007). As AAOIFI allowed sale and lease back in sukūk al ijārah 44. Here following controversial issues will be determined: It will be analyzed that whether such sale and leaseback amounts to bayʽ al wafā, bayʽ al īnah and bayʽ al- istighlāl or not? Whether it amounts to ribā or not? The opponents labeled it another form of bayʽ al- wafa, bayʽ al īnah and bayʽ al- istighlāl Bayʽ Al Wafā Bayʽ al wafā is defined as the seller sells the property with the condition to buy back the property in case of payment (Al-Amine, Sukūk Market: Innovation and Challenges, 2008). Here in ijārah sukūk, the seller is in need of cash, for cash he sell out his property and when he is able to returns the cash he will buyback the property from the buyer. The asset is leased to the seller and the rent is collected as installments ends into ownership giving effect similar to ijārah muntahiya bi al- tamleek (in which lease contract ends into ownership) is analogous to bayʽ al wafā (Al-Amine, Sukūk Market: Innovation and Challenges, 2008). Bayʽ al wafā is considered as a defective sale by Hanbalī, Mālikīs, early Shāfīs and Hanafīs jurists. They gave the rationale that in such sale legal modes are used as a cover-up to indulge in forbidden practices in Sharīʽah. Moreover, they argue that the apparent sale is just like the loan and the use of property is interest (ribā) collected over the loan hence prohibited. Incredibly this structure is again enforced in sukūk where money is generated over the usufruct by leasing back the asset to the seller but the modern scholars allowed it. Generally in Islamic jurisprudence, there is no objection to selling the property to the person from whom he has bought but it shouldn t be in single contract ( Gamal, 2006). The reason is depicted in the hādīth of the holy Prophet SAWW that prohibited joining two sales in one contract (Mansoori, 2003). The separate contracts can be concluded in this regard. If it is in a single sale can we call it valid sale? We cannot call it sale because absolute rights of ownership are not transferred in original by restricting the right of sale ( Gamal, 2006) P a g e 44 AAOIFI 2008 Resolution available at Last accessed 10 May

139 International Islamic Fiqh Academy declared it Invalid by giving rationale that it put limitation on absolute exercise of proprietary right as the owner cannot dispose of the property as he has no right to sell and right to give property as gift but in actual he bound to sell it to the first seller on face value. Therefore this transaction is parallel to loan transaction. Here the first seller needs money he is borrower and the buyer is the lender who gives money. The property is mortgage here to the lender from which he is getting benefits. It is a recognized fact that any benefit drawn out of mortgage property is ribā. In this transaction the second sale i.e. buyback of assets is in actual return of loan to lender (Mansoori, Use of Hiyal in Islamic Finance and its Sharīʽah Legitimacy, 2011) Bayʽ Al- Istighlāl It is also known as exploitation sale and sale of usufruct (Mansoori, Use of Hiyal in Islamic Finance and its Sharīʽah Legitimacy, 2011). It is a sale in which the right of redemption is created by the seller. The seller here takes the property on lease and uses the proceeds. 45 After paying the price he will get back the property. The opponents consider that it is parallel to sale and lease back structure in sukūk (Al-Amine, Sukūk Market: Innovation and Challenges, 2008) Bayʽ Al- Inah Here sale and lease back is also viewed as a kind of bayʽ al īnah (Al-Amine, Sukūk Market: Innovation and Challenges, 2008) in which two sales are joined together: one is spot sale and other is deferred sale (that is with higher price). For instance on spot sale was made on 800 Rs but later on pre-agreed price he will buy back such as 700Rs. Here difference between two prices amounts to ribā. The invalidity of īnah is based on the following hādīth: Hādīth reported by Abu Hurairah Whoever makes two sales in one sale, then for him is the lesser value or it is ribā. hādīth No (At-Tirmidhi, 2007) Hādīth reported by Al-Awzai A time will come over people when they will seek to permit ribā through sale hādīth No. 13, 25 (Al-Albani, 1985). On basis of these issues it is argued by opponents that such sale and leaseback arrangement in sukūk is subterfuge or a trick to legalize ribā (Al-Amine, Sukūk Market: Innovation and Challenges, 2008) Issue: Is Unilateral Promise to Purchase has binding Implications? I. Wad or Purchase Undertaking in Sukūk As discussed that AAIOFI 2008 resolution mandated real sale and transfer of all rights in ownership, pre AAOIFI period depicts that some issuer relied on wad but pro AAOIFI period depicted some decline in it but still some issuers never observed AAOIFI recommendations. It demonstrates the mind set of people that they do prefer asset-based sukūk. Purchase undertaking is an irrevocable promise in the contract to buy to assets from SPV at maturity. It is normally on par value which is, in fact, guaranteeing the returns of principal replicating conventional bonds. When any asset is buy back at par value then the risk associated with asset is not actually borne by the buyer i.e. the risk of loss to the capital. Therefore, it secures the capital against the risk (Al-Amine, Sukūk Market: Innovation and Challenges, 2008). The legal presumption with sukūk is that there can be no guarantee that capital will be returned to investors. Instead, they have a right to the real value of the sukūk 139 P a g e 45 Last accessed, 20 June, 2016.

140 assets, regardless of whether their value exceeds that of their face value or not. Modern day sukūk, however, guarantee by indirect means sukūk holders principal. The practice of Issuer granting such purchase undertaking has been heavily criticized by the scholars and perhaps the most notable one is by Taqi Usmani (Ellias, Haron, & Mohammed, 23 September 2013). He criticized that it is not allowed to buy assets at par value but can be allowed at market value or money agreed at time of re purchase. The justification for the ruling of "unlawful" with regard to the binding promise by one of the partners to purchase the assets of the partnership at face value is that this is the same as a capital guarantee, which is unlawful (Usmani, 2007). AAOIFI stated in 2008 that repurchase can be on market value. This rule was made to eliminate the element of price fixing (Ellias, Haron, & Mohammed, 23 September 2013). The institutions having Islamic windows for operation of Islamic finance (here for transacting in sukūk) have mindset of bond market. They do not want to bear risk associated with sukūk due to inflation, liabilities and profit making. The institutions fear that due to inflation the price of asset may devalue. For securing themselves from such risk they avoid to have Sharīʽah compliance in it. Management of liabilities concerning clients as well as profit making is another leading factor for avoidance of risk by them. In asset-based sukūk originator wants to raise funds irrespective of delivering ownership of assets in sukūk. Legal ownership remains with originator whereas beneficial ownership remains with SPV on behalf of sukūk holders. By applying Islamic normative theory of profit it is determined that the risk is the vital element of profit making and not bearing risk amounts to interest. In interest, money is given somebody as the loan of for a time period where returns are guaranteed. The fixed amount is enjoyed here by exploiting the labor of others. It is observed in asset-based sukūk the investor wants to secure money, fixed returns and no risk in assets. All of these elements are crucial component of conventional bonds. These sukūk are not functioning at the market level of Islamic institutions but by the institutions having mindset of conventional banks. Usmani criticism also highlighted that transactions involving lack of transfer of ownership, fixed returns based on percentage of capital instead of profits and capital guarantying are characteristics of bonds (Ellias, Haron, & Mohammed, 23 September 2013). If these are found in any form of sukūk then there is no difference between bond and sukūk rather than nomenclature. It is criticized in sovereign ijārah sukūk that in Islamic banking the intention of government to create SPV is to ensure buy back arrangement only. The government usually sells the rentable assets by unilateral promise to buy back the assets on maturity if the SPV requests. Here it is critically scrutinized that SPV is established by the government, therefore entirely dependent on the government or can be named as dummy works solely for government. Therefore, SPV is under an obligation to exercise the right to sell the assets back to government on par value even the market price is poles apart to par value. In this way, the unilateral promise has the binding implications in practice (Salman Syed Ali, 2005).This matter is clearly depicted in WAPDA sukūk where unilateral promise has the binding implications open to Sharīʽah criticism. (Israr, 2012) Prof. Dr. Sayyid Tahir also objected on the first step in ijāra sukūk i.e. the creation of SPV. It is criticized that the SPV and originator are not two autonomous people as required by Sharīʽah. The initial step is void ab initio and doesn t require supplementary steps. Here the creation of an SPV merely for the purpose of the lease and buy back of asset is suspicious (Forum, 2015). The difference is merely the difference in nomenclature i.e. the markup with rentals. For instance, on repurchase of any asset makeup is taken but here sale and repurchase agreement is made and the rentals are received which is, in fact, a markup. Therefore it resembles with the prohibited tricks mentioned in 140 P a g e

141 Holy Qur ān al- A rāf (Forum, 2015). So, what is need of SPV here? A well-organized structure can be designed to execute unilateral promise without an SPV (Ali S. S., 2005). For Instance, government has issued rentable monotonous asset such as useless barren land on inflated price by linking it to benchmarking. The government should execute binding unilateral promise to buy it back on specified date. On maturity price of asset in market will be less than the face value because it is mundane asset. Here it will be money put option 46 for the investors to sell it back on face value. In this way, financial needs of government will be fulfilled devoid of issuing any useful asset but for real Sharīʽah compliance, the given example is not reliable. The new model of sukūk, will discuss in the last chapter of dissertation will try to cope with the issues. Another controversial issue is if the assets will buy back on market value, whether secondary market exists in sovereign sukūk? Most of the sovereign sukūk issued include unilateral promise to buy the sukūk at market value. Sovereign sukūk usually issue assets of public good, therefore their market value doesn t exist and who will ascertain its fair market value is ambiguous (Ali S. S., 2005) Pricing of Sukūk As benchmarking became common in Islamic finance, though it is permissible but for determination of returns it is not correct to rely upon benchmarking. In ijārah sukūk, it is required that the rentals should be received on basis of underlying asset but practically it is generated by linking to benchmarking irrespective of nature of property, jurisdiction and market value. Hence it is criticized that return is reflecting not the underlying asset but prevailing interest rate. For Instance: If there are two properties (i.e. asset). Both of them are completely different from each other in respect of nature, use, jurisdiction and market value of property. What is required here? Here the returns or the rentals will be different of both properties but here in sukūk same return will be paid because of benchmarking i.e. to prevailing interest rate. Hence, such practice is objectionable from Sharīʽah point of view (Ali S. S., 2005). From the commerce point of view, benchmarking holds numerous issues. Firstly, profits are guaranteed here in a sense that even before ascertainment of profits fixed amount is ensured. Secondly, the profits are confirmed even before actually incurred. Thirdly, the amount of profit depend something other than actual profits. Lastly, here the capital is also assured. All of these elements are depicted in conventional lending. Sukūk murābaha which is issued by buyer assures that he will pay the deferred price of the sold item. It is depicted that in sukūk murābaha, the benchmark rate is implied in markup. The formula to determine the markup is similar to that of interest in conventional lending. Consequently, the price of the asset in murābaha is on same footing to that of loan. There are two risks arise in Islamic financing i: e interest risk and floating rate risk. It is argued that the benchmarking determines only profits not interest rate but they ignored various issues i. e. amount is determined even before profit incurred, amount is determined not as a share of profit but on basis of share in capital which is similar to lending and the originator assures capital and profit. The distribution of profit should be on basis on actual profit incurred. The aforesaid mentioned activity neglects the principle of risk sharing. Here when to profits is guaranteed then the loss sharing will not be even possible. The assurance of pre determined profits and capital guarantee in sukūk is linked with debt like instrument. It therefore hardly comes as a surprise that income and capital guarantees expose originators to the risk that commonly faces lenders: the risk of default. From macroeconomics point of view, the benchmarking amounts to price 46 For a put option, when the strike price is above the market price of the underlying asset. Available at Last accessed, 26 June, P a g e

142 fixing which is injustice (zulm) in Sharīʽah. Price fixing causes hardship and eliminates competition in market. Therefore it is illegal in various jurisdictions including Pakistan (Abdullah, Use of Interest Rate Benchmarks For Determining Profits on Islamic Sukūk). I. Is Floating rate permissible in Sukūk? From benchmarking a critical issue is raised regarding floating rate of rent in ijārah sukūk. As most of the ijārah sukūk issued internationally as well as nationally, most preferably here focus is in Pakistan is linked to benchmarking in which underlying rent in sukūk is linked to floating rate of KIBOR For Instance, Motorway and WAPDA sukūk. Whether it is allowed to benchmark the rentals to the floating rate of LIBOR or KIBOR? Is it permissible in Sharīʽah? Is ijārah contract allows it? The instant issue requires jurisprudential analysis. In ijārah contract, the rent can be floating or variable (Usmani, An Introduction to Islamic Finance, 1998). In floating ijārah (for avoidance of injustice and disputes in long term lease) it is suggested to use a well-known benchmark in which upper limit should be used for elimination of gharar in order to avoid market fluctuations. 47 In sukūk, it is criticized to link the rentals in ijārah with the floating rate of benchmarking to an interest based index. Usmani criticized by rendering this practice to ribā (Safari, Ariff, & Mohamad, 2014). He criticized that it is an excessive interest. It is recommended by the Sharīʽah scholars to develop alternative Islamic benchmarking to overcome estimation and pricing procedure. The new benchmark should not rely on interest. 48 In order to overcome the ribā issue, government sukūk may possibly be analyzed through macroeconomic signs and corporate sukūk could be analyzed based on the company performance indicators. IMF survey depicted that internationally there are US$ 14 billion ijārah sukūk issues (Safari, Ariff, & Mohamad, 2014) Sukūk Rating It is criticized that the rating in sukūk is done by accessing purchase undertaking and guarantee of company issuing sukūk which is controversial issues in Sharīʽah (Al-Amine, Sukūk Market: Innovation and Challenges, 2008). More clearly investigating the rating in sukūk it is explicitly viewed that all the international organizations are following these strategies to rate an instrument. Moody s rate the sukūk on basis of income generated from underlying asset, whereas in asset-based sukūk it can also be based on the purchase undertaking in sukūk (Ahmed, Islam, & Alabdullah, 2014). Taqi Usmani also raised the issue in his paper and criticized that the International credit rating companies don t differentiate between halāl and hāram. They don t verify the transfer of ownership to investors but only come across to guarantee and fixed profit in rating an instrument. He gave rationale that these agencies are doing so because they build up in interest based atmosphere. Therefore they cannot access the instrument quality rather they focused on guarantee and fixed profits. On the hand, Islamic economic system requires profit and loss sharing involving risk in transactions which can never be rationalized by these conventional agencies. Usmani also supports to get free of these agencies (Al-Amine, Global Sukūk and Islamic Securitization Market: Financial Engineering and Product Innovation, 2012) Tanazul and Ibra in Sukūk Despite the above-mentioned criticism on sukūk, there are some other issues which are heavily criticized by the scholars. Among the key concerns on practice of tanazul in equity-based structure such as mushārakah is that one or some of the partners waive certain rights up -front in favor of other partners for something that is yet to be known and to be realized in the future. Sharīʽah scholars 142 P a g e 47 Last accessed, 26 June, leasing, Last accessed, 26 June, 2016.

143 declared it against essence of contract i. e. Al kharaj bi al-damān. Sheikh Taqi Usmani opined that any condition which leads to interruption in sharing of profit will be void. A binding promise to purchase the assets at face value is unlawful because it is same as a capital guarantee, which is unlawful. This is in line with the AAOIFI Sharīʽah Standard which states: It is unlawful for the conditions of partnership or for the basis of profit distribution to include any text or condition that leads to the possibility that the sharing of profits will be interrupted. If this happens, the partnership will be void 49 The main issue is that whether the stipulation of ibra clause is in Sharīʽah compliance offered in the event of early settlement? The issue rebate may exist in murābaha sukūk, istisnā sukūk where sukūk is redeemed before its maturity date on event of default or upon early settlement. OIC Islamic Fiqh Academy in its resolution no. 64/2/7 resolves that a rebate on a debt for early payment, whether it is requested by the creditor or the debtor is legal and is not a kind of ribā, the Academy asserts that there should be no prior agreement between the contracting parties and the deal should involve only two parties i.e., the seller and buyer (Al-Amine M. a., 2006) (Academy, 2000) Maqāsid Al Sharīʽah Maulana Taqi Usmani key concern was that sukūk are in violation of maqāsid al Sharīʽah. He clearly said that: If we consider the matter from the perspectives of the higher objectives of Islamic law or the objectives of Islamic economics, then sukūk in which are to be found nearby all of the characteristics of conventional bonds are inimical in every way to these purposes and objectives. The whole objective for which ribā was prohibited is the equitable distribution among partners of revenues from commercial and industrial enterprise. The mechanisms used in sukūk today, however, strike at the foundations of these objectives and render the sukūk exactly the same as conventional bonds in terms of their economic results (Usmani, Sukūk and Their Contemporary Applications (Paper), 2007) Similarities with Bonds In sukūk al-ijārah, the cash is actually given against the cash by having a sale and leaseback arrangement along with temporary ownership in it. SPV is merely created to facilitate the buyback and leasing principle whereas, the control remains with the originator. In the whole arrangement the returns are replicating the conventional bonds on the basis of principle of borrowing and lending. Bonds are prohibited because it has elements that render it un Islamic. The sukūk here resemble bonds due to following features: In bonds, the bond holder doesn t have an ownership but they are in actual an interest bearing papers (Usmani, Sukūk and Their Contemporary Applications (Paper), 2007). Similarly it is examined in sukūk al-ijārah that the real rights of ownership are missing. A mere piece of paper is given to the sukūk holders consequence in right to get returns by making sale and lease arrangement. Moreover, the income generated has no link with the productivity of underlying assets is a vital characteristic of bond. The scrutiny of sukūk shows that the same exists in it (fixed or variable returns sukūk). Sukūk holders get the returns written in contract irrespective of actual profit and loss (Siddiqi, 2006). 49 AAOIFI, 2008, Sharīʽah Standard No 12, P a g e

144 In the light of above research, it is therefore concluded that the existing model of sukūk is fabricated in a manner that is not Sharīʽah-compliant. The practical application of sukūk is similar to conventional bonds. Moreover, it is a hilah to legalize ribā. Hence, only giving it notion of Islamic cover cannot render it Islamic. The application of sukūk in Pakistan will further uncover the real picture of sukūk. The law of sukūk and Sharīʽah analysis of sukūk issued in Pakistan will discuss in next chapter. 3. SUKŪK: NEED OF A NEW MODEL Islamic capital market is the backbone of the economy. The vital issue is the assessment of Islamic capital market, whether it replicates the conventional market or not? (J.T.McMillen, "Sukūk and the Islamic Capital Markets" in Contemporary Islamic Finance, ed. Karen Hunt Ahmed, 2013) Sukūk, an innovative model is developed to raise the Islamic capital market by considering principles of Islam. They were issued over the globe and currently it became a popular source of economy of Islamic capital market (Adam & S.Thomas, 2004). In fact, it has changed the dynamics of the Islamic finance. 50 Considering facts and figures, it is considered as the fastest growing instrument in the Islamic capital market. In Pakistan, Sharīʽah compliant funds have exceeded over 50% of the total market capitalization. For that reason, this expansion necessitates Islamic banking. Even though; the popularity is not only common in the Islamic banks but also in the commercial and International banks (Bellala & Masood, 2013). Moreover, the current Issue of Sukūk Regulations, 2015 is a great step towards the development of sukūk market. On the other hand, the capital market is governed by the issuance of bonds, shares and other investments. In Islam, trading in bonds is prohibited due to interest (ribā) in it (Fund, Finance and Development, 2010) which renders its income hāram (Adam & Thomas, Islamic Bonds: Your Guide To Issuing, Structuring And Investing in Sukūk, 2004). Sukūk as an alternative to conventional bond has brought revolution in Islamic finance in past few years. They were advertised through the religious notions provides the exemption that the process will follow transparency in near future. 51 It is criticized that most of the sukūk doesn t comply with Sharīʽah standard given by AAOIFI. The product has a purpose of attracting investments from banks which are resistant to risk-taking. Moreover, these products are not designed to attract genuine risktaking investors and banks who want real investment in line with Sharīʽah. Unfortunately, these products are designed in such a way that replicates conventional bonds by giving a Sharīʽah cover. These are composed in complex way consists of different contractual structures which in individual level are Sharīʽah compliant but at composite level contradicts the objectives of Sharīʽah (Salman Syed Ali e., 2008). The close scrutiny of sukūk highlighted numerous issues (as discussed in the previous section of the dissertation) which are injurious to Islamic finance. Ijārah sukūk is targeted from all axes whereas musharkah and equity sukūk is no longer away from criticism. The first step that is the creation of SPV is also subjected to criticism. The situation of sukūk in Pakistan in the dissertation seems to be in disguise. Hence, the necessity is to develop a new model against ijārah sukūk (which was the focus of instant dissertation) conforming the principles of Islam. Before discussing new model, the principles of Islamic law need to consider. 3.1.The Principles of Islamic Commercial Transactions Islamic law has following features in dealing business and contracts: 144 P a g e 50 Last accessed 30 March Last accessed 30 June 2016.

145 Firstly, ribā in prohibited in all transactions on the ground that it involves exploitation and injustice to society (Fund, Finance and Development, 2010). The severity of prohibition of ribā is understood by a verse of holy Qur ān in which Allah SWT declared it war against HIM and HIS prophet Saw (2: ). Hence, all the contracts in form and spirit must prohibit ribā. Secondly, the contracts should free from gharar. The word gharar expresses the meaning of uncertainty and risk, which may consequence in disputes. Thirdly, qimār and maysir are prohibited. Qimār includes all the money obtained from games of luck and chance. It also includes the money earn at the cost of others. Maysir means earning the money without working hard for it. Gambling is one of the examples of maysir. The Qur ān has explicitly prohibited this practice (5:90) (Mansoori, Islamic Law of Contract and Business Transaction, 2003). Fourthly, It is prohibited to involve in hāram activities i.e. all those activities that can harm the society. Holy Qur ān prohibits eating carrion, gambling, drinking alcohol etc. Fifthly, all forms of fraud and deception are prohibited in holy Qur ān and Sunnah. Numerous practices fall within the ambit of fraud such as false bidding and short weight etc. Sixtly, a number of ahādīth prohibited the two mutually inconsistent contracts. Abu Hurayrah narrated that holy prophet (s.a.w.s.) has prohibited to sales in one sale. Seventhly, all the transactions should observe the principles of maqāsid -al-sharī ah. These principles include the protection and preservation of dīn,nafs, nasl, aql and māl. Lastly, all commercial transaction should comply with the principle of liability to loss and entitlement to profit (Mansoori, Islamic Law of Contract and Business Transaction, 2003). 3.2.The Aim of New Model of Sukūk In the light of this study in the previous chapters, the design of the new model is driven by the following goals: That the principles of sarf and prohibitions of ribā are to be applied on new model. That the principle of al kharaj bi al-damān is to be observed. That the spirit as well as form should be Islamic in the new model. That the Qur ānic verdicts should b followed. The two contracts should not be joined in a single one violating hādīth of joining two contracts into one. That the maqāsid al Sharīʽah should be followed comprehensively. That the true sense of ownership is to be applied in the new model. The new model should avoid the gharar. Bayʽ al wafā and Bayʽ al īnah are to be avoided. Conventional credit rating is to be avoided in the new model. The model will be based on the principle of profit and loss sharing i.e. risk sharing. 3.3.Existing Structure In existing structure of sukūk al-ijārah, the originator issues the sukūk through SPV to the sukūk holders. The detail of the structure is already discussed in former chapters. The criticism on the structure is very harsh and critical Sharīʽah evaluation pinpoints numerous Sharīʽah issues. Summing up the issues, from the creation of SPV to maturity of sukūk the whole thing is disapproved. The new model will try to discard these issues through Sharīʽah compliance. 145 P a g e

146 3.4.New Structure The structure commences with the originator i.e. let s assume the government who is in need of finances. It is the necessity of the government to raise the funds; in this regard the Islamic capital market is a major sector. For raising funds, the originator i.e. the government issues sukūk alijārah. As discussed, sukūk is the certificate of an undivided share of ownership in assets or usufructs etc. While it is difficult to transfer the ownership of assets belonging to the government to the public, therefore the originator must issue the sukūk over an asset which it is planning to privatize in near future. The rationale behind it is to avoid the issues of ownership in near future. For this purpose, there is no need to create an SPV. The issuance of sukūk is to be solely done by the originator. The originator after issuance of sukūk transfers its ownership to sukūk holders in the real sense so that the risk may pass with the ownership. The transfer of ownership should not only confine to transfer in books of accounts but actual transfer of ownership. In this sense, AAOIFI recommendations regarding the transfer of ownership will be observed in true spirit. After transfer of ownership, the originator can take it back on the lease from the sukūk holders. In Islamic law, the sale and lease back is only allowed in dire cases. Here it is allowed on the ground that raising funds on the halāl way to avoid ribā is the necessity of originator, so it can be considered a dire need. In the instant ijārah agreement, all the rules of ijārah should be observed comprehensively. The rentals should not be variable and must originate out of the underlying asset. The major maintenance of property should be done by lesser whereas the minor and day to day maintenance is to be held by the lessee. As when in an Islamic instrument more than one principle is tied up, there is factor of un-islamic elements. So, the instrument should be observed profoundly. The rentals shouldn t be tied to conventional benchmarking but based on fixed rental by following the jurisdiction, nature of the asset and its usufruct. During this period, the asset risk is to be borne by the owner. At end of the lease, the asset should be transferred back to the sukūk holders. If the originators further want the usufruct of the assets, by making a fresh ijārah agreement can take asset on the lease. However, at termination, the sukūk holders should take possession of asset back from the lessee. 1. The originator is in need of financing. Originator observing 5. The assets were lease back to originator by rules of ijārah in Islam. 2. It sells assets to raises funds by issuing sukūk certificates. 146 P a g e

147 Rentals 6. the the At termination of ijārah, sukūk holders will take property back from lessee. sell the observing 3. The assets were sold to sukūk holders on cash. Sukūk Holders the 8. The sukūk holders can assets freely in market by rules of co-ownership. 4. All the rights annexed to ownership are transferred to sukūk holders. 9. The originators are barred to purchase the property for any reason, in order to avoid stratagem to legalize ribā. Figure 3.1 New Model of Sukūk 52 Sukūk holders are free to trade the asset in the market. As sukūk mostly issue to more than one person, the rulings of musha must be observed to trade in the market. Sukūk holders should be restricted to sells the asset back to the originator in order to avoid bayʽ al wafā, bayʽ al īnah and a stratagem to ribā-based model. However, it can be traded freely in the market. For credit rating of sukūk, an alternative Islamic credit rating agency should be established. Illustration The new model is illustrated by giving practical example and possibility. Here let s assume the government of Pakistan is need of financing. The government has assets i.e. metro buses and wants to privatize them as it is already running on the subsidy but it needs its usufruct for a time period. Here the government can issue the sukūk over the asset to sukūk holders and take it back on lease for a period of time (The Islamic principles of the lease as discussed above should observe here). Consequently, the funds will rise through Islamic capital market i.e. sukūk without contradicting any Sharīʽah principles. The Islamic capital market and the economy will boost up. At the end of the lease period, the possession of asset should be transferred back to the lessor/owner. The sukūk holders by observing the rules of co-ownership can trade freely in the market. The government will be restricted here to buy the asset back, in order to, avoid bayʽ al wafā, bayʽ al īnah and a stratagem to ribā-based model. 147 P a g e 52 The model is made by the writer of dissertation.

148 3.5.General Advantages of New Model The new model will act as a new blood in the field of Islamic finance. It will serve the purpose of fund raising by complying Sharīʽah requirements concerning contracts and transactions. It will eliminate the element of ribā in the transaction. As a consequence, the Islamic capital market will flourish. 4: CONCLUSION AND RECOMMENDATIONS Conclusion In the light of the instant research, it is therefore concluded that sukūk being an innovative instrument has brought revolution in Islamic capital market. Through this instrument, the Islamic capital market has gained popularity worldwide. Considering facts and figures, it is considered as the fastest growing instrument in the Islamic capital market. In contrast to bonds, sukūk were issued as Islamic products. The AAOIFI rulings of sukūk were the consequence of great efforts by the scholars. Unfortunately, there are several elements which are rendering it un-islamic and a stratagem to legalize ribā as discussed in the dissertation. The removal of these un-islamic elements can render sukūk truly Islamic. Sukūk can be considered Islamic as long as it truly complies with the principles of Islam. Otherwise, non-compliance can shape it a worse form of bond. Dr. Tahir Mansoori also recommended that issues in sukūk should be addressed to free it from a mere replication of conventional bonds. He further criticized that in the present form sovereign sukūk are stratagem to legalize ribā (Mansoori, Use of Hiyal in Islamic Finance and its Sharīʽah Legitimacy, 2011). On the basis of discussed facts and figures, most of the sukūk were issued by the government sector i.e. ijārah sukūk. Unluckily, ijārah sukūk is specifically criticized i.e. the whole arrangement in it is hilah to permit ribā. To resolve the un-islamic elements in ijārah sukūk, the new model is given in the dissertation. The new model, if truly followed, will aid in the escalation of the Islamic capital market. Being an innovative Islamic model, it will mobilize the funds in all the sectors. There should be Islamic credit rating agency to rate the instrument by accessing the instrument on the principles of Islam. By analyzing the law of sukūk in Pakistan, it is concluded that the Issue of Sukūk Regulations 2015 is a great step taken by the government of Pakistan but the need of an hour is to formulate a uniform and consolidated law for the government and private sector. In this regard, the recommendations of the instant research should be considered. Recommendations 1. The sukūk based on already existing assets and future projects must be distinguished for the real transfer of ownership. Sharīʽah perception of sale and ownership should be used in sukūk rather than concepts of common laws. 2. Sukūk should be issued on the assets which the government is going to privatize in near future. In this way, the funds will be raised by the government and there be the real transfer of ownership to the sukūk holders. Such privatization through sukūk will also boost the economic activity in the state. 3. The new advised model: an outcome of the dissertation should be considered by the relevant authorities for the issuance of sukūk. 4. The prospectus must contain the real transfer of ownership rights to sukūk holders. Furthermore, the transfer should also pursue in book accounts. 5. Bayʽ al wafā and bayʽ al īnah should be avoided by adopting new recommended structure of sukūk. 6. GOP Ijārah Sukūk Rules 2008 should be amended as par the recommendations. 7. To mitigate risk in sukūk, takaful can be made a part of sukūk transaction. 8. The returns of the sukūk should be based on an actual productivity of underlying assets. 148 P a g e

149 9. There should be the consolidated law for the government and private entities for the issuance of sukūk. 10. In sukūk al-ijārah, there is undivided ownership of sukūk holders. Therefore, the Sharīʽah rules of co-ownership i.e. musha should make a part of the law in order to regulate sukūk in the secondary market. 11. The conversion of sukūk into shares should be prohibited to eradicate discrepancy between sukūk and shares. The sukūk should be made untainted and Islamic. 12. To secure risks in sukūk, the benevolent third party can give the guarantee as par AAOIFI rulings but the government shouldn t give the guarantee in this respect. The guarantee shouldn t be given to ensure the return of principal amount. 13. Investors should be protected by disclosing the sukūk structure as well as its Sharīʽah and legal consequences. 14. The government of Pakistan should issue a specific accounting standard to regulate sukūk market, by considering the distinctive feature of sukūk. 15. The government of Pakistan should establish a proper forum for regulating and stimulating the trade of sukūk in the market. The regulatory forum must have qualified Sharīʽah scholars for effective implementation and observance of maqāsid al Sharīʽah in contracts. 16. For credit rating, an alternative Islamic credit rating agency should be established, which can rate the instrument on principles of Islam. 17. An alternative interest free benchmarking should develop to promote the real Islamic financial market. 18. To regulate the sovereign sukūk in the international market, there should consolidated law for all countries. The uniformity of law will promote the Islamic financial market. 19. OIC, IFSB and AAOIFI should meet on a single forum to decide the Sharīʽah issues in sukūk. A uniform structure should be adopted by all of them in structuring sukūk as Holy Prophet (P.B.U.H) said that my ummah will never agree on an error. 20. Islamic Development Bank should take measures to build up an organized framework for sukūk which will serve a procedural requirement for member countries To regulate Islamic capital market, the need of an hour is an alternative Sharīʽah compliant model. In this regard, the gates of jurisprudential research should be opened for innovation and promotion of diversity in Islamic capital market. 53 The conference was held in Tunisia in 2015 under name of Islamic Sukūk between Sharīʽah Legitimacy and Legal and Accounting Requirements in which papers were presented and recommendations were given. Last accessed 25 July, P a g e

150 REFERENCES Al- Qur ān, Chapter 5, Verse 90. Al- Qur ān, Al- A rāf, Verse Al- Qur ān, Chapter 2, Verse Abdullah, A. K. (n.d.). Legal and Beneficial Ownership. Economic, Finance, Zakat & Awqaf, 1-4. Retrieved from HYPERLINK " Abdullah, A. K. (n.d.). Use of Interest Rate Benchmarks For Determining Profits on Islamic Sukūk. Economic, Finance, Zakat & Awqaf, 1-4. Retrieved from Academy, T. C. (2000). Resolutions and Recommendations of the Council of Islamic Fiqh Academy, Jeddah, Saudi Arabia: Islamic Development Bank. Retrieved from HYPERLINK " Adam, N. J., & S.Thomas, A. (2004). Islamic Bonds: Your Guide To Issuing, Structuring And Investing in Sukūk. United Kingom: Euromoney Books. Ahmed, E. R., Islam, M. A., & Alabdullah, T. T. (2014). Islamic Sukūk: Pricing Mechanism and Rating. Journal of Asian Scientific Research, al-albani, M. N.-u.-D. (1985). Ghaya Tul al Marami Fi Takhrej Ahadith al Halāl wa al Haram, 3rd ed. Bairut: Al Maktab al Islami. Al-Amine, M. a. (2006). Istisnā (Manufacturing Contract) in Islamic Banking and Finance. Kuala Lumpur: A.S. Noordeen. Al-Amine, M. A.-B. (2008). Sukūk Market: Innovation and Challenges. Islamic Economic Studies. Al-Amine, M. A.-B. (2012). Global Sukūk and Islamic Securitization Market: Financial Engineering and Product Innovation. The Netherlands: Koninklijke Brill NV. Al-Humam, I. (1990). Fath Al-Qadīr Sharh Al-Hidayat. Beirut: Daar Sadir. Ali, M. M. (2011). The Religion of Islam. USA: Ahmdiyaah Anjuman Ishaat Islam. Ali, S. S. (2005). Islamic Capital Market Products, Developments and Challenges (Occasional Papers). Islamic Research and Training Institute. Al-Qarafi, A. a.-a. (1998). Al-Furuq. Beirut: Dar al-kutub al-ilmiyyah. Al-Sharī ah, U. b. (n.d.). Sharh Al-Wiqayah Fi Masa il Al-Hidayah. Al-Subki, A. a.-w.-d. (1991). Al-Ashbah Wa Al-Naza ir, 1st ed. Beirut: Dar Al-Kutub Al-Ilmiyyah,. Ashraf, S. (2006). Judicial Culture in Islam. New Delhi, India: Anmol Publication. 150 P a g e

151 At-Tirmidhi, A. ʿ. (2007). Sunan at-tirmidhi, ed. Hafiz Abu Tahir Zubair. Riyadh: Maktaba Dar-us- Salam. Ayub, M. (2007). Understanding Islamic Finance. England: John Wiley & Sons Ltd. Ba albaki, M. (1980). Al-Mawrid. Beirut, Lebanon: Dar El-Ilm Lil-Malayēn. Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (October 2010). Islamic vs. Conventional Banking Business Model, Efficiency and Stability. The World Bank Development Research Group Finance and Private Sector Development Team. Bellala, M., & Masood, O. (2013). Islamic banking and Finance. United Kingdom: Cambridge Scholar Publishing. Ellias, M. R., Haron, M. N., & Mohammed, M. F. (23 September 2013). Sharīʽah Issues in Sukūk (paper). Kliff Sharīʽah Forum, (pp. 1-22). Kuala Lumpur. Forum, J. D. (2015). Liquidity Management Product of SBP. Journal of Islamic Business and Management, Retrieved from HYPERLINK " Fund, I. M. (2010). Finance and Development. Washington DC: IMF. Gamal, M. A. (2006). Islamic Finance Law, Economics and Practice. New York: Cambridge University Press. Ghani, N. A., & Lahsasna, M. Y. (2015). Beneficial Ownership: To What Extent It Complies with Sharī ah? Canadian Center of Science and Education, Guthman, & Doughal. (1952). Corporate Financial Policy. New York: Prentice Hal. Hasan, S. M. (2013). Asset- Backed & Asset-Based Sukūk: An Introduction. International Sharīʽah Research Academy, 1-4. Retrieved from HYPERLINK " Israr, M. (2012). The Application Of Sukūk In Pakistan (Case Study Of WAPDA And Motorway) (LLM dissertation). Islamabad: International Islamic University Islamabad. J.T.McMillen, M. (2013). Sukūk and the Islamic Capital Markets in Contemporary Islamic Finance, ed. Karen Hunt Ahmed. New Jersey and Canada: John Wiley and Sons, Inc. JKamali, M. H., & A.K. Abdullah, e. (2014). Islamic Finance: Issues in Sukūk and Proposals for Reform. United Kingdom: International Institute of Advance Islamic studies and the Islamic foundations. Khan, M. A. (2013). What is Wrong with Islamic Economics?: Analyzing the Present State and Future Analysis. USA: Edward Elgar Publishing Limited. Mansoori, D. M. (2003). Islamic Law of Contract and Business Transaction. Islamabad: Sharīʽah Academy. Mansoori, D. M. (2011). Use of Hiyal in Islamic Finance and its Sharīʽah Legitimacy. Journal of Islamic Business and Management, Nujaym, I., & Ibrāhim, Z. a.-d. (1968). Al-Ashbāh Wa Al-Nazā ir. Beirut: Dar al-kutub al-ilmiyyah. 151 P a g e

152 Nyazee, I. A. (1994). Theories of Islamic Law: The Methodology of Ijtihād. International Institute of Islamic Thought and Islamic Research Institute. Nyazee, I. A. (1998). Islamic Law of Business Organization Corporations. Islamabad: The International Institute of Islamic Thought and Islamic Research Institute. Nyazee, I. A. (2000). Islamic Jurisprudence. Islamabad : International Institute of Islamic Thoughts and Islamic Research Institute Islamabad. Nyazee, I. A. (2010). Outlines of Islamic Jurisprudence. Islamabad: Advance Legal Studies Institute. Rehman, D. H. (2003). Islamic Financial Instruments. Peshawar Cantt: Sardar Khan Welfare Trust. Safari, M., Ariff, M., & Mohamad, S. (2014). Sukūk Securities: New Ways of Debt Contracting. Singapore: John Wiley and Sons. Salman Syed Ali. (2005). Islamic Capital Market Products, Developments and Challenges (Occasional paper No.9). Islamic Research and Training Institute. Islamic Research and Training Institute. Retrieved from HYPERLINK " Publications/Occasional%20Papers/Islamic%20Banking%20and%20Finance/Islamic_Capital _Marke_%20Development_Products.pdf" Publications/Occasional%20Papers/Islamic%20Banking%20and%20Finance/Islamic_Capital _Marke_%20Development_Products.pdf Salman Syed Ali, e. (2008). Islamic Capital Market Products, Regulations & Development, Proceedings of International Conference. Saudi Arabia: Islamic Research & Training Institute. Siddiqi, M. N. (2006). Islamic Banking and Finance in Theory and Practice: A Survey of State of the Art. Islamic Economic Studies, Taymiyyah, A. b.-h. (2002). Al-Qawa id Al-Nuraniyyah Al-Fiqhiyyah. Riyad: Maktabat Al-Tawbah. Usmani, M. T. (1998). An Introduction to Islamic Finance. Karachi, Pakistan: Idaratul Ma arif. Usmani, M. T. (2007). Sukūk and Their Contemporary Applications (Paper). Accounting And Auditing Organization For Islamic Financial Institutions, (pp. 1-15). HYPERLINK" HYPERLINK" conomics/ijārah leasing HYPERLINKhttp://dictionary.cambridge.org/dictionary/english/private-property HYPERLINK" 20Islamic%20Finance/58.%20CIFE17-18%20UNDERSTANDING%20SUKUK.pdf" ic%20finance/58.%20cife17-18%20understanding%20sukūk.pdf HYPERLINKhttp://investment-and-finance.net/islamic-finance/b/bay-al-istighlal.html HYPERLINKhttp://investment-and-finance.net/islamic-finance/t/takyif-fiqhi.html" P a g e

153 HYPERLINK " Wx" \t "_blank" HYPERLINK " HYPERLINK " HYPERLINK" HYPERLINK" nvestopedia.com/terms/i/inthemoney.asp#ixzz4cjtpbepb HYPERLINK" HYPERLINK" 173.pdf HYPERLINK" Companies Ordinance, Issue of Sukūk Regulations, Securities and Exchange Commission Act Sharī ah Standard No. 21, AAOIFI. Sharī ah Standards No. 5, AAOIFI Sharī ah Standards No.17, AAOIFI 153 P a g e

154 Lucrativeness of Islamic Vs Conventional Mutual Funds in Pakistan. Bilal Nafees Research Sacholar, CIIT, Lahore (Not Presented) Abstract The purpose of this study is to conduct comparative risk adjusted performance and selectivity & timing skills analysis, Islamic VS Conventional mutual funds in Pakistan. The study utilizes various risk-adjusted measures to evaluate risk and return characteristics. The study also utilized proposed technique by Treynor and Mazuy (1966) and Merton-Henriksson (1981) to appraise selectivity and timing skills on the data set ranging Islamic VS Conventional mutual funds. In this study, four categories Aggressive Fixed Income, Asset Allocation, Equity and Balanced open end mutual funds are analyzed. On the basis of evidences found, only few managers from conventional and Islamic mutual funds hold better stock picking skills. The mutual fund managers of both conventional and Islamic mutual funds industry are found poor market timer in Pakistan. Islamic mutual funds have earned better returns than conventional mutual funds. Therefore, risk adjusted performance of Islamic mutual funds is better than the conventional mutual funds. Key words: Mutual Funds, Islamic, Conventional, Managerial Skills And Risk Adjusted Performance. Introduction Islamic mutual funds have attracted a lot of investment because of impressive performance, especially in Islamic countries. In Pakistan, well diverse Islamic mutual funds have better ability to outperform. Islamic mutual funds have witnessed tremendous growth over the last few years (Razzaq, Gul, Sajid, Mughal, & Asma, 2012). Islamic mutual funds have to ensure compliance with Islamic laws which most commonly known as Shariah Law. Focus of Islamic principles is to promote economic condition of individuals following decent values and business practices (Ebrahim, 2008). Financial institutions from western world have established keen interest in Islamic finance (Čihák & Hesse, 2010). Despite of tough challenges to economy of Pakistan conventional mutual funds have also registered tremendous growth over the last few years. The conventional mutual funds operating in Pakistan have also grabbed significant attention amongst top mutual funds of the world. The conventional funds are major contestant of the Islamic mutual funds. In terms of returns, it has been claimed in a report published in 2012 that amongst top hundred equity mutual funds twenty mutual funds belongs to mutual funds industry of Pakistan 54. Amongst these twenty mutual funds the highest and lowest return is % by Golden Arrow Selected Stock Fund, having 5th ranking worldwide and 74.23% by Safeway Mutual Fund having 20th ranking worldwide. This performance is for only e62cfb08787_PRIMARY.pdf 154 P a g e

155 single financial year. It is difficult to generalize the ex-ante and ex-post returns without evaluating risk adjusted performance along with timing and selectivity skills. Therefore, it is also necessary to check whether fund managers have consistently added value to performance of funds or not. Pakistan is an Islamic state that cannot opt any law violating the basic principles of Islam. That is why, on religious basis, many investors believe in investing in sharia compliance opportunities. Islamic mutual funds have reported faster growing rate than conventional counterparts. Moreover, Investors can avail benefits by focusing on limited set of emerging markets (Buchanan, English II, & Gordon, 2011). The relationship between Islamic and conventional mutual funds is strong that indicates the importance of Islamic mutual funds. Islamic mutual funds are growing at rapid pace than conventional mutual funds. The size of Islamic mutual funds is lesser than conventional mutual funds (F Mansor & Bhatti, 2009). The pre-going discussion arises series of conjectures between Islamic VS conventional mutual funds of emerging markets. It is important to evaluate risk adjusted performance and managerial skills to dig out lucrative efficiency of Islamic and conventional mutual funds. This study will add landmark value addition in the existing literature on one of the prominent emerging market of mutual funds of South Asia because evidences on emerging market mutual funds in all continents of the globe are scarce. The main objective of this study is to assess whether Islamic mutual funds are more lucrative or conventional mutual funds. To the best of authors knowledge, this study fills the gap in literature with the help of methodology that have never been applied on the sample taken. Literature Review Negative risk adjusted returns and high management fee hinder the growth of mutual funds industry. Whereas, assets turnover, expense ratio and family proportion positively contribute in growth of mutual fund industry of Pakistan (Nazir & Nawaz, 2010). Negative results of risk adjusted performance of open end mutual funds indicate that mutual funds industry is not flourishing in Pakistan. The ranking of mutual funds is subject to measure used for risk and return analysis (Khalid, Abbas, & Shah, 2010). Overall performance of mutual funds industry is below the market portfolio in Pakistan (Nafees, Shah, & Khan, 2011). Return of mutual funds industry is not above the risk free rate of return from 2006 to Negative alpha value indicate that none of the mutual fund has outperformed the capital market in Pakistan (Mahmud & Mirza, 2011). Broker backed equity mutual funds performed better than institutional backed equity mutual funds in Pakistan (Gohar, Ahmed, & Niazi, 2011). Performance of Islamic mutual funds have been poor against benchmark indices. Selectivity skills of mutual fund managers are also poor. The poor performance of Islamic mutual funds is due to lower diversification (Abderrezak, 2008). Insignificant statistical difference in the performance of Islamic and convention market indices exist in Malaysia during (Albaity & Ahmad, 2008). Positive insignificant selectivity skills and no evidence regarding timing skills of managers are found in Poland (Swinkels & Rzezniczak, 2009). In Saudi Arabia during 2003 to 2010, Islamic mutual funds underperformed than conventional mutual funds. Same results have been found during bullish trends (Merdad, Hassan, & Alhenawi, 2010). Islamic equity mutual funds performed under than the Islamic as well as conventional benchmark around the world. Further, Islamic mutual fund managers are found to be bad market timer (Hayat & Kraeussl, 2011). Around the globe, Islamic mutual funds have focused on growth oriented stocks and reflect small cap preferences (Hoepner, Rammal, & Rezec, 2011). In Malaysia, Islamic mutual fund managers possess superior selectivity skills but timing abilities are inferior (Fadillah Mansor & Bhatti, 2011). Investigating 23 developed and P a g e

156 emerging financial markets around has confirmed that Islamic mutual funds invest in stocks having growth-oriented trend and tend to show positive momentum (Walkshäusl & Lobe, 2012). In Taiwan, continuity of previous trend in the performance has been observed. Further, style of momentum, size and length of fund history is negatively related with the timing performance. Positive relationship between value style and investment decision is evidence of loss-averse behaviour (Hou, 2012). Specific country characteristics are vital for better performance of mutual funds. Therefore, performance of mutual funds is better in such countries where capital markets liquidity is high with strong legal institution (Ferreira, Keswani, Miguel, & Ramos, 2013). In Croatia, the timing abilities of mutual fund managers are not found (Škrinjarić, 2013). On the basis of literature review, following hypothesis has been proposed. H1: Islamic mutual funds are more lucrative than conventional mutual funds. H2: Conventional mutual funds are more lucrative than Islamic mutual funds. Research Methodology As the purpose of this research is to evaluate the timing & selectivity skills and risk adjusted performance of mutual fund managers. Therefore, timings & skills evaluating techniques developed by Jensen Alpha, Treynor & Mazuy and Henriksson & Merton has been applied. Risk adjusted performance measures has been to evaluate the risk adjusted performance of mutual fund managers. This study utilizes selectivity and timing skills measures along traditional measures of risk adjusted performance. (Jensen, 1968) developed a model that is also known as Jensen Alpha. This model is based on the (CAPM) capital asset pricing model. CAPM assumes that the expected return of any security is linearly dependent on relative risk of the security with the capital market and risk premium. The model prosed by Jensen Alpha is given below: Further, represents the return of analysed mutual fund in given time t, represents the return with no risk of portfolio. (Alpha), it represents the Jensen Alpha value. (Beta) is the coefficient of market premium calculated using, which is, also known as risk premium and is the return of market in time t. represents error term of the equation. (Alpha) is the measure that is used to assess the selectivity skills of mutual fund managers. The previous model does not take into account the timing skills of mutual fund managers while moving in and out from the market based on investment decision. (J. Treynor & Mazuy, 1966)) proposed a model that can be used to assess both timing and selectivity skills simultaneously of mutual fund managers. As, mutual fund managers are expert of the industry therefore have some additional information relating to the sign and size of the market. Thus, basic assumptions used by Treynor and Mazuy are size and sign of the market movement. The proposed model is given below in equation form The timing skills of mutual fund managers can be measured coefficient of. It is the additional reward caused by additional information., represent selectivity skills. 156 P a g e

157 (Henriksson & Merton, 1981) developed a model. This model takes into account that mutual fund managers have information about the direction of market return movement as well. In the equation, coefficient represents market timing skills of the managers, means that it will take value 1 only if the return of market is above the risk free rate otherwise zero., the whole expression would be used to assess the timing skills of mutual fund managers., represent selectivity skills. The MM measure is the extended form of sortino measure and developed by (Modigliani & Modigliani, 1997). This measure effectively explains the difference between the returns of portfolio and market. The MM measure defines difference of performance from basis points. If the difference becomes positive then the fund has outperformed the capital market. If the difference is negative then the fund has underperformed the capital market. The MM measurement is presented below: Where, represents the sharpe measure of portfolio and represents the Sharpe measure of market portfolio. is standard deviation of market returns. TT Measure is also extended form like MM, developed by (Bodie, Kane, & Marcus, 2005). It is simply the difference between Treynor measure and average market premium. If the answer of TT measure is positive and greater than one then mutual fund has earned more than per unit of risk and above than market risk premium. Where, TR stands for Treynor Measure, and is average return of market and risk free assets. Sharpe measure was developed by (Sharpe, 1966). This risk adjusted performance measure is being widely used by investors to evaluate risk adjusted performance of mutual funds. This measure evaluated excess return earned by portfolio over per unit of absolute risk. The formula of this measure is given below. Sortino measure was developed by Fran A Sortino in In this measure only down risk is used. it is the only difference between sharper and sortino measure. So, using this measure excess return is calculated over per unit of downside risk. The downside risk is of more importance because it ensures that risk has been taken into account more realistically to measure the performance. The formula of this sortino measure is given below. 157 P a g e

158 KSE100 Index KMI30 Index Treynor measure was developed by (J. L. Treynor, 1964). As other some measure consider absolute risk but this measure consider relative risk of mutual fund with the capital market. These measures determine that how much excess return from benchmark has been realized over each unit of relative risk. This risk is also known as systematic or un-diversifiable risk. The formula of Treynor ratio is given below. Where, = market return, = portfolio return, = risk free return, n = number of observations. If managers are able to outperform the market then investors would be more willing to invest in such mutual funds. Sample Construction This research focuses on mutual funds industry of Pakistan. The sample set inherits some characteristics. The mutual funds data taken for the study is post financial crisis. Four categories of mutual funds are selected because of data constraint. KMI30 (KSE Meezan Index) and KSE100 (Karachi Stock Exchange) index are used as benchmark for Islamic and conventional mutual funds respectively. Values of Indexes are obtained from website of Karachi Stock Exchange. The data is obtained from the respective websites of mutual funds from over the period of 2009 to Risk free rate is taken from SBP (State Bank of Pakistan) data warehouse. Table 1 Category No of Funds Benchmark Panel A (Conventional Mutual Funds) Aggressive Fixed Income 7 Asset Allocation 4 Equity Fund 16 Balanced Fund 4 Panel B Islamic Mutual Funds Islamic Aggressive Fixed Income 3 Islamic Asset Allocation 3 Islamic Equity/ Income 10 Islamic Balanced Fund 2 Table 1 shows the description of the sample. Total numbers of conventional and Islamic mutual funds are thirty one and eighteen. The full name of all mutual funds are provided in the appendix. Further, sample is almost fifty percent of population of open end mutual funds. The appraisal of others categories have not been done because of non-availability of appropriate benchmark in Pakistan. Results and Interpretation 158 P a g e

159 First of all managers skills are empirically analyzed with help of Jensen Alpha, Treynor Mazuy and Merton-Henriksson. Results of estimated parameters are reported on mean average basis. Jensen alpha results are reported in table 2. Only asset allocation category has significant positive alpha value thus asset allocation managers have been able to beat the market as compare to other fund categories of conventional mutual funds. Whereas, in Islamic mutual funds, asset allocation category has positive but insignificant alpha value. All others categories of both conventional and Islamic mutual funds has negative and significant alpha value. Hence, the mutual fund managers have not been able to beat the market apart from asset allocation category from conventional and Islamic mutual funds. Table 2 Jensen Alpha Measure Α Panel A Conventional Mutual Funds Using KSE100 Benchmark Aggressive Fixed Income Asset Allocation Equity Fund Balanced Fund Panel B Islamic Mutual Funds Using KMI30 Benchmark Islamic Aggressive Fixed Income Islamic Asset Allocation Islamic Equity & Income Islamic Balanced Fund α t-value In Table 3 results of (J. Treynor & Mazuy, 1966) model are reported. As far as conventional mutual funds are concerned, Aggressive Fixed Income and Balanced mutual fund managers exhibit positive significant market timing skills. Asset Allocation mutual funds possess positive but insignificant market timing skills. Whereas, amongst Islamic mutual funds, Aggressive Fixed Income and Equity & Income mutual fund managers exhibit positive and negative insignificant timing skills respectively. Whereas, Asset Allocation and Balanced Mutual fund manager exhibit positive and negative significant market timing skills. Therefore, conventional mutual fund managers have better market timing skills than Islamic mutual fund managers. These managers might be better aware of about sign and size of capital market. Table 3 Treynor Mazuy α α t-value β β t Value τ TM τ TM t-value Panel A Conventional Mutual Funds Using KSE100 Benchmark Aggressive Fixed Income Asset Allocation Equity Fund Balanced Fund Panel B Islamic Mutual Funds Using KMI30 Benchmark 159 P a g e

160 Islamic Aggressive Fixed Income Islamic Asset Allocation Islamic Equity & Income Islamic Balanced Fund Table 4 contains the results (Henriksson & Merton, 1981) model. This model helps to empirically analyse the ability of manager to select stocks providing more returns with minimum possible risk and moving in and out from the capital market at suitable time and it is very important characteristics while analysing the performance of mutual funds. These results are different from the results of Treynor Mazuy model. Aggressive Fixed Income and Asset Allocation from conventional mutual fund managers exhibits positive significant and insignificant market timing skills respectively. Conventional Equity and Balanced mutual fund managers exhibits negative significant market timing skills. Amongst Islamic equity mutual funds, Aggressive fixed income and Asset Allocation mutual fund managers possess positive insignificant whereas Equity & Income and Balance mutual fund managers possess significant negative timing skills of mutual fund manager. The probable reason of poor timing skills of Islamic mutual fund managers might be limited availability of Islamic financial products. Another reason is that conventional mutual fund managers had superior information about sign of capital market returns than Islamic mutual fund managers. The results on average are consistent with Treynor and Mazuy that conventional mutual fund managers are better market timer. Table 4 Merton-Henriksson α α t-value β β t Value τ TM τ TM t-value Panel A Conventional Mutual Funds Using KSE100 Benchmark Aggressive Fixed Income Asset Allocation Equity Fund Balanced Fund Panel B Islamic Mutual Funds Using KMI30 Benchmark Islamic Aggressive Fixed Income Islamic Asset Allocation Islamic Equity & Income Islamic Balanced Fund In Table 5 results proposed (Modigliani & Modigliani, 1997) are reported. All the Islamic and conventional mutual funds have underperformed because of negative MM measure. On average, the MM Measure result of conventional and Islamic mutual funds are and respectively. Conventional mutual funds have underperformed by if conventional mutual funds and capital market have identical risk. Similarly, Islamic mutual funds have underperformed by P a g e

161 TT measure results are reported in Table 6. According to results, the performance of conventional mutual is worse than the Islamic mutual funds. Only Islamic Asset Allocation funds have earned greater than one unit of risk and above market risk premium. Table 5 MM Measure SM p SM m σ m MM Measure Panel A Conventional Mutual Funds Using KSE100 Benchmark Aggressive Fixed Income Asset Allocation Equity Fund Balanced Fund Panel B Islamic Mutual Funds Using KMI30 Benchmark Islamic Aggressive Fixed Income Islamic Asset Allocation Islamic Equity & Income Islamic Balanced Fund Table 6 TT Measure T.M p Av. R m Av. R f TT Measure Panel A Conventional Mutual Funds Using KSE100 Benchmark Aggressive Fixed Income Asset Allocation Equity Fund Balanced Fund Panel B Islamic Mutual Funds Using KMI30 Benchmark Islamic Aggressive Fixed Income Islamic Asset Allocation Islamic Equity & Income Islamic Balanced Fund P a g e

162 In table 7, results of Sharpe measure are displayed. Asset Allocation mutual fund in both conventional and Islamic categories have earned highest average and average excess returns followed by KSE 100 and KMI30 index respectively. Risk adjusted performance of Islamic mutual funds is better than conventional mutual funds. Islamic balanced mutual funds earned positive average excess returns but it is less than the risk taken. The mutual funds have earned less than one unit return over per unit of risk this is true for all those mutual funds who have earned positive excess return. Therefore, none of the mutual fund have been able to beat the market performance. Table 7 Sharpe Measure Av. R p Av. ER p S.D Sharpe Measure Panel A Conventional Mutual Funds Using KSE100 Benchmark Aggressive Fixed Income Asset Allocation Equity Fund Balanced Fund KSE 100 Index Panel B Islamic Mutual Funds Using KMI30 Benchmark Islamic Aggressive Fixed Income Islamic Asset Allocation Islamic Equity & Income Islamic Balanced Fund KMI30 Index Sortino measure results are reported in table 8. According to the results, Islamic mutual funds have less down side risk as compare to conventional mutual funds. Equity mutual funds have more down volatility than other categories in both conventional and Islamic mutual funds. Performance of Asset Allocation mutual funds is better than mutual funds of other categories. Islamic Asset Allocation mutual funds have earned more than one unit over per unit of down side risk. Islamic Balanced funds also have earned positive excess return but it is less than over per unit of risk. Therefore, the down side risk adjusted performance of Islamic mutual funds is better than conventional mutual funds. Table 8 Sortino Measure Av. R p Av. ER p D.S. R p Sortino Measure Panel A Conventional Mutual Funds Using KSE100 Benchmark Aggressive Fixed Income Asset Allocation P a g e

163 Equity Fund Balanced Fund KSE 100 Index Panel B Islamic Mutual Funds Using KMI30 Benchmark Islamic Aggressive Fixed Income Islamic Asset Allocation Islamic Equity & Income Islamic Balanced Fund KMI30 Index In Table 9, results of treynor measure are reported. Amongst conventional mutual fund, Aggressive Fixed Income and Asset Allocation mutual funds have inverse movement with capital movement because of negative value of relative risk. Although Equity and Balanced Mutual funds have same directional movement with the market but due to negative excess returns the overall performance is negative over per unit of relative risk. Only Islamic Aggressive Fixed Income mutual funds have inverse relationship with the market movement. Treynor measure results revealed that relative risk adjusted performance of Islamic mutual funds is better than conventional mutual funds. Table 9 Treynor Measure Av. R p Av. ER p Slope Treynor Measure Panel A Conventional Mutual Funds Using KSE100 Benchmark Aggressive Fixed Income Asset Allocation Equity Fund Balanced Fund KSE 100 Index Panel B Islamic Mutual Funds Using KMI30 Benchmark Islamic Aggressive Fixed Income Islamic Asset Allocation Islamic Equity & Income Islamic Balanced Fund KMI30 Index Conclusion In this study, comparative lucrativeness Islamic VS conventional mutual funds have been empirically analysed through well documented techniques to assess the managerial skills and risk adjusted performance of mutual fund managers. Empirical analysis is performed on four categories of Islamic and conventional mutual funds. It is found that conventional mutual exhibited better timing skills than Islamic mutual funds. The selectivity skills of both conventional and Islamic mutual funds are poor. Overall mutual fund managers in Pakistan are poor timer of the market. Then risk adjusted performance analyses were also analysed. As per results of MM measure, the conventional and 163 P a g e

164 Islamic mutual funds have unperformed. Only Islamic asset allocation mutual funds have performed better according to the results calculated by TT measure. Further, results obtained through Sharpe, Sortino and Treynor measure revealed that Islamic mutual funds portfolio have earned better average return as well as average excess return than conventional mutual funds. Therefore, it can be inferred that Islamic mutual funds have performed better than conventional mutual funds comparatively. Hence, we are fail to reject H1 i.e. Islamic mutual funds are more lucrative than conventional mutual funds. Further, Islamic mutual funds are new in Pakistan. Limited Islamic financial products are available to invest with limited investors. The results of this empirical research imply that government should take necessary steps for Islamic mutual funds, such as more tax rebate, formulation of further better investment opportunities by uniform Shariah board and creation of public awareness of Islamic mutual funds through SECP (Securities and Exchange Commission of Pakistan). This research has only focused on four categories of Islamic and conventional mutual funds from 2009 to 2013 operating in Pakistan. There exist other categories of mutual funds operating in Pakistan and around the world. Further, efficiency of Islamic and conventional mutual funds is still unexplored. References Abderrezak, F. (2008). The performance of Islamic equity funds: A comparison to conventional, Islamic and ethical benchmarks. Retrieved April, 1, Albaity, M., & Ahmad, R. (2008). Performance of Syariah and composite indices: Evidence from Bursa Malaysia. Asian Academy of Management Journal of Accounting and Finance, 4(1), Bodie, Z., Kane, A., & Marcus, A. J. (2005). Befektetések: Aula Kiadó. Buchanan, B. G., English II, P. C., & Gordon, R. (2011). Emerging market benefits, investability and the rule of law. Emerging markets review, 12(1), Čihák, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2-3), Ebrahim, M. S. (2008). The financial crisis: comments from Islamic perspectives. International Journal of Economics, Management and Accounting, 16(2). 164 P a g e

165 Ferreira, M. A., Keswani, A., Miguel, A. F., & Ramos, S. B. (2013). The determinants of mutual fund performance: A cross-country study. Review of Finance, 17(2), Gohar, R., Ahmed, S., & Niazi, U. (2011). Performance comparison of mutual funds in Pakistan. African Journal of Business Management, 5(14), Hayat, R., & Kraeussl, R. (2011). Risk and return characteristics of Islamic equity funds. Emerging markets review, 12(2), Henriksson, R. D., & Merton, R. C. (1981). On market timing and investment performance. II. Statistical procedures for evaluating forecasting skills. Journal of business, Hoepner, A. G., Rammal, H. G., & Rezec, M. (2011). Islamic mutual funds financial performance and international investment style: Evidence from 20 countries. The European Journal of Finance, 17(9-10), Hou, T. C.-T. (2012). Return persistence and investment timing decisions in Taiwanese domestic equity mutual funds. Managerial Finance, 38(9), Jensen, M. C. (1968). The performance of mutual funds in the period The Journal of finance, 23(2), Khalid, S. I., Abbas, Z., & Shah, D. (2010). Performance Evaluation of Close-ended Mutual Funds by Investment Objectives in Pakistan s Economy. Interdisciplinary Journal of Contemporary Research In Business, 2(4). Mahmud, M., & Mirza, N. (2011). An Evaluation of Mutual Fund Performance in an emerging economy: The case of Pakistan. The Lahore Journal of Economics, 16, 301. Mansor, F., & Bhatti, M. (2009). The Performance of Islamic mutual funds: The Malaysian Case. Paper presented at the 14th Annual Banking and Finance Conference, Melbourne University, September. Mansor, F., & Bhatti, M. I. (2011). The Islamic mutual fund performance: New evidence on market timing and stock selectivity. Paper presented at the 2011 International Conference on Economics and Finance Research IPEDR. Merdad, H., Hassan, M. K., & Alhenawi, Y. (2010). Islamic Versus Conventional Mutual Funds Performance in Saudi Arabia: A Case Study. J. KAU: Islamic Econ., 23, P a g e

166 Modigliani, F., & Modigliani, L. (1997). Risk-adjusted performance. The Journal of Portfolio Management, 23(2), Nafees, B., Shah, S. M. A., & Khan, S. (2011). Performance evaluation of open end and close end mutual funds in Pakistan. African Journal of Business Management, 5(28), Nazir, M. S., & Nawaz, M. M. (2010). The determinants of mutual fund growth in Pakistan. International Research Journal of Finance and Economics, 54(2010), Razzaq, N., Gul, S., Sajid, M., Mughal, S., & Asma, B. (2012). Performance of Islamic mutual funds in Pakistan. Economics and Finance Review, 2(2), Sharpe, W. F. (1966). Mutual fund performance. The Journal of Business, 39(1), Škrinjarić, T. (2013). Market timing ability of mutual funds with tests applied on several croatian funds. Croatian Operational Research Review, 4(1), Swinkels, L., & Rzezniczak, P. (2009). Performance evaluation of Polish mutual fund managers. International Journal of Emerging Markets, 4(1), Treynor, J., & Mazuy, K. (1966). Can mutual funds outguess the market. Harvard business review, 44(4), Treynor, J. L. (1964). How to rate management of investment funds. Walkshäusl, C., & Lobe, S. (2012). Islamic investing. Review of Financial Economics, 21(2), P a g e

167 The Current Model of Islamic Banking and Concentration of Wealth Anwar Shah Quaid-i-Azam University, Islamabad, Pakistan Waqasul Hassan M.Phil Graduate, Quaid-i-Azam University, Islamabad, Pakistan (Not Presented) Abstract The eradication of the concentration of wealth is one of the prime objectives of Islamic finance. Many scholars have written on this issue, who claim that by eradicating interest from the society, we will be able to minimise the concentration of wealth in an economy. This study conjectures that interest-free finance is a necessary but not sufficient condition for the eradication of the concentration of wealth. The sufficient condition is to bring change in the objective of the banks, that is, switching the moto from the maximisation of the profit to the maximisation of welfare of society. This paper states that the main focus of Islamic banks is to transform the current modes of interest based transaction to interest free transaction. However, by mere changing the transaction from interest based to interest free might not be enough to achieve the main objective of Islamic finance. The study compare the assets side of Islamic and conventional banks to provide support in favour of the hypothesis that with current objective of profit maximisation, the Islamic banks are less likely to play any role in the eradication of the concentration of wealth. 167 P a g e

168 Global Emergence of Islamic Finance: a Case Study of the UK, Pakistan and German Regulatory and Supervisory Models Muhammad Ashfaq CEO, Amanah Institute of Islamic Finance and Economics, Germany Abstract It is estimated that the size of Shari ah-compliant assets was around $2 trillion at the end of 2014, showing a growth of 12% compared to The aim of this paper is to discuss the global growth and development of Islamic finance and also tostudy the emergence of Islamic finance from the Western European perspective.this paper also aims to analyze the regulatory and supervisory models of Islamic banking in the UK, Pakistan and Germany. The UK has been one of the most important destinations of Islamic finance outside of the Muslim world since the beginning of Islamic products being offered worldwide.does openness to regulatory reforms and institutional flexibility have a positive impact on the development of Islamic finance in the UK? This paper has found that supportive regulatory and financial environment, and key policy initiatives taken by the current political government has made the UK the leading Western centre for Islamic finance.in addition to this, the slow development of Islamic financial services in Germany is mainly due to lack of proactive political and regulatory approach, unlike the situation in the UK.In Pakistan, Islamic banking and finance is functioning parallel to conventional banks and Islamic banks have gained over 11% market share from their counterparts within a short span of time. Key words: Islamic finance, supervisory models, regulatory reforms, UK, Germany, Pakistan 168 P a g e

169 Role of Bai Salam/Islamic Finance in Wheat Production Business: a Case Study From Faisalabad, Pakistan Hafiz Zahid Mahmood Assistant Professor, COMSATS Institute of Information Technology, Lahore. Atiq Amjad COMSATS Institute of Information Technology, Lahore. Abstract A paramount number of financial institutions are involved in agriculture financing globally and in local settings. Islamic Agricultural financing is an innovation, has been, currently, introduced in agroproduction businesses. This study has been devised to observe the impact of Salam, extended by Wasil foundation, on input purchasing behaviors regarding their temptations to purchase on credit / cash and wheat production business in Faisalabad district. In this regard, data were collected from 90 Salam clients (i.e. treatment group) and 100 non-salam farmers (i.e. control group) from target area using closed ended questionnaire. Descriptive statistics, independent sample t-test, and multiple linear regressions were rendered between age, education, family size, farm size, Salam/borrowers, cost of land preparation, cost of labor, cost of irrigation, cost of chemicals and wheat output to achieve the results of the study. Results of the study confirm significant differences in inputs purchasing behaviors, amount of output per area, revenue and profit per unit area between treatment and control groups. Moreover, the regression results revealed that age and irrigation cost have significant negative relationship with wheat yield while cost of land preparation and chemicals and loan taken has significant positive relationship with output. On the basis of results of the study, it is strongly recommended policy makers, researchers and practitioners must focus on this vital mode of agrofinancing to work on Salam on wider scale to augment per acre output of wheat which will lead to food security and poverty reduction in the country. Keywords: Bai Salam, agro production business, Islamic agriculture financing, Islamic Finance, agricultural credit. 169 P a g e

170 Role of Islamic Microfinance in Enhancing Financial Inclusion: Case of Pakistan Sabeen Khurram Khan (Corresponding Author) Assistant Professor, CIIT, Islamabad. Qaisar Abbas COMSATS Institute of Information Technology, Islamabad. Syed Kashif Saeed Pakistan Institute of Engineering and Applied Sciences, Islamabad. Humaira Kousar Lecturer, CIIT, Islamabad. Abstract The main aim of this study is to explore the potential role of Islamic microfinance in enhancing financial inclusion in Pakistan. There is an increased realization that accessibility of finance is necessary along with financial development, to achieve economic growth and poverty alleviation. The micro financial services have proved instrumental in enhancing financial inclusion and alleviating poverty but interest based microfinance is not liked much by the Muslim populations. In Muslimmajority countries an estimated 72 percent of people do not use formal financial services (Honohon 2007). In Muslim world with high poverty rates, microfinance has potential to play a key role in providing financial access to the poor. Microfinance programs based on Islamic financing principles has unique features lays great emphasis on inclusion, social justice and resources sharing between haves and haves not. Islamic finance addresses the issue of access to finance and financial inclusion from two directions; one is to provide a viable alternative to conventional debt-based financing risk-sharing contracts, and the other is through specific instruments redistribute the wealth among the society. Both channels work simultaneously side by side. The study used a cross sectional sample for data collection from borrowers of Islamic microfinance institutions. Primary data collected through self-administered questionnaires from the users of Shari ah compliant products. The descriptive analysis depicted that Islamic microfinance institutions have positive role and the interest free products are leading to reduce voluntarily financial exclusion resultant in enhancing financial inclusion in Pakistan. The results revealed that in the absence of formal financial services to mitigate the financial exclusion the poor resort to informal strategies. Unfortunately, the costs of these coping strategies outweigh their benefits. Due to proximity of relationships with clients, IMFIs can educate the poor regarding Shari ah compliant products. IMFIs should also diversify their product portfolios by including savings, insurance and other services for diversified livelihoods. Furthermore, by expanding their outreach IMFIs can make a significant contribution by becoming a mediating link between governments and people in policy implementation and achieving development goals. Such initiatives will not only bring socio- 170 P a g e

171 economic stability among people but will also tackle the issue of future poverty by reducing voluntarily and involuntarily financial exclusion. Therefore, the policy makers in Muslim countries who are serious about increasing the access to finance or financial inclusion should exploit the potential of instruments based on Islamic principles to achieve this goal and focus on improving the regulatory and financial infrastructure to promote enabling environment. 171 P a g e

172 Layers of misconceptions about Islamic banking: Are Islamic banks threats, challenges and opportunities for investors. Malik Shahzad Shabbir Awais Rehman (Not Presented) Abstract This paper aims to identify some important misconceptions about Islamic banks, which impact on investor s portfolio in term of threats, challenges and opportunities.this study attempt in five layers of misconceptions such as, first layer define the ideology of layman about Islamic banks. Whereas, this layman has neither any account in interest bearing and non- interest bearing financial institutions. Whenever, someone asks to him about Islamic banking, he says strictly and straight that Islamic banks are prohibited without any theoretical and practical evidence. The second layer consists of those people who deal with Islamic banks. Actually they have misconceptions about the mechanics and product structure either on the liability side or asset side. The third layer consists on economists, who know economics very - well but unfortunately they do not have solid grip on Fiqh The.(فقه) fourth layer consists on Islamic economists, who have sufficient knowledge of both economics and fiqh,(فقه) but they still didn t believe and properly unable to understand the working method of Islamic banking. The fifth layer is Ulema s and Islamic scholars,those have good knowledge in fiqh but they don t have a sufficient knowledge about financial system like, Asset driven, liability,(فقه) driven, spread, securitisation and credit creation etc. The results of this study show that two variables such as opportunity and challenge out of three are positively significant and rest of one as threat is insignificant. Keywords: misconceptions, challenges and opportunities, layers, Fiqh, liability driven. INTRODUCTION The modes of Islamic banking is an important aspect to appreciate by all kinds of religious and social educated people in order to understand complete Islamic banking system. However, it is noted that most of people have insufficient knowledge about procedure of Islamic financial institutions (IFI) and they perform their strong role as an opponent s or proponents for IFI s. Most of time, their arguments become threats for new and existing clients of IFI s because if their arguments are in favour of IFI s, it will give benefit for short period of time and useful for a specific nature of investment, which is not suitable for other types of investment. After that transaction, the particular investor become double mind and contraryideas are created in his mind about Islamic banking system. The reason behind this misconception is insufficient knowledge about Islamic financial transactions. Meanwhile, if the arguments are not in favour than wholesituation will be changed and it becomes a challenge for every investors. Meera and Larbani, (2006) noted that a surge in income inequality in Islamic world leads economically regressive to Islamic nations. This study investigated the behaviour and ideas of five layers of misconception about Islamic banking system, where the first layer identifies the ideology of layman about Islamic banks. Whereas, this layman has neither any account in interest bearing and non- interest bearing financial institutions.during our survey, it is noted that the behaviour of layman was absolute strange about Islamic banking system without any evidence. When we asked them, why you should show this kind of attitude, they told straight that we heard negative observations from other people about Islamic 172 P a g e

173 financial system that s why we said it is prohibited.however, the misconception behinds this layman has personal non-thinking power, lack of observations and misguide about Islamic banking system. In the second layer of misconception, we deal with those investors who have only accounts in Islamic financial institutions. However, these investors become doubtful about their investment because they still didn t clear about profit earn on their investment was interest free or not. It is a general observation that whenever some investors will meet each other in any function, they must ask each other business and consult about new investment in the entire market.in our survey, it is observed that most of account holders of Islamic financial institutions were unable to fetch the exact information to investors of conventional banks and also incapable to motivate the other investors to convert their investment in Islamic banks. The misconception behind the second layer of people was about the mechanics and product structure of Islamic banks either on the liability side or asset sidearouri (2013). However, recently several studies such as (Causse, 2010a, 2010b, 2010c; Causse and Abdelhafid, 2010; Causse and Hideur, 2010) investigated the properties of IFI s product development system through a proper analysis of investors returns, risk sharing and performance in different markets.the third layer consists on conventional economists who know and understand economics very well but they didn t have strong knowledge about Islamic system of financial transactions (Fiqh ul Mam olat). Mostly, it is observed during our survey that these economists identify and solve the problem of Islamic financial transactions on the basic knowledge of conventional economics. Actually, third layer of misconception based on solving method and use of interpretation techniques, which is all most constructed on conventional economics system. When product development team launches any new product or make new innovation in existing products according to the needs and wants of customers, before product launching in the market they get approval from shariah advisory committee of their IFI s. The second misconception found in this layer, sometimes it has seen that after approval of products from shariah advisory committee, when products come in the market the perception, structure and results are same as quoted by conventional economists then these economists argued about Islamic banking system are not working according to sharaih complaints in some conferences, seminars and corner meeting.arbouna (2007) found that Islamic banks used different combinations of sale and trade contract s to meet the legal requirement of shariah about the development of new products and services or make necessary innovations in existing products and services of IFI s in order to maintain the desires of investors. It does not mean that if the results of some products are same or near to same then some economists cited that IFI s working and product development methods are same as the conventional system. Actually, reason/misconception behinds this issues the shariah scholars of IFI s make sure that every component of this product meets the basic and essential criteria of shariah. After this whole process finish then Training and developmentdepartments of IFI s give training to staff members of banks. During this whole process, if the perception and estimated results of economists meet at some extent with that particular product. The conventional economists see the outer look of products and give their final decision in term of neglecting. Actually, they didn t understand the whole process behind this product designing and purify by the shariah advisory committee.nathan and Rebiere (2007) investigated the performance of Islamic banks through different concepts such as wisdom, Faith and knowledge and its impact on investor sbehaviour through Shari a Supervisory Boards. The fourth layer depends upon Islamic economists who have enough knowledge of both economics as well as Figh ul Mamo lat to understand the Islamic financial systems. These people have only one 173 P a g e

174 major misconception about IFI s. According to them, most of model which are used by IFI s adapted from conventional banking, so these people base this issue and give some comment in such manner s that IFI s are not working accurately within the limits of shariah. The answer of this misconception is very simple and straight, if IFI s adapted some model of conventional banking system and used these models after purify from riba and some other prohibited components, I don t think there is any shariah issue behind these financial models because all these models are approved by shariah board of IFI s and then convert it into the market. One thing more, any model which is designed for any product of IFI s must understand the needs and wants of their target customers. It is observed that Islamic banking system is more effective and steady in a proficient and alteration free market Iqbal and Mirakhor (1999). The second component of misconception of these Islamic economists is valid for some extent. They raised the issue that Islam and its education is most superior in the world from day first then why we cannot make new financial system from starting base for IFI s, they also claimed that when more than four decades back Islamic bankingstart in Arab countries than why they didn t start from the base point. After conducting survey about this fourth layer, we further communicate with shariah scholars, Head of IFI s, training and development department of IFI s and some experts of Islamic Finance to resolve this misconception.jouini (2009) examined that Islamic finance is the only choice for investors to reframe their previous finance through constraints of Islamic finance, where risk was controllable and speculation was treated as moderate. The fifth layer consists on Ulema s and religious/ Islamic scholars who have brilliant knowledge about Fiqh ul Mamolat s and worships but they don t have same level of knowledge about Financial transactions to differentiate among assets driven, liability driven, spread,securitisation and credit creation according to shariah rules and regulations. Actually, these above mention people of fifth layer are legends of their own work because they spend a lot of time on Fiqh and its related topics, so on the base of this knowledge they neglect the IFS. During our survey, it is observed that some of scholars totally disagree with IFS and refer this system as complete prohibited, whereas most of scholars consider IFS as partially prohibited and rest of nominal scholars deny to give any kind of remarks about IFS.Aglietta (2009), Aglietta and Rigot (2009) propose that investors are interested and hopeful to convert their investment in IFI s due to endure on investment in term of returns and risk sharing factor in IBS. Now we give a snapshot to differentiate among assets driven, liability driven and other factors. The main source of conventional banks to take borrow on nominal amount charge on it and lend it huge amount charge on that particular amount, so the difference between both charge amount is called Spread. The relationship between cost of funds and return on lending is called Liability driven, which refer to conventional banks. The relationship between return on assets (real estate and automobiles) and investment returns (wadiah, safe custody) is called Assets driven, which refer to Islamic banks.when constraint on leverage conducts then its results convert to Credit creation Jawadi (2014). However, these are the basic knowledge of financial transaction, which will differentiate between both financial systems. If our fifth layer of people is unable to completely understand this basic things then who we can expect from them to realize, review and give decision on complicated financial transactions of IFI s.however, it is noted that Islamic banks (IBs) treated their customers as partners in order to manage risk and increase the returns on their investment. Whenever IBs enclosed its profit and loss report than market will weed incompetent entrepreneurs. This element shows the importance of market discipline and harmony. So depositors select the financial institutions carefully and understand that bank is compactable within the limits of shariah about investment perspectives (Chong and Liu, 2006). 174 P a g e

175 175 P a g e 1. The Advantages of Islamic banking system as an opportunity for Investors. The strong correlation foundin Islamic banks between financial institutions and depositors on liability side while on the assets side it transfers to financial institutions and its borrowers.it is a beauty of Islamic Banking system that neither any participant faces unequitable systematic shocks among them. However, conventional capital system of west has found such kinds of unequitable practice of shares/profit among their stakeholders. One of the best examples for understanding of investors aboutconventional capital system failed in 2007 financial crises especially in house financing sector of the world economy. Return in Islamic banking is not merely the collection of a spread between the costs of funds mobilized and the return on funds advanced Conventional debtor-creditor relationships. One of the fundamental requirements in Islamic form of intermediation is that financial transactions must be supported by real economic activity. This requirement ensures the financial stability in general. Financial innovation in Islamic finance must be within these Shari ah parameters and tested against the Maqasid al-shari ah (objectives of the Shari ah). Unnecessary financial engineering led to financial instability in global financial crisis Sale of debt against debt is not allowed in Islamic commercial law. Realization of benefits to the people. Just & equitable aspect of distribution is absent in interest based financing, it may either exploit the debt-holder or the financier. This is because the just & equitable aspect of distribution is absent in this way of financing. Inflows (profit) of business are obviously random and are affected by many uncontrollable factors while outflows (interest payment) are fixed in case of business is financed by debt. If the inflows are zero or less than the outflows it will be detrimental for the businesses. This will certainly lead to bankruptcies, which in turn affect the growth, production cut-downs and hence lead to greater unemployment. On the other side, if businesses make huge revenues then the financier is being exploited as the financing earned less than its actual share. However, in equity based financing there is always just distribution of revenues and both parties get their equitable share in both above mentioned scenarios. Debt based financing always caters the needs of those segments of the society who are able to give safe & fixed repayments. Financing only well-secured businesses and giving less weightages to profit-potential projects lead to income and wealth inequalities and misallocation of resources. This security oriented approach is fatal for the growth of small business enterprises which may have enormous potential to grow and hence have greater potential to contribute more to the gross national product (GNP) but failed to provide an assurance of repayment to financial institutions. The over reliance on pledges, securities and collateral leave very small room for small scale entrepreneurs to benefit from these financing which is a great obstruction to the growth of economy. Islamic finance promises to enhance the discipline that contributes towards ensuring growth and financial stability. Interest-based system leads to income and wealth inequalities and mis-allocation of resources. 2. LITERATURE REVIEW Interest free financing become a conceptual issue and it has primarily focused by (Ahmed 1981, Karsen 1982) through Islamic banking system (IBS) around the world because strong conceptual

176 ideas of the investors left a good image for the rest of investors. However, it is noted that the existing literature is unable to complete cover the main factors such as facilitation of transactions, pool risk and mobilized saving of IBS, which shows the exact growth and viability of Islamic banks. While some studies exclude the interest from IFI s through their strategy consequencekhan (1986), Khan and Mirakhor (1987) and Bashir (1996). IFI s face new challenges as well as know some new realities of market after deregulation andtopical trends of financial liberalization. These trends create competitions between interest free and non interest free financial institutions after global financial markets combination.ifi s consider this competition as an opportunity and it starts to design innovational models according to the needs and wants of their target customers in domestic and international markets. After gaining this opportunity by IFI s, it gets more investment prospectfrom the market within the viable retune rates and regulatory degree of risk, Bashir, Darrat and Suliman (1993), Bashir (1999), Zaher and Hassan (2001) and Hassan (1999). Muslim and non-muslim are two main types of investors in IFI s, where satisfaction is a basic and essential element of the any investor. Non-Muslim investors get satisfaction from maximize their profits and still this increment of profit remain in their accounts continuously. Some of non-muslim investors who don t believe on Islamic faith, for their perspectivesislamic banks are reasonably a new concept and it may become an opportunity for them as new investor in existing market. However, the satisfaction levels of Muslim investors are different from non-muslim investors because Muslims investors got maximum utility from absolute relation with Allah (SWT)and well deed behaviour with his human beings.however, the Muslim investors and consumers also face restrictions on what to invest and consume, where to invest and consume according to shariah respectively. Whereas, Quran gives a clear indication about this perspective because charity is a function of good deeds too (Qur an, 46:15; 18:46), it is the one best form of good deeds. Allah (SWT) admireddisbursements on charity (Qur an, 63:10). Actually, Islam teaches us how to manage and allocate your resources, different activities of capital market, wealth and income distribution system and how to manage production and consumption system (Asutay, 2008). It is a general concept of Islamic economics that risk of venture will bear by mutual understanding of borrowers and lenders because success or failure of venture is uncontrollable by them.dar and Presley (2000) found some theoretical models likeprofit and loss sharing (mudarabah) and joint venture (musyarakah) concepts are mostly used in Islamic banking.gait and Worthington, (2008) investigate some obstacles exist to investors of Islamic banks such as different risk sharing conditions, complications among management and unfamiliar business situations. It is also noted that financing method of Islamic banks are related with visible risk of its capital. According to (Zaini and Rosly, 2008; Metwally, 1997) highlighted some of difficulties about risk arising, classifying, observing and computing through the financing instruments of IFI s. All intellectual, practical, political, constitutional and legal efforts undertaken to enforce an interest-free system were not meant in earnest and therefore they inflicted a serious damage to the cause of Islam as well as Islamic banking (Khan and Bhatti, 2006, p.145) The Malaysian investors received 1.16% through return on Mudaraba deposits (ROMD) which is less return on equity (ROE) rather than USA fixed deposit holders. It shows an opportunity for the investors of IFI s. However, 11.82% gap found between ROE and ROMD of Islamic banks of Malaysia is higher than 8.61% return of USA interest based banks. An internally snapshot of ROMD with others Islamic modes of financing in Malaysia shows that an average of ROMD 7.56 times was higher than the Malaysian Islamic banks through their capital share. When we designed the rank of Malaysian banks on the basis of ROMD than we come to know the highest position got by Bank Islam Malaysia Berhad with times higher than its share of capital. Whereas, the lowest position 176 P a g e

177 got by Maybank of Berhad with 2.9 times higher than its capital share of market Zaini and Rosly s (2008). However, Islamic banks found an exclusive institution for investor s perception to provide financial products and services permitting to the needs and wants of their target customers within the limits of Islamic principles and IFI s also took risk management as special challenge to compete this risk and it had showed a positive effect on new and existing customers to easily motivated them for more investment in Islamic banks. After the global challenges and financial crises has damaged the international market, the priority of international investors had converted from conventional to Islamic banks globally because when all big brand names had become the victim of crises and continuously declined their market values, so in that particular time IFI s not only stable their position in the market but also rapidly growth its market value. This is the main cause, which pushes the minds of all kind of investors but especially non-muslim investors to think about their investment and decide, are they continuously face this decline process or change their banks Sundararajan and Errico (2002)? Today we have reached a tipping point, which leaves us only one choice: change or face continued decline and misery Chairman World Economic Forum (2010). 3. Methodology This research is based on primary data. It includes the opinion of investors, layman, educationists and customers of different types of Islamic banks. The respondents belong to different age groups, educational and occupational background, irrespective of gender. However, some branches of Islamic bank were selected at random from Lahore city;we also interviewed some investors and Academician from Lahore to make our study more valuable and strong in this regard, whereas, 132 questionnaires were distributed among investors, customers and other people of the society. The investors and academician were interviewed on a structured questionnaire through experienced enumerators. We took 5 percent as level of confidence in data analysis. The sample remained un-weighted in respect of gender to avoid any bias. The areas of questions consist of the following;personal information, Preference for bank selection, Opinion about Shariah compatibility of Islamic banks, Knowledge of investors about Islamic financial practices and products, Level of satisfaction about service quality of banks, Islamic Scholars or Ulema understand the basic concepts of Islamic banking such as Asset driven, liability driven and spread, Islamic banking is an opportunity or thread or challenge for the investors, Islamic banks give opportunities and information about usage of services and facilities to their investors.questions were designed keeping these areas in mind and to confirm the objectives of the study. A pilot survey was conducted and necessary adjustments were made in the questionnaire. On the average, it took 15 to 20 minutes of enumerator to interview respondentinvestors. The responses of the questionnaires were summarized in SPSS software. Cross tabulation was done for getting the overall results of the research. All the results were then converted into percentages / proportions. 177 P a g e

178 Table 1 Mean Values 4. DATA ANALYSIS AND DISCUSSION Table no 1 show the mean values of all the variables in the questionnaires. However, the purpose of mean Descriptions Mean Do Islamic Scholars or Ulema understand the basic concepts of Islamic banking such as Asset driven, liability driven and spread Do you think Islamic banking is a threat for the investors? Do you think Islamic banking is a challenge for the investors? Do you think Islamic banking is an opportunity for the investors? How would you rate your level of satisfaction with Islamic banks? Do you ask from your banks about the Shariah compatibility of the bank operations? When you have a problem, your bank shows a sincere interest in solving it for motivation of their investors? Islamic banks give opportunities and information about usage of services and facilities to their investors? What is your opinion about profit of Islamic banks? What is your opinion about Sharia compliant banking system? Normally no Islamic bank approached common investors Procedure of opening an account is difficult in Islamic banking for laymen How many Islamic religious scholars understand the mechanism of Islamic banks such as financial transactions? How much investors know that Deposits are used and distributed in Islamic Banks? Do common investors know about the procedure of products of Islamic banking like car and house financing? values is to determine the centre of tendency in all the values given in the data. Whereas, the maximum and minimum value of mean and respectively in the above table. Whereas the difference of maximum and minimum value is 1.588, Most of values are near to maximum value of mean and there is no negative value found in the whole table, which shows that the positive relationship among all the mean values. For overall Islamic banks the highest mean values occur at,do common investors know about the procedure of products of Islamic banking like car and house financing?, with the magnitude of for both of these variables. As per the questionnaire used to collect this data, the value 1 was representing highly disagree state and the 5 is for highly agree response. Hence mean vale of shows that most of the investors are agree in both of these cases. However, the lowest mean values occur at, do you think Islamic banking is an opportunity for the investors? 178 P a g e

179 Table 2 Group means Variables Group Means Variables Bank Type Mean Means Diff Sign (2- tailed) Do Islamic Scholars or Ulema understand the basic concepts of Islamic banking such as Asset driven, liability driven and spread Conventional Islamic 1.5 Do you think Islamic banking is a threat for the investors? Conventional Islamic Do you think Islamic banking is a challenge for the investors? Conventional Islamic Do you think Islamic banking is an opportunity for the investors? Conventional Islamic 1.10 How would you rate your level of satisfaction with Islamic banks? Conventional Islamic Do you ask from your banks about the Shariah compatibility of the bank operations? Conventional Islamic When you have a problem, your bank shows a sincere interest in solving it for motivation of their investors? Conventional Islamic Banks give opportunities and information about usage of services and facilities to their investors? Conventional Islamic What is your opinion about profit of Islamic banks? Conventional Islamic What is your opinion about Sharia compliant banking system? Conventional Islamic Normally no Islamic bank approached common investors. Conventional Islamic Procedure of opening an account is difficult in Islamic banking for laymen. Conventional Islamic P a g e

180 How many Islamic religious scholars understand the mechanism of Islamic banks such as financial transactions? Conventional Islamic How much investors know that Deposits are used and distributed in Islamic Banks? Conventional Islamic Do common investors know about the procedure of products of Islamic banking like car and house financing? Conventional Islamic Table 2 divulges the results generated by the independent sample T test. The data was processed under this test with the aim for comparative analysis of challenges, opportunities and threads in the way of correcting the misconceptions for society about Islamic banks. The significant differences between the mean values were observed at the variables ofhow would you rate your level of satisfaction with Islamic banks, Islamic banking is a threat for the investors, When you have a problem, your bank shows a sincere interest in solving it for motivation of their investors, your opinion about Sharia compliant banking system, Banks give opportunities and information about usage of services and facilities to their investors,normally no Islamic bank approached common investors, Procedure of opening an account is difficult in Islamic banking for laymen and How much investors know that Deposits are used and distributed in Islamic Banks. The significant value shows that these Islamic banks observe statistically different results under the variables of Banks give opportunities and information about usage of services and facilities to their investors, Do common investors know about the procedure of products of Islamic banking like car and house financing?while between these variables the biggest mean difference occurs at the common investors know about the procedure of products of Islamic banking like car and house financingwith the mean difference of Whereas, Positive means difference is the evidence to state that this problem is present at a bigger level in Islamic counterparts. It means that the conventional banks management in Pakistan is not as much concerned with the service quality as the Islamic bank management. This issue is due to the new entry of Islamic banks in the financial industry for the investors. ANOVA For the multiple comparisons, in order to observe the change in the investors perception with respect to religious education was conducted, table below describes the results of one way ANOVA. As evident through data analysis, the investors perception of taking the Islamic banking as threat undergoes insignificant difference with the change in religious education with significance value at 0.064, while the results are vice-versa with the variables of challenge and opportunity. Henceforth, the variable of threat was not taken to the further test of LSD and vice versa for challenge and opportunity. 180 P a g e

181 Table 3 ANOVA Description Sum of Squares DF Mean Square F-stat Sig. Threat Between Groups Within Groups Total Challenge Between Groups Within Groups Total Opportunity Between Groups Within Groups Total Table 4 Multiple Comparisons of LSD The table below entails the statistics generated for LSD. Here, the group difference become significant as the religious education goes from1 to 2, with significance value at 0.09 and the mean difference at This negative mean difference is representative of the fact that the investors perception go towards No. However, we say that increase in investor s religious education from Amma to Khasa (primary to secondary level) makes them less in taking the Islamic banking investments as a challenging one. When religious education goes from 2 to1 then all the results are same as above discusses but with positive mean difference value (0.466). Whereas, in same dimension 3 the results are different when religious education goes from 2 to 3 with mean difference at level of significant. It means that investor perception is positive about Islamic banking as a challenge. In dimension 2, religious education spirits from 3 to 2 with negative mean difference (-0.416) form at same above discussed significant level (0.001) and all the results converted into inverse form. In opportunity table, when religious education moods from 1 to 3 and 1 to 4, the group difference become positively significant with and at and significant levels respectively. These positive signs represent that Islamic banks are an opportunity for investors. However, in dimension 2, when religious education transferred from 1 to 2 and 1 to 3, the difference of mean values are and with significant level of acceptance and In dimension 3, the relationships among religious education find positively significant from 2 to 3, 2 to 4 and 2 to 5 with their mean values 0.520, and at different levels of significant 0.000, and respectively. The results of this correlation among the variables represent that investor s want to invest more in Islamic banks through their portfolio investment. In dimension 3, 4 and 5, it has found 181 P a g e

182 negative correlation among the variables as from 3 to1 & 3 to 2 and 4 to 1 & 4 to 2 and 5 to 2 with mean difference values (-0.337, , , and ) at altered affirmative level of significant values (0.012, 0.000, 0.009, and 0.032). Table 4 Multiple Comparisons LSD Dependent Variable 182 P a g e Challenge Dimension 3 Dimension 3 Dimension 2 Dimension 3 Dimension 1 Dimension 3 Dimension 3 Opportunity Dimension 3 Dimension 2 Dimension 3 Dimension 3 Dimension 3 Dimension 3 (I) Education Religious (J) Education Religious Mean Difference (I-J) Std. Error Sig * * * * * * * * * * * * * *

183 ANOVA In relative comparisons among three variables as threat, opportunity and challenge in order to observe the change in the investors perception with respect to religious education was conducted, table below describes the results of one way ANOVA. As evident through data analysis, the investors perception of taking the Islamic banking as challenge undergoes significant difference with the change in religious education of significance value at 0.000, while the results of opportunity is same as Challenge but result of threat is different which shows insignificant value at level of significant. Henceforth, the variable of threat was not taken to the further test of LSD and vice versa for challenge and opportunity. Table 5 ANOVA Description Sum of Squares Df Mean Square F-stat Sig. Threat Between Groups Within Groups Total Challenge Between Groups Within Groups Total Opportunity Between Groups Within Groups Total Table 6 Multiple Comparisons LSD Dependent Variable Challenge Dimension 3 Dimension 3 Dimension 2 Dimension 3 (I) Education Conventional (J) Education Conventional Mean Difference (I-J) Std. Error Sig * * * * * P a g e

184 Dimension 3 Dimension 3 Dimension 1 Opportunity Dimension 3 Dimension 3 Dimension 2 Dimension 3 Dimension 3 Dimension * * * * * * * Table 6 Multiple Comparisons of LSD The table below entails the statistics generated for LSD. Here, the group difference become significant as the religious education goes from1 to 3, with significance value at 0.02 and the mean difference at This negative mean difference is representative of the fact that the investors perception go towards No. However, we say that increase in investor s religious education from Amma to Khasa (primary to secondary level) makes them less in taking the Islamic banking investments as a challenging one. When religious education goes from 2 to3 then all the results are same as above discusses but with positive mean difference value (-0.833). Whereas, in same dimension 3 the results are different when religious education goes from 3 to 1 with mean difference at 0.02 level of significant. It means that investor perception is positive about Islamic banking as a challenge. In dimension 2, religious education spirits from 3 to 2 with negative mean difference (0.833) form at same above discussed significant level (0.02) and all the results converted into inverse form. When religious education moods from (3 to 4 & 3 to 5 and 5 to 4) the group difference mean values become positively significant with 0.583, and at significant levels of 0.000, and respectively. Whereas, in dimension 3& 1, variables show negative mean values with magnitude of (-0.583, & ) at significant levels values (0.000, & 0.024), where 184 P a g e

185 religious education transferred from (4 to 3, 4 to 5 and 5 to 3) respectively. In the table of multi comparisons of LSD test for Opportunity variable, where religious education goes from 4 to 5 with value of mean difference at significant levels This positive sign represents that Islamic banks are an opportunity for investors. However, in dimension 3, when religious education transferred from 5 to 4, the difference of mean value is with significant level of acceptance CONCLUSION This study investigated the behaviour and ideas of five layers of misconception about Islamic financial system, where the first layer identifies the ideology of layman about Islamic banks. Whereas, this layman has neither any account in interest bearing and non- interest bearing financial institutions. However, rest of four layers consist of account holder of Islamic banks, Islamic economists, conventional economists and religious scholars or Ulema s. In this study, we find that Islamic banking is an opportunity, challenge and threat for investor perspective. The results of this study show that two variables such as opportunity and challenge out of three are positively significant and rest of one as threat is insignificant. Results of Individual mean values express that almost of the values are near to origin and where the maximum and minimum values are as and respectively. While, T- test represents the individual significant and insignificant results of model and we elaborate all the individual values on base of significance levels. Whereas, F test denotes the significant level as an acceptance or rejection of the whole model. In the tables of multi comparison of LSD tests shows hybrid results in term of positive and negative terms which are based on dimension s, difference of mean values, standard errors, both religious education (I, J) and significance levels. Whereas, it is also noted in our survey that most of investors are not well educated and they unable to differentiate between function of asset and liability side of balance sheet.in our survey, some investors share their views that investors of conventional banking system told us that Islamic banking will not work or exist more in the global market. This news will draw bad effect on the new as well as existing investors of Islamic banks. On the above mention misconception, it is suggested that Islamic financial institutions (IFI) will publish small booklets in national as well as local language for motivation of new and existing investors about the structure of product development system and investment areas of Islamic banks in the world. The IFI s will also organize corner meetings with their all investor but especially with long term investors. These mention facts must reduce the misconception of investors and it also promoted the Islamic financial system (IFS) in the world as an opportunity for new investors. 185 P a g e

186 References Aglietta, M. (2009), La crise, Michalon, Paris. Aglietta, M. (2010). La crise: les voies de sortie (p. 15). Michalon. Aglietta, M., & Rigot, S. (2009). Crise et rénovation de la finance. Odile Jacob. Ahmad, Khurshid, (1981). Studies in Islamic Economics. Leicester, United Kingdom: Islamic Foundation Arbouna, M. B. (2007). The combination of contracts in Shariah: A possible mechanism for product development in Islamic banking and finance. Thunderbird International Business Review, 49(3), Arouri, M. E., Ben Ameur, H., Jawadi, N., Jawadi, F., & Louhichi, W. (2013). Are Islamic finance innovations enough for investors to escape from a financial downturn? Further evidence from portfolio simulations. Applied Economics,45(24), Asutay, M. (2008). Islamic banking and finance: social failure. New Horizon, (169), 1-3. Azhar Rosly, S., & Ashadi Mohd. Zaini, M. (2008). Risk-return analysis of Islamic banks' investment deposits and shareholders' fund. Managerial Finance, 34(10), Bashir, A. (1999). Risk and Profitability Measures in Islamic Banks: The Case of Two Sudanese Banks. Islamic Economic Studies, Vol. 6, No. 2: Bashir, A. (2000), Determinants of profitability and rates of return margins in Islamic banks: some evidence from the Middle East Grambling State University Mimeo. Bashir, A., Darrat, A. F., & Suliman, M. O. (1993). Equity capital, profit sharing contracts, and investment: theory and evidence. Journal of Business Finance & Accounting, 20(5), Causse, G. (2010). La finance Islamique: les principes et les principales opérations. La revue du Financier, 183, Chairman World Economic forum, (2010). The Global competitive report Chong, B.S. and Liu, M. (2006). Islamic Banking: Interest-Free or Interest-Based? Pacific-Basin Finance Journal, Vol. 17, pp Dar, H. A., & Presley, J. R. (2000). Lack of profit loss sharing in Islamic banking: management and control imbalances. International journal of Islamic financial services, 2(2), Gait, A., & Worthington, A. (2008). An empirical survey of individual consumer, business firm and financial institution attitudes towards Islamic methods of finance. International Journal of Social Economics, 35(11), Iqbal, Z., & Mirakhor, A. (1999). Progress and challenges of Islamic banking.thunderbird International Business Review, 41(4 5), Jawadi, F., Jawadi, N., & Louhichi, W. (2014). Does Islamic Finance outperform Conventional Finance? Further Evidence from the recent financial crisis (No ) Jouini, E., & Pastré, O. (2009). La Finance Islamique-Une solution à la crise? Kameel Mydin Meera, A., & Larbani, M. (2006). Part I: Seigniorage of fiat money and the maqasid al-shari'ah: the unattainableness of the maqasid.humanomics, 22(1), P a g e

187 Karsen, I Islam and Financial Intermediation. IMF Staff Papers. Khan, M. (1986). Islamic Interest Free Banking: A Theoretical Analysis. IMF Staff Papers. Khan, M. S., & Mirakhor, A. (1987). The framework and practice of Islamic banking. Theoretical Studies in Islamic Banking and Finance, The Institute for Research and Islamic Studies, Texas. Mansoor Khan, M., & Ishaq Bhatti, M. (2006). Why interest-free banking and finance movement failed in Pakistan. Humanomics, 22(3), Metwally, M. M. (1997). Differences between the financial characteristics of interest-free banks and conventional banks. European Business Review, 97(2), Nathan, S. and Ribiere, V. (2007). From Knowledge to Wisdom: the case of corporate governance in Islamic Banking, The journal of Information and Knowledge Management Systems, Vol. 37, No. 4, 2007, pp Samad, A., & Hassan, M. K. (1999). The performance of Malaysian Islamic bank during : An exploratory study. International Journal of Islamic Financial Services, 1(3), Sundararajan, V., & Errico, L. (2002). Islamic financial institutions and products in the global financial system: Key issues in risk management and challenges ahead (Vol. 2). International Monetary Fund. Zaher, T. S., & Kabir Hassan, M. (2001). A comparative literature survey of Islamic finance and banking. Financial Markets, Institutions & Instruments,10 (4), P a g e

188 Achieving the Object of Interest-Free Economy: Challenges and Prospects Dr. Rafi Amir-ud-Din Assistant Professor, CIIT, Lahore Shazia Aziz Sidra Rasool Abstract Achieving the objective of the interest-free economy is critical for Islamic countries because interest is categorically prohibited in Islam. However, this objective has proved elusive partly because Islamic countries have to work within the capitalistic framework which crucially depends on interest to equilibrate debt and credit. Forces of globalization have made it hard for a country to exist in isolation in a world dominated by the capitalistic system. In this study, we have found that the legislative measures undertaken in Iran and Pakistan to outlaw Riba have not proved effective and have also opened backdoor to Riba. We have argued that a vibrant growth in the Islamic financial system is not enough per se unless some of the instruments at the disposal of Islamic financial institutions IFIs such as Murabaha and Ijarah are further reviewed to ensure strict compliance with the standards of Shariah. More importantly, the operations of the IFIs have to embody the spirit at the root of injunctions prohibiting Riba. It is argued that some space within the capitalistic system can be expeditiously used probationally such as maintaining zero interest rates and pursuing policy of interest free loans. However, achieving the objective of interest-free economy is not possible unless we develop effective institutions. We also highlighted the critical role of moral commitment to achieve the objective of Riba-free economy. Using data for the OIC countries, we found that the strong commitment at the mass level required to establish the vibrant Islamic economic and financial institutions is lacking. Keywords: Interest-free economy; Islamic financial institutions; Capitalism; Institutions Introduction The Islamic world is facing a deeply disturbing and paradoxical situation. It has to operate in a world dominated by the capitalistic system. However, the core Islamic economic values fundamentally differ from the capitalist values. One of the essential features of Islamic economic system is the prohibition of Riba while it is the lynchpin of the capitalistic system. "Those who devour usury will not stand except as stand one whom the Evil one by his touch Hath driven to madness. That is because they say: "Trade is like usury," but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are companions of the Fire: They will abide therein (forever)" (Quran, 2:275). The Prophet Sallallahu Alaihi Wassallam was no less categorical in emphasizing the enormity of the sin involving Riba. Jabir b. Abdullah reports that the Prophet cursed the receiver of interest and the payer thereof, the one who records it and the two witnesses thereof. He said: "They are all alike [in guilt]" (Muslim, Tirmidhi, Ahmad). In another Hadith, the Prophet Sallallahu Alaihi Wassallam said, "Riba has 73 doors or 70 grades, least serious is equivalent to committing adultery with his own mother" (Ibn Majah). 188 P a g e

189 Even if controversy rages on endlessly about what constitutes riba, there is a compelling evidence to suggest that the adverse consequences of interest-based debts are well understood even in the capitalistic framework. Mian and Sufi (2015) pile up a huge evidence which points to the fact that interest-based debt leads to inequality by putting borrowers at a disadvantage, causes bubbles and boom and bust cycles, stalls recovery from crises, causes bank runs, promotes exhibitionist consumption and is often used as a strategic tool by non-state actors. The challenge faced by the Islamic world is twofold: achieving the objective of a riba-free economy and more ominously, doing this in a framework dominated by the capitalistic system which crucially depends on interest. Against this background, we have explored a set of options to achieve the objective of a Riba-free economy. In this study, we have briefly reviewed the history of legislative measures undertaken in Iran and Pakistan to outlaw Riba with a view to learn some useful lessons for future (Section 2). In Section 3, we have highlighted some of the issues central to the development of Islamic financial institutions (IFIs). In Section 4, we have explored the space available in the capitalistic system to pursue interest-free policies. Section 5 thoroughly analyzes the challenges in the way of abolishing Riba against a background where capitalistic system dominates the world and globalization process has made it nearly impossible for any nation to survive in isolation. This section also highlights the critical role of moral commitment to achieve the objective of a Riba-free economy. We have done an empirical analysis in this section to show that in the absence of a strong will at the mass level, a riba-free economy will remain a distinct dream. 1. Ending Riba: A gradualist approach 1.1. Legislative measures: lessons from Iran and Pakistan While almost all the OIC countries have dual banking system based on Islamic and conventional models, only three countries claim to have applied riba-free principles in their local banking transactions including Iran, Pakistan and Egypt. Both Iran and Pakistan banned riba and put in place measures to make the financial sector Shariah compliant (Kuran, 1993; Nomani, 2003). They used primarily two types of operational tools: profit loss sharing (PLS) and non-profit loss sharing. Initially, both countries used profit loss sharing (PLS) investment mode. In the PLS system, customers of the banks share the profit on their investment, and in case of loss they also share it. The non-pls based Murabaha and Ijarah are other widely used instruments by the banks. Murabaha is a mark-up based transaction. In this contract, the lender marks up the price of some object so that interest becomes the part of the price. Given that this transaction involves an element of interest, some Shariah scholars question its validity (Abdul-Khaliq, 2014). While Iran and Pakistan are similar to an extent that they have put a ban on Riba, there are some marked differences between these two countries. In Pakistan, the debate on what is the true definition of interest is still raging endlessly but there was no such debate on the definition of interest-rate in Iran. Iran followed rather more moderate approach to the definition of interest-rate but in Pakistan the more traditional and literal interpretation of interest was preferred (Nomani, 2003, 2006). It is perceived that there was an element of political expediency in abolishing Riba through constitutional measures in Iran and Pakistan (Gafoor, 1997). While both these countries are quite similar is that they used the issue of interest-rate for achieving political legitimacy and leverage, they stopped short of enforcing the Riba ban according to the strict interpretation of Quranic and Hadith literature. It should be a small wonder that, Murabaha, which is a purchase and resale contract and includes marked up price, makes up a large chunk of the total transactions of the operations of the 189 P a g e

190 Islamic banks (Abdul-Khaliq, 2014; Haron, Ramli, Injas, & Injas, 2015). The Figure 1 below shows the historical trend of various Sukuk instruments used in the Islamic financial markets. Figure 2: Sukuk instruments traded in the Islamic Financial Markets (US$ Billion) Source: Thomson Reuters Sukuk Perceptions & Forecast 2015; Global Islamic Finance Forum, E&Y Reports, Zawya 55 Pakistan's constitution is quite categorical that interest-rate should be abolished. However, the effort to abolish interest from the economy was undertaken in all earnestness by the military dictator General Zia-ul-Haq who ruled Pakistan from 1977 to The conventional banks were ordered to start operations on the profit loss sharing system basis. However, in practice, most of the banks shifted their interest-based operations to both profit loss sharing system and to the mark up based Murabaha system (Khan, 2008). These developments made many scholars question the validity of the riba-free process put in place through legislative measures, and the situation was considered "a crisis of identity of the Islamic financial movement" (Iqbal & Molyneux, 2016; Siddiqi, 1983). In the wake of the turbulent Islamic revolution in Iran, the banks were nationalized in Parliament outlawed Riba through legislative measures except when they were dealing with dealing with the foreign countries. The Guardian Council however allowed interest-based transaction to the non- Muslims Lessons Learnt One of the most conspicuous lessons is that despite the legislative measures undertaken in Iran and Pakistan to abolish Riba from the economy, neither country has been able to successfully abolish Riba. On the contrary, the legal obligations only made banks look for the loophole in the system and shift their operations to the Islamic transaction models such as Murabaha and Ijarah which are of questionable juristic validity. The reasons behind this is that when Islamic economic system has to operate within the bounds of the dominant capitalistic system, such failures should not be surprising. In Section 5, we shall discuss the implications of coexisting with capitalistic system. 2. Ridding Financial Sector of Riba 2.1. Steep rise in Islamic banking and finance 55 Questions 190 P a g e

191 Assets in the Islamic banking sector all over the world have grown remarkably from close to 200 US$ 200 billion in 1990s to around US$ 2000 and is projected to reach US$ 3500 billion by 2018 (Figure 2 below). Figure 3: Global Islamic assets (US$ Billion) Source: Various, KFH Research Database 56 The growth of Islamic assets to around 17 times in this period is by no means a mean achievement. However, it is important to note that the Shariah compliant Islamic assets are not equally distributed in the Islamic world. In the Figure 3 below, we see that it is Iran and Malaysia which lead the rest of Islamic countries by a wide margin in terms of the assets in their Islamic financial markets P a g e

192 Figure 4: Total Assets of Islamic Financial Institutions (Million USD) Source: Global Financial Development Report A steep rise in the Islamic banks in Islamic societies, it is argued, is per se not a good thing unless it satisfies some important criteria. It is a desirable if and only if it is aligned with the spirit behind prohibition of interest-rate. The spirit behind prohibition of interest-rate is to end poverty and exploitation, reduce inequality and promote co-operation. One measure of judging as to what extent the deeper penetration of Islamic banks has been instrumental in achieving these goals is the reduction of inequalities and absolute poverty and promotion of cooperation among the people. When enough data becomes available on the Islamic assets and various components, it will be possible to analyze the impact of the Islamic banking and finance on the level of inequality and poverty in the Islamic countries and other societies where Islamic banking and finance is being practiced. Though some studies have theoretically analyzed the impact of microfinancing initiatives such as the operations of Akhuwat on poverty alleviation (Akhter, Akhtar, & Jaffri, 2009; Alam Choudhury & Wajdi Dusuki, 2008), most studies do not come close to providing reliable empirical evidence on the relationship between penetration of Islamic banking and finance and any significant change in the redistribution of resources Question of Shariah Compliance If a gradualist approach is a preferred method to achieve the objective of Riba-free economy, it is crucial to rid the existing Islamic financial institutions of the anomalies which open a back door to interest and are liable to be used as legal trickery to gloss over interest in the transactions. Evidence suggests that majority of the instruments used by Islamic banks are, in their essence, no different from the debt-based and interest-based instruments used by the conventional banks. Instruments generally used by the Islamic banks such as Ijarah and Bai Salam, are the ones which are declared as exceptions according to some scholarly opinion. However, the instruments that are based on sharing 192 P a g e 57

193 the risk such as Musharka and Mudharba make only a small part of the operations of the Islamic banks (See Figure 1) Ifis: Embodying Spirit Of Riba-Prohibition Is Critical One of the reasons behind the prohibition of the interest rate is that it leads to inequality and exploitation. Islamic economic system focuses on creating a just society where the people with adequate resources must come to the help of have-nots. " They ask thee how much they are to spend; Say: "What is beyond your needs." Thus doth Allah Make clear to you His Signs: In order that ye may consider" (Quran 2:219). Even if it is easy to expect the obvious differences between the spirit of devouring interest and the spirit of spending in the path of Allah, surprisingly the similarities between Islamic and conventional banks are telling. Profits offered by the Islamic banks on PLS accounts are roughly the same as are offered by the conventional banks. Many Islamic banks slap penalties if some customers fail to repay the loans within the stipulated time. Banks need to be overly watchful when it comes to making investment decisions. There are clear guidelines as to where investment is permissible and where it is not permissible. One cannot do any business which is expressly prohibited in Islam such as the sale of wine or pork. However, there is widespread belief that Islamic banks are not adequately strict in the investment decisions. Islamic banks at times invest in the stock exchanges which involves speculation (gharar) which is clearly prohibited in Islam. On the other hand, Islamic banks have to make sure that they engage in a business activity which is beneficial for the society. Only those businesses need to be undertaken which generate real economic activity. There is a lot of research to suggest that if we can create an economic activity in the financial sector only without any corresponding activity in the real sector, there would be huge bubbles and violent booms and busts in the economy (Allen & Gale, 2000; Semlali & Collyns, 2002). Yet another salient feature of the Islamic businesses is the equity based transactions rather than debt based transactions. The preferred mode is risk sharing activities. Musharka and Mudharba need to be the essential mode of Islamic business model, while markup based leasing (Ijara) and Murabaha should be discouraged. In a nutshell, if the profit is the only business of the business, as Friedman (2007) famously put it, it is not possible for the Islamic banks to reflect the spirit which lies at the heart of Riba prohibition. 3. Maneuvering within the capitalistic system As we discussed earlier that the objective of abolishing the interest from the economy can be achieved only gradually. It may be expedient to use the space that is available in the capitalistic system. The Islamic world may adopt the risk-sharing business models in the developed world and replicate them in their conventional sector. Islamic world may also undertake the interest-free loans initiatives in the public sector and in private capacity. As is being done by many major banks in the developed world, arrangements may be put in place to ensure that the lenders and borrower may share the operations of the proposed venture. Micro-financing is another possibility and there are many institutions in the developed world that are providing interest-free micro-financing. For example, No Interest Loans Scheme (NILS) that has been operating in Australia has given interest free loans to 20,000 borrowers. Over 70% of the recipients were women and the elderly, while the r repayment rate has been 93%. Interest-free societies with a focus on some specific target group have also flourished in the United States. New York Hebrew Free-Loan Society has given interest free loans to nearly 1,000,000 people with a repayment rate of 99%. Interest-free loans to the students is yet another successful program (Beed & Beed, 2014). 193 P a g e

194 3.1. Zero interest rate In recent years, the frequency of policy rates reaching zero percent or even in negative territory has increased in many parts of the world, especially after the 2008 financial crisis. Islamic countries may try to use their monetary policy tools to bring policy rates down to zero percent. Evidence suggests that many central banks have brought interest rates close to 0% after the 2008 global financial crisis (Honkapohja, 2016). In Japan effective short-term interest rates have been zero in 1998 (Claus, Claus, & Krippner, 2016) and some other money and capital markets have gone down below zero even (von Ruden, 2015). According to the economic daily monetary policy becomes totally irrelevant below a certain policy late (Apergis & Christou, 2015) and father but was it could give us a useful opportunity to train because Islam is more consistent with use of fiscal policy tool. Fiscal policy stabilization is found to compensate for the benefit of welfare losses caused by persistence of presence of zero bound (Schmidt, 2013). Some studies have been sure that in case of zero interest rates the multiplier in fiscal policy can change by large magnitude (Ramamurthy & Sedgley, 2013). Even in some cases exchange rate can be effectively used as an alternative monetary policy to a zero interest rates (Iwata & Wu, 2012) Sharia's point of view To what extent it is acceptable for the Islamic countries to maneuver within the capitalistic system and adapt from capitalistic system is a question of juristic debate and inquiry. One view is that corroborating interest rate in any circumstances is unacceptable. The Quran is very categorical when it says that believing in part of the book while rejecting the other part of the book has serious consequences. " Believe ye in part of the Scripture and disbelieve ye in part thereof? And what is the reward of those who do so save ignominy in the life of the world, and on the Day of Resurrection they will be consigned to the most grievous doom. For Allah is not unaware of what ye do" (Quran, 2:85). However, there are some attenuating circumstances. If there is utter necessity (iztiraar), it is acceptable to consume those things that are prohibited for bare survival only. " But if one is forced by necessity, without willful disobedience, or transgressing due limits; then is he guiltless" (Quran, 2:173). Similarly, when one is committed to fight back, a strategic retreat is also acceptable. " If any do turn his back to them on such a day - unless it be in a stratagem of war, or to retreat to a troop (of his own)- he draws on himself the wrath of Allah, and his abode is Hell--- an evil refuge (indeed)!" (Quran, 8:16). There are many instances in which things from foreign cultures have been adapted only if they do not pose any challenge to the fundamentals of Islamic faith such as digging the trench and using cannon (minjneeq) in the battles. Taking cue from these examples, it may be acceptable to adapt from the capitalistic system the models which are clearly consistent with Islamic way of life such as business models based on risk-sharing and interest-free loan schemes and zero interest rates through monetary policy manipulation. 4. Challenges in abolishing Riba 4.1. Dominant capitalistic system The objective of a Riba-free economy cannot be achieved in isolation. Currently we are living in a unipolar world in which the dominant political system is the liberal democracy and the dominant economic system is capitalism. One shared characteristic of democracy and capitalism is that they divorce religion from the affairs of public life and relegate it to the position where it become a personal matter. Previously the world was divided into two blocs that ensured a balance of power. Following the defeat of the Communist bloc at the hands of Allied forces in the World War II, the Soviet Union represented a powerful symbol of the communism until its demise in the P a g e

195 Thatcher's privatization and Reagan's deregulation policies had already represented sharp departures from the socialist policies of the major western European economies and Canada. The net result is that the dominant economic system after 1990s is capitalism and it has remained unchallenged so far. The recent wave of globalization setting off some 20 years ago, has reinforced dependencies in the economic relations of the nation states. International institutions such as the World Bank and IMF have assumed a greater role in the working of the global economy. Against this background, the vulnerabilities of the developing countries have also been accentuated. The economies of most of the Islamic countries are dependent on the foreign aid that is based on interest-rate. Industrial sector of the Islamic countries is most conspicuously financed by state control financial institutions which are interest based and more importantly are linked with international financial institutions (Ayaz, 1984). So it is not easy to set an isolated interest-free economy of the country that is dependent on the developed world for its economic survival (Razi, 2014) Capitalistic system is antithetical to Islamic worldview Islamic economic system and the capitalistic system are radically different from each other. Islamic system encourages a life of simplicity and moderation, while the capitalistic system favors spending on luxury goods and conspicuous consumption. When profit becomes the only justification of the economic activity, the culture of consumerism is the only expected result. In this culture of consumerism, the sooner a consumer disposes of his belongings the better it is. High GDP growth is not possible unless consumption increases. Often elaborate adverting campaigns are required to artificially create a demand for the things that may be unnecessary. Islamic economic system also differs from the capitalistic system in that the former focuses on generosity and the resulting circulation and distribution of wealth, while capitalistic system is focused on savings and investment and accumulation of the private wealth (Zaman, 2015b). Love of money for its own sake has always remained a despicable moral quality. However, pursuit of wealth is the cardinal principle of capitalism. Weber believed that in the capitalistic system, pursuit of wealth for its own sake has reached a point of irrationality (Weber, Tawney, & Parsons, 1930). It is not possible to develop institutions to satisfy the desire for limitless production without legitimizing the love for money and greed. Keynes realized that a single-minded pursuit of wealth was an undesirable thing but, in a convoluted sense, it was necessary for the time being to pursue wealth. He wrote that the accumulation of wealth is the most distasteful of human qualities (a mental disease). But he said that For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight" (Keynes, 1930). Friedman said that in a business, a concern with anything except the profit is immoral because it is equivalent to destroying the money of the stakeholders (Friedman, 2007). In Islam, earning profit for its own sake is not encouraged and wealth can be earned legitimately if it has to be spent in the way of Allah. "O ye who believe! there are indeed many among the priests and anchorites, who in Falsehood devour the substance of men and hinder (them) from the way of Allah. And there are those who bury gold and silver and spend it not in the way of Allah: announce unto them a most grievous penalty" (Quran 9:34). The primary object of doing business is service and not the profit (Ibne Majah). 195 P a g e

196 Dovetailing Islamic economic system with the capitalistic regime: adverse consequences Capitalism and Islamic system are radically different from each other. A major difference between Islam and Capitalism system is that they provide different answers to the fundamental question of what to do with the surplus resources (Zaman, 2015a). Islam emphasizes that excess resources need to be spent in the path of Allah, while capitalism encourages one to invest the savings to generate more wealth. So, some serious problems are bound to arise if we try to supplant the capitalistic financial institutions into the Islamic economic system. Zaman (2016) says that a whole generation of Islamic economists found that the liberal democracy, capitalism and freedom were consistent with Islam and consequently, they began to look for Islamic analogues of Western financial institutions. The reality is that capitalistic institutions are alien to the spirit of Islam. Amanah or safekeeping and investment are two legitimate functions of the economic activity and date back to the times of the Prophet Mohammed (SAW). The problem with the modern banking is that it does not keep these two fundamental functions of the banks apart. In the wake of the global financial crisis of 2008, many investment bankers who had no knowledge of the Islamic economy came to the conclusion that we can ensure the stability of the banking system only if we keep these two functions apart. Zaman (2016) gives the broad contours of an Islamic financial institution. According to him, Islamic economic system will engage only in the real activities and will strictly stay away from the financial activities which are out of sync with the real activities. There will be separate institutions for safe keeping and investment. In this situation, it is argued, Islamic monetary system could run at zero inflation. The design of the deposit should ensure that inflation is being hedged against. Investment banks will share profits but they will also share the losses and risks. The most important dimension of the Islamic economic institutions would be Awqaf because this is the institution which encourages generosity and spending in the way of Allah and is most consistent with the true spirit of Islam (Kahf, 2003) Strong Moral Commitment Abolishing the interest overnight is extremely difficult if not outright impossible. There are many reasons behind it, and the most conspicuous among which is that the collective will required to form desired interest-free institutions does not exist. What people want is crucial in shaping the form of institutions. Polanyi (1957) writes that Institutions are embodiments of human meaning and purpose. The implication of this statement is that the human will is required to form required institutions. However, if the will does not exist or is sagging, the process of the institution making will remain unrealized. Polanyi writes that Interests, however, like intents, necessarily remain platonic unless they are translated into politics by the means of some social instrumentality. The required human will is though not sufficient to materialize the goal of interest-free society, it is a necessary condition because it is through potent human will that institutions are formed which in turn realize the desired goal, which in this case, is the establishment of interest-free economy. Some recent understanding also points to the fact that the moral commitment necessary to achieve the purpose of interest-free economy is nearly missing in the Islamic world today. Hasan (2015) says that, "Most of the writings in the area of Islamic economics and finance are oblivious to the fact that the moral element in economic actors is utterly non-functional today, if not non-existent. They present their postulates on the tacit assumption that people are reasonably committed to moral and 196 P a g e

197 ethical norms, which is unfortunately not the case. When confronted with the choice of reaping economic benefits or obeying religious imperatives, worldly concerns tend to outweigh the Hereafter consideration." It is argued that if we want to abolish the interest completely, there has to be a strong desire at the mass level, otherwise a dual system of Islamic and conventional financial institutions would continue while Islamic financial system would be marred by financial engineering of questionable juristic validity. It is important to analyze the claim made by Hasan (2015) that concern for economic benefits outweigh the religious imperatives because it will provide insights regarding the probability of achieving the goal of interest-free economy. Our hypothesis is that the countries where there is a higher degree of religiosity will have less number of bank accounts in the conventional banking system, and the higher percentage of accounts in the Islamic banks. Since religiosity, or faith for that matter, is not observable, we can only use proxies. However, the problem with the use of these proxies is that they are very crude and are based on many implausible assumptions. Currently available data is about the religiosity and financial inclusion at the OIC level. The religiosity data has been taken from Pew Research Center s Religion & Public Life Project 58. The data on the financial inclusion is taken from the Global Financial Development Report 2014: Financial Inclusion (Group, 2013). The GFDR 2014 contains data on the financial inclusion as well as financial exclusion. The financially excluded group is the share of the 15 years and above population of the OIC countries which do not have a bank account because of religious reasons. We hypothesize that a high degree of religiosity is positively associated with the share of population which does not have bank accounts for religious reasons. Alternatively, when people do not hold a bank account in the conventional banks to avoid Riba, it will be construed as a strong will to establish an alternative Riba-free economy which will become instrumental in due course of time to establish Riba-free institutions. There are some caveats in using this approach. The countries where there is a larger financial penetration in the conventional sector may not have developed adequate Islamic banking and financial services to match the demand for Islamic institutions. Another reason might be that even if Islamic banking and financial institutions are there, people lack trust in the standards of Shariah compliance of these banks. Very small financial penetration in the conventional system may also result from the religious commitments of the people as well as the small savings of people. We have used simple correlations and quadratic regressions to see the association between commitment to riba-fee economy proxied by the variable "No account because of religious reasons" and other measures of religiosity such as "Salat", "Fasting", "Hajj", "Zakat" and "Importance of religion in life." The pairwise correlation estimates (Table 1 in Appendix) show that only Zakat is significantly associated with no-account for religious reasons. While this result is according to our expectation that a higher percentage of Zakat-payers will have a higher number of those people who do not have a bank account for religious reasons (correlation coefficient = 0.27; P-value < 0.10). Additionally, the negative sign of the category of non-payers of Zakat (correlation coefficient = -0.28; P-value < 0.10) is also according to our expectation. The lack of statistical association between other measures of religiosity such as Salat, Hajj, Fasting and Importance of religion in our life and having no bank account for religious reasons points to the lack of strong commitment to riba-free economy. To test the hypothesis that religiosity and its various indicators such as prayer, fasting, hajj and Zakat are inversely related with the penetration of conventional financial institutions, we used pairwise correlation and quadratic regressions and saw that only prayer is significantly associated with a bank account. The negative coefficient sign between the share of population which says prayers five times 197 P a g e 58

198 No account due to religious reasons % Account at a formal institution % a day and has account in the conventional bank (correlation coefficient = -0.32; P-value <0.05) rejects the hypothesis that economic benefits outweigh religious imperatives (Table 2 in Appendix). To sum up, we find that the population which says the prayers five times a day is likely to have smaller number of accounts in the conventional banks while the population paying zakat choose not to have any bank account because of religious reasons. Figures 4 and 5 below show the relationship between zakat and financial penetration and prayer and financial penetration respectively Gives zakat? "Yes" Gives zakat? "No" Gives zakat? "Yes" Gives zakat? "No" Figure 5: Zakat vs (No) bank account It is important to see that the people who do not say even Juma prayer regularly are more strongly associated with having a bank account in the conventional financial sector. The Pearson correlation between the share of population saying prayer once in a month is 37% (correlation coefficient = 0.37; P-value <0.05); 32% for the share of population saying prayer on Eid only (correlation coefficient = 0.32; P-value <0.05), and 39% for the share of population saying prayer seldom only (correlation coefficient = 0.39; P-value <0.05). See Figure 5 below. 198 P a g e

199 No account due to religious reasons % No account due to religious reasons % No account due to religious reasons % No account due to religious reasons % No account due to religious reasons % Account at a formal institution % Account at a formal institution % Account at a formal institution % Account at a formal institution % Account at a formal institution % Prayer "Multiple times a day" Prayer "Juma only" Prayer "Once or twice a Prayer month" "Few times a year, especially Eid" Prayer "Seldom" Prayer "Never" Prayer "Multiple times a day" Prayer "Juma only" Prayer "Once or twice a Prayer month" "Few times a year, especially Eid" Prayer "Seldom" Prayer "Never" Figure 6: Prayer vs (No) bank account 199 P a g e

200 The association between other measures of religiosity such as Fasting, Pilgrimage and Importance of Religion in Life is statistically insignificant. Figures 6-8 are given in the Appendix. 5. Conclusion We have found that the legislative measures undertaken in Iran and Pakistan to outlaw Riba have not proved effective and have also opened many backdoors to Riba. We have found that a vibrant growth in the Islamic financial system is not enough per se unless some of instruments such as Murabaha and Ijarah are reviewed to ensure strict compliance with the standards of Shariah. More importantly, the operations of the Islamic financial institutions have to embody the spirit at the root of injunctions prohibiting Riba. It is argued that some space within the capitalistic system can be expeditiously used probationally such as maintaining zero interest rates. We have also explained that Islamic economic system and capitalistic economic system are antithetical to each other in important ways. Consequently, any effort of supplanting the capitalistic ideas within the Islamic financial systems will prove counterproductive. We also highlighted the critical role of moral commitment to achieve the objective of Riba-free economy. The empirical analysis shows that the strong commitment at the mass level required to establish the vibrant Islamic economic and financial institutions is lacking. The way out is to nurture that commitment which can be realized if we adequately disseminate the adverse consequences of Riba in our societies. 200 P a g e

201 6. Bibliography Abdul-Khaliq, S. (2014). Comparison study of Murabaha and Istisnaa in Islamic banking in Jordan. Interdisciplinary Journal of Contemporary Research in Business, 5(9), Akhter, W., Akhtar, N., & Jaffri, S. K. A. (2009). Islamic micro-finance and poverty alleviation: A case of Pakistan. Proceeding of the 2 nd CBRC, Lahore. Alam Choudhury, M., & Wajdi Dusuki, A. (2008). Banking for the poor: the role of Islamic banking in microfinance initiatives. Humanomics, 24(1), Allen, F., & Gale, D. (2000). Bubbles and crises. The Economic Journal, 110(460), Apergis, N., & Christou, C. (2015). The behaviour of the bank lending channel when interest rates approach the zero lower bound: Evidence from quantile regressions. Economic Modelling, 49, Ayaz, B. (1984). Islamic Banking: Island in Capitalist Ocean'. Karachi Dawn, Economic and Business Review, 17. Beed, C., & Beed, C. (2014). Jesus on Lending, Debt, and Interest. Journal of Biblical Integration in Business, 17(1). Claus, E., Claus, I., & Krippner, L. (2016). Monetary Policy Spillovers across the Pacific when Interest Rates Are at the Zero Lower Bound. Asian Economic Papers, 15(3), Friedman, M. (2007). The social responsibility of business is to increase its profits Corporate ethics and corporate governance (pp ): Springer. Gafoor, A. A. (1997). Interest-free commercial banking: Apptec Publications. Group, W. B. (2013). Global Financial Development Report 2014: Financial Inclusion (Vol. 2): World Bank Publications. Haron, M. S., Ramli, R., Injas, M. M. Y., & Injas, R. A. (2015). Reputation Risk and Its Impact on the Islamic Banks: Case of the Murabaha. International Journal of Economics and Financial Issues, 5(4). Hasan, Z. (2015). Risk Sharing versus Risk Transfer in Islamic Finance : A Critical Appraisal. ISRA International Journal of Islamic Finance, 7(1), doi: / Honkapohja, S. (2016). Monetary policies to counter the zero interest rate: an overview of research. Empirica, 43(2), Iqbal, M., & Molyneux, P. (2016). Thirty years of Islamic banking: History, performance and prospects: Springer. Iwata, S., & Wu, S. (2012). A Note on Foreign Exchange Interventions at Zero Interest Rates. Macroeconomic Dynamics, 16(5), Kahf, M. (2003, 2003). The role of waqf in improving the ummah welfare. Keynes, J. M. (1930). Economic Possibilities for our Grandchildren (1930) (pp ): MIT Press - Journals. Khan, F. (2008). Islamic Banking by Judiciary: The "backdoor" for Islamism in Pakistan? South Asia: Journal of South Asian Studies, 31(3), Kuran, T. (1993). The economic impact of Islamic fundamentalism (pp ): Chicago: U. Chicago Press. Mian, A., & Sufi, A. (2015). House of debt: How they (and you) caused the Great Recession, and how we can prevent it from happening again: University of Chicago Press. 201 P a g e

202 Nomani, F. (2003). The Problem of Interest and Islamic Banking in a Comparative Perspective: The Case of Egypt, Iran and Pakistan. Review of Middle East Economics and Finance, 1(1). doi: / Nomani, F. (2006). The dilemma of riba-free banking in Islamic public policy. Islam and the Everyday World: Public Policy Dilemmas. Routledge, London, Polanyi, K. (1957). The Great Transformation:(the Political and Economic Origin of Our Time): Beacon Press. Ramamurthy, S., & Sedgley, N. (2013). Exploring Fiscal Policy at Zero Interest Rates in Intermediate Macroeconomics. Journal of Economic Education, 44(4), Razi, N. (2014). Socio-Ethical Dimensions of Islamic Economy and Issue of Modern Interestand {RIBA}: An Analysis in the Light of the Economy of the Muslim World. Journal of Islamic Banking and Finance, 2(2). doi: /jibf.v2n2a3 Schmidt, S. (2013). Optimal Monetary and Fiscal Policy with a Zero Bound on Nominal Interest Rates. Journal of Money Credit and Banking, 45(7), Semlali, M. A. S., & Collyns, M. C. (2002). Lending booms, real estate bubbles and the Asian crisis: International Monetary Fund. Siddiqi, M. N. (1983). Banking without interest (Vol. 5): Islamic Foundation. von Ruden, B. (2015). Zero interest rates as a new reality on the financial markets - Are they really new and who will profit from them? Betriebswirtschaftliche Forschung Und Praxis, 67(5), Weber, M., Tawney, R. H., & Parsons, T. (1930). The Protestant Ethic and the Spirit of Capitalism, Translated by Talcott Parsons... with a Foreword by RT Tawney. Zaman, A. (2015a). Building Genuine Islamic Financial Institutions. Journal of Islamic Economics Banking and Finance, 11(2), doi: / Zaman, A. (2015b). Re-Defining Islamic Economics. Zaman, A. (2016). Reviving the Promise of Islamic Economics. 202 P a g e

203 Appendix Table 1: No account in the conventional bank for religious reason (% of population above 15 years of OIC countries) Mea n S.D. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16 ) (1) no_account (2) zakat_yes (0.0 7) (3) zakat_no (0.0 5) (0.0 0) (4) prayer_five (0.8 0) (0.0 1) (0.0 2) (5) prayer_juma (0.3 7) (0.2 4) (0.3 1) (0.0 2) (6) prayer_mont h (0.5 5) (0.5 1) (0.4 5) (0.0 0) (0.5 7) (7) prayer_eid (0.2 2) (0.0 0) (0.0 0) (0.0 0) (0.0 4) (0.0 0) 203 P a g e

204 (8) prayer_seldo m (9) prayer_never (10 ) (11 ) (12 ) (13 ) (14 ) (15 ) fast_yes fast_no hajj_yes rel_v_imp rel_some_im p rel_not_too_ imp (0.5 0) (0.0 4) (0.0 4) (0.0 0) (0.0 1) (0.0 0) (0.0 0) (0.3 (0.0 (0.0 (0.0 (0.0 (0.2 (0.0 (0.0 8) 4) 7) 0) 0) 4) 0) 0) (0.3 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 8) 0) 0) 0) 0) 6) 0) 0) 0) (0.4 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 1) 0) 0) 0) 0) 5) 0) 0) 0) 0) (0.3 (0.1 (0.1 (0.0 (0.0 (0.4 (0.0 (0.0 (0.0 (0.0 (0.0 9) 2) 6) 0) 3) 3) 3) 0) 0) 1) 1) (0.7 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 5) 0) 0) 0) 0) 1) 0) 0) 0) 0) 0) 0) (0.7 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 7) 0) 0) 0) 0) 0) 0) 0) 0) 0) 0) 0) 0) (0.6 (0.0 (0.0 (0.0 (0.0 (0.1 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 1) 0) 0) 0) 0) 2) 0) 0) 0) 0) 0) 0) 0) (0.0 0) 204 P a g e

205 (16 ) rel_not_at_al l (0.9 (0.0 (0.0 (0.0 (0.0 (0.4 (0.0 (0.0 (0.0 (0.0 4) 0) 0) 0) 1) 0) 0) 0) 0) 0) p-values given in the braces. Only the highlighted cells show statistical significance at 10% level (0.0 (0.0 0) 3) (0.0 0) (0.0 (0.0 0) 0) Table 2: Account in the conventional banks (% of population above 15 years of OIC countries) Mea n (1) account S.D. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16 ) (2) zakat_yes (3) zakat_no (4) prayer_five (5) prayer_juma (6) prayer_mont h (0.8 0) (0.7 (0.0 4) 0) (0.0 (0.0 (0.0 3) 1) 2) (0.7 (0.2 (0.3 6) 4) 1) (0.0 2) P a g e

206 (0.0 1) (0.5 1) (0.4 5) (0.0 0) (0.5 7) (7) prayer_eid (0.0 3) (0.0 0) (0.0 0) (0.0 0) (0.0 4) (0.0 0) (8) prayer_seldo m (0.0 1) (0.0 4) (0.0 4) (0.0 0) (0.0 1) (0.0 0) (0.0 0) (9) prayer_never (0.5 6) (0.0 4) (0.0 7) (0.0 0) (0.0 0) (0.2 4) (0.0 0) (0.0 0) (10 fast_yes ) (0.5 9) (0.0 0) (0.0 0) (0.0 0) (0.0 0) (0.0 6) (0.0 0) (0.0 0) (0.0 0) (11 fast_no ) (0.5 1) (0.0 0) (0.0 0) (0.0 0) (0.0 0) (0.0 5) (0.0 0) (0.0 0) (0.0 0) (0.0 0) (12 hajj_yes ) (0.6 1) (0.1 2) (0.1 6) (0.0 0) (0.0 3) (0.4 3) (0.0 3) (0.0 0) (0.0 0) (0.0 1) (0.0 1) (13 ) rel_v_imp (0.3 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 (0.0 3) 0) 0) 0) 0) 1) 0) 0) 0) 0) 0) 0) (14 rel_some_im ) p P a g e

207 (0.4 0) (0.0 0) (0.0 0) (0.0 0) (0.0 0) (0.0 0) (0.0 0) (0.0 0) (0.0 0) (0.0 0) (15 rel_not_too_ ) imp (0.4 (0.0 (0.0 (0.0 (0.0 (0.1 (0.0 (0.0 (0.0 (0.0 1) 0) 0) 0) 0) 2) 0) 0) 0) 0) (16 rel_not_at_al ) l (0.2 (0.0 (0.0 (0.0 (0.0 (0.4 (0.0 (0.0 (0.0 (0.0 8) 0) 0) 0) 1) 0) 0) 0) 0) 0) p-values given in the braces. Only the highlighted cells show statistical significance at 5% level. (0.0 0) (0.0 0) (0.0 (0.0 0) 0) (0.0 (0.0 0) 3) (0.0 0) (0.0 0) (0.0 0) (0.0 0) (0.0 (0.0 0) 0) 207 P a g e

208 No account due to religious reasons % Account at a formal institution % No account due to religious reasons % Account at a formal institution % Fast "Yes" Fast "No" Fast "Yes" Fast "No" Figure 6: Fasting vs (No) bank account Hajj "Yes" Hajj "No" Hajj "Yes" Hajj "No" Figure 7: Hajj vs (No) bank account 208 P a g e

209 No account due to religious reasons % No account due to religious reasons % No account due to religious reasons % Account at a formal institution % Account at a formal institution % Account at a formal institution % Religion "Very important" Religion "Somewhat important" Religion "Not too important" Religion "Not at all important" Religion "Very important" Religion "Somewhat important" Religion "Not too important" Religion "Not at all important" Figure 8: Prayer vs (No) bank account 209 P a g e

210 Role of Islamic Microfinance in Financial Inclusion Muhammad Kashif Aslam Graduate Student, CIIT, Lahore Dr. Hafiz Zahid Mahmood Associate Professor, CIIT, Lahore Abstract This study has been devised to observe the nexus of microfinance and financial inclusion with reference to Islamic microfinance. In this regard data has been collected from 100 clients each of two Islamic Microfinance organizations (Akhuwat Foundation and NAYMAT) totaling 200 sample size, using close ended questionnaire. The study employs pre and post assessments approach to gauge the role Islamic Microfinance Intuitions in Financial Inclusion. Descriptive statistics is mainly used to achieve the objectives of the study. Results of the study exhibit that only 8.75 % target respondents of Islamic microfinance instructions were financially included before borrowing from respective organizations. Moreover, it has also been observed that Islamic Microfinance Institutions played pivotal role in gender inclusion in the form of financial inclusion in a developing country like Pakistan where, according to world Bank (2013), only 13 % of adults are financially included. Therefore, it is strongly recommended that Islamic microfinance should be taken up as tool of financial inclusion by the practitioners and policy makers. Keywords: financial inclusion, Financial Exclusion, Islamic Microfinance, Voluntary exclusion, 210 P a g e

211 Contriving areas of improvement in Islamic Finance Education for Present & Future: A Practitioner's Perspective Mr. Pir Qasim Shah Lecturer Management Sciences FAST-National University PhD Scholar at Institute of Management Sciences Abstract This endeavor focuses on the current and future technical, operational and strategic needs of Islamic Finance industry and aims to conceptualize knowledge areas for Islamic Finance Education in Pakistan as viewed by Islamic Finance practitioners. A qualitative case study methodology was used by collecting data through extensive semi-structured face to face interviews to describe the phenomenon. Data was analyzed using content analysis techniques. The study found substantial areas to improve Islamic Finance education in the country namely revamping curricula tailored to the dynamic demands of the industry, titivating courses at the diploma, undergraduate and graduate level in order to precisely enable students understand the contemporary challenges and opportunities of practical nature. It was also found that an effective apprenticeship program could bring in prospects & potentials to revitalize the overall educational framework of Islamic Finance education. The study also incorporates the viewpoints of Islamic banks operating as a subsidiary to a conventional parent bank and an independent window. Additional studies may enhance the findings further by supplementing other perspectives to it. Keywords: Islamic Finance Education, Islamic Finance Industrial Needs. JEL Classification: A20, I2, I20 & I P a g e

212 Introduction and Background of the Study Islamic Finance Education is as important as Islamic Finance industry itself as the human resource required to back up the industry is being provided by educational intuitions as well. The worldwide growth and development of Islamic Finance education has created demand for institutions to commence Islamic Finance Education. Need for Islamic Finance Education and Research Participants of Islamic Finance Industry are required to be holder of certain skills that makes them competent to perform their functions efficiently and effectively. Just like any other discipline Islamic Finance evolves with the changes and requirements of customers but the unique principles with Islamic Finance are the underlying principles of Islamic Shariah that doesn t change but surprisingly its holistic principles doesn t require any upgradation as Muslims believe that the teaching of Islam has been comprehensively explained through divine revelation. However, the need of research and development is not something that may remain stagnant but Islamic Shariah allows rather motivates and appreciates individuals to explore knowledge through research. Therefore, there is a need for continues improvement of education and curriculum of Islamic Finance education so as to enable all stakeholders embrace the requirements of today and tomorrow. Statement of the Research Problem The current skills and competencies of Islamic Finance Graduates are not as per the demands of the industry where these resources are used. Therefore, it is worthwhile to identify potential improvement areas for Islamic finance education, as the current level of IF education is not being considered an optimal one by the practitioners.. Objectives of the Research To identify potential areas from improvement Islamic Finance Education in Pakistan To identify key knowledge areas required by the Industry to be inculcated in Islamic Finance graduates. To document the expectations of Industry from the academia involved in Islamic Finance Education and Research. To document areas that may be included in updating framework of Islamic Finance Education. Significance of the Research Growth of Islamic Finance industry demands extensive human resources fully equipped with the ability to deal with contemporary challenges. The study is important for HEC for the reason that it talks about Islamic Finance educational. The study is likewise important for State Bank of Pakistan to cater the strategic human resource needs of the Islamic Finance Industry and foresee essentialities for its long-term vision. Similarly, this research is important for those institutions who are either delivering Islamic Finance Education or are intending to start such a program as this research delivers an over-all of Islamic Finance Education. The most significant part of this research is that it focuses on an indigenous environment that allows all stakeholders easily deploy the results into their institutions. only to share the findings discovered as of yet. Therefore, it is limited in terms of the numbers of participants interviewed from Islamic financial institutions and independent windows. The researchers collected data from Peshawar and Karachi based banks only. Therefore, the input of Islamabad and Lahore based banks couldn t be gathered in the current version of the study. The study is also limited on the fact that it only demonstrates the perspectives of practitioners and not of the regulatory body or academia. 212 P a g e

213 Suggestions for future studies The limitations mentioned in the aforementioned section may be accounted for in the future study. Following list may help others to work in this area: Other perspectives such as students, regulator and academia may be added to the current unidimensional perspective Data may be collected from other sources and countries as well Other modes of training and education such as professional bodies providing Islamic finance education such as AAOIFI may be included in the research frame. 213 P a g e

214 Review of the Related Literature Higher education commission (HEC) the regulator of educational sector of Pakistan supervises all the educational institutions of the country. National Business Education Accreditation Council (NBEAC) a division of HEC actively evaluates the periodic performance of all the business education institutions including Islamic business education institutions. Islamic Finance Education Studies show that the more a student has complete and updated knowledge about Islamic and conventional modes of finance the more vigilant decisions students eventually make during their professional life. Clear learning gives direction to the commitment and the higher the level of commitment one has, higher the chances of selecting an Islamic solution over a conventional one are there. Islamic Finance fundamentals are increasingly becoming important. Every graduate need to have a command over it regardless of his majors as Islamic finance education plays an important role in supplying technically qualified human capital. Bley and Kuehn (2004). Modes of Islamic Finance Education There are various modes of Islamic Finance Education that enables an individual contribute to the industry. The following text provides a summary of these modes. Universities/Degree Awarding Institutions (DAIs) Offering Islamic Finance Education Historically, Islamic studies departments of public and private sector universities offered education in the various domains of Islam. There were perhaps individuals who specialized in Islamic Business related subjects and wrote dissertations in Masters and PhD Islamic studies that contributed in one way or another. Specific departments dealing in the areas of Islamic Business are also present in many locations. International Islamic University Islamabad (IIUI) was charted on the very same grounds to provide international perspectives through research in Shariah. Shariah Academy of IIU played a significant role in dissemination of research endeavors in the field of Islamic business and economics. Other universities offering Islamic finance education are COMSATS CIIT Lahore through its center for Islamic finance. UMT is also offering a course on Islamic finance. Likewise there are other institutions that offer Islamic finance education as a fulltime degree for instance the three centers of excellence in Islamic finance established in LUMS, IBA and IM Sciences. These three centers are also offering either a degree program or short courses or both in the area of Islamic business and finance. Dars-e-Nizami Dars-e-Nizami is full time 8-11 years of formal Islamic Education extensively delivered in a certified madrassah. The first 8 years of education has yearly modules that cover variety of subjects namely Introduction to Islamic principles, Grammar, Sarf-o-Nahav, Literature, Mathematics, Algebra, Philosophy, Logic and Critical Thinking, Islamic Business, Arabic, Hadees, Usool-e-Hadees, Fiqh, Usool-e-Fiqh, Tafseer etc. The next three years are specialization level certification that could be Miraas, Qur an, Hadees, Business and many others. It is important to note that not every institution offers the last three year education as it is very extensive and demands a scholar to work in a Darul Iftah after writing his dissertation. It is important to note that the above mentioned information is shared with the readers only for information purposes to supplement their understanding that there are more than one method of getting Islamic education especially Islamic Finance and Business Education. However, the purpose 214 P a g e

215 this research study is only focused towards the BBA, MBA, MS and PhD degrees offered by degree awarding institutions affiliated with the HEC. Professional Islamic Finance Education Providers Institute of Bankers Pakistan, Institute of Chartered Accountants of Pakistan, Institute of Cost and Management Accountants of Pakistan included chapters and topics related to Islamic Economics and Finance. These courses are also available as part of specialization of electives. Some international organizations such as AAOIFI and CIMA are offering certifications in Islamic Finance. From financing in Islam to Islamic Finance Interest free banking came under reconsideration in the late 1920s when Sheikh Ibrahim Abu Al- Yaqdhan described the functioning of contemporary banking system within the principles of Shariah. Likewise in 1963 Mit Ghamr bank in Egypt started working towards the social responsibility side of intermediation by providing interest free loans to the members of local society. Thereafter, the concepts of Interest-free banking, Islamic Bank, Islamic Financial Institutions, Bayt Al-Tamwil (Finance House), Dar-ul-Maal Al-Islami (House of Islamic Money) started emerging with a rapid speed. (Belouafi, Belabes & Trullols, 2012). Due to the scarcity of available literature on the subject matter only a handful review is included. Methods The following sections would reflect different aspects of the methodology used for the research. Type and Nature of the Research This research endeavor is a qualitative descriptive study that digs deep into the evolutionary development process of Islamic Finance Education in Pakistan. The study focuses in demonstrating the practitioner s perspective. The study used case study as a method of inquiry that allows a researcher to do in-depth analysis of a program or activity or process. (Stake, 1995) It also permits the researcher to collect data from many sources over a period of time. (Yin, 2009) Data Collection Methods The study was undertaken using primary data, collected via extensive semi-structured face to face interviews from selected Heads of Human Resources/Training and Sharia Scholars working in Islamic Banks, Independent Islamic Banking Windows/Subsidiaries and Takaful Companies operating in Pakistan, based in Peshawar and Karachi. Sampling and Techniques of Analysis These sampled financial institutions include Meezan Bank, Al-Baraka Bank, Dubai Islamic Bank, Bank Islami, Habib Bank Islamic Banking Group, National Bank of Pakistan Islamic Banking Group, UBL Ameen, Bank of Khyber Islamic Banking Division, Soneri Mustaqeem Bank, Bank Al-Habib Islamic Banking Division, Pak-Qatar Family Takaful and Takaful Pakistan Ltd. These financial institutions cover more than 90% of the total Islamic Financial institutions population. The duration of interviews ranged from 30 minutes to 60 minutes or more. Data was analyzed after transcribing the interviews keeping in view the language and translation consistency. Then transcribed sets were analyzed using qualitative data analysis software i.e. Nvivo by incorporating content analysis techniques such as word trees and word frequencies to summarize findings. 215 P a g e

216 Research Philosophy Constructivism The underlying philosophy of this endeavor is constructivism that is sometimes also referred to as interpretivism. According to Saunders, Lewis and Thornhill, (2012) & Creswell (2013) Believer of a constructivist philosophy thinks of reality as a socially constructed phenomenon that is subjectively based on the researchers, respondents, institutions and organizations within a situation. It is also true that the social value system is also given considerable amount of weight in the research based on constructivist s approach. (Andrade, 2009). Similarly, Gray, (2004) is of the view that constructivist believes in science of observations in the mind of an individual that is also influenced by value system and other relevant contexts. Saunders et al. opine that constructivist use qualitative data collection methods namely interviews and discussion, similarly focus group observations could also be used. Consequently, the data is analyzed based on qualitative techniques such as content analysis and word frequencies etc. Saunders, Lewis and Thornhill, (2012) Data Analysis Findings & Conclusions Following sections would through some light on the Findings of interviews and end with a conclusion. Beyond Fundamental Islamic Finance Education Islamic Finance has been growing from the last one decade in the country. This is a high time to move beyond basic fundamental Islamic Finance Education especially those enrolled in 4 or 2 year degree programs. [I think curricula of Islamic business shouldn t merely work like that. There is a deeper side of it for instance, as we are telling someone in school that taking bribe is prohibited in Islam; we should also inform him about the scenarios in which we enter into a position of giving or taking a bribe or what the preconditions and after effects of bribery are.] O-A-1 Basic Fundamentals should be covered in first two semesters and then students should be exposed to advanced level practical knowledge of industry and Shariah. This will enable students acquire prudency and make sound business decisions is field setting. Imparting Practical Training through Activity Based Learning [Management of Islamic banks and those of working in Islamic Banking Windows should understand the need of training its employees especially in an activity based method. So, that all understand the depth of fundamentals of Islamic Finance. Another important point that I want to share is that in the fundamentals of IF training, sources of Shariah] O-A-2 Teaching and Training of students in campus or that of employees working in an Islamic Bank may be done through activity based learning so that students are more inclined towards solving real world challenges instead of hypothetically constrained problems. This is will open up the mind of members and focus them towards the real problems of industry. Indigenous markets operate on modern and at times on traditional methods that often are Shariah Compliant or otherwise. The most challenging portion is the market practice of old traditional markets not following the rules of contract theories and doing business verbally that needs proper direction. Enhancing Knowledge Base of Industry Stakeholders [Moreover, each and every person working in IF industry should have a clear vision about life, about existence and there should a proper way that inculcates the vision of Islamic banking in employees. I have heard employees saying that it s the same thing like conventional banks. This is all because we don t enhance our knowledge] O-A P a g e

217 All stakeholders of industry be it Customers or Employees, Investors/Shareholders or Students, Teachers or Researchers need to enhance their knowledge base. This is a time to move forward. Following list would give areas in which the industry demands knowledge enhancement: Documentation is Islamic Financial Contracts its nature and sequence Shariah Compliant Investments in Capital Markets Sukuks and other Capital Market Decisions Musawwama and Salam Products AAOIFI Standards and Islamic Accounting, Auditing & Finance Asset and Liability Side Operations of Shariah Finance etc. This list is based on the interviews conducted for the purpose of this research and shouldn t be accepted as an exhaustive one. Culminate right mindset for Islamic Finance industry [Therefore, Mu amilat should be given due consideration and IF (Islamic Finance) curricula should inculcate factual nature and right mindset in students who are able to see the big picture and depth of IF industry.] O-A-1 [I think that the real change in Islamic finance education will only occur if the mindset of upper management is developed. Regardless of how much talented, well-educated and trained workforce we have.] O-A-2 More than 90% of respondents required students with the right mindset before entering industry. Practitioner is paying costs on the training and development of its employees. But the goal can t be achieved to the full potential. People with the wrong mind-set do more harm than good to the industry. A few respondents also noted that after years of working in an Islamic Bank people claim that Islamic and Conventional Banks are the same. Limited Knowledge, Wrong Interpretations and negative biasness all contribute to this type of mindset. Therefore, academia should inculcate right mindset in students so that they do not misguide others with their limited knowledge. Training Students on challenges of Islamic Banking Windows [Similarly, management of Islamic banks and those of working in Islamic Banking Windows should understand the need of training. but when management doesn t realize the training needs in an IIBW; they don t allocate sufficient resources for it that creates a lot of trouble down the road.] O-A- 2 [I believe that perception prevails you know that banking industry has its own challenges.. Banks with an Islamic window has its distinct challenges. Imagine that you were a conventional bank for decades, then you are to open an Islamic window and say that my conventional sister concern isn t a good financial institution.] O-A-5 Islamic banking windows are operating on parallel basis with conventional banks and same brand name is providing both types of banking namely Islamic and Conventional. The respondents who were working in this type of facility expressed issues with the understanding side of conventional banks. Increased training costs to enable employees understand Shariah compliant financial intermediation often becomes difficult. Enhancing Feedback Mechanism [There should be supervisor follow up in academic institutions for the mutual projects of academia & industry. Students shouldn t be set free for such endeavors And on a lighter note, along with 217 P a g e

218 these internships; supervisors should take a strong role in follow-ups about the interns, their learning, attendance and the like.] 0-A-3 Islamic Finance professionals suggested adding a two tier feedback mechanism that goes both ways. Students/Trainees should give feedback about the contents/modules of knowledge and skills being delivered as well as about the teacher, trainer and facilitator. If the trainer is good he can inculcate the right skills in individuals. Redesigning Apprenticeship Programs [The internship..doesn t fully equip the graduating student with the requirements of the industry that s not even the aim of it. When students don t get ample exposure of industry during the course of their academic learning in campus it is important to revamp the whole process of internships and align it with the industry needs.] O-A-6 Industry practitioners gave suggestions to revamp the whole apprenticeship programs of business education. The current internship program of 4-6 weeks was not appreciated due to absence of students from services, showing low motivation in learning. The same is true from the practitioner side. Since there is no proper policy in place therefore not even the practitioner takes the role of internship seriously. Proper marks and grades should be assigned to the weekly performance of internees. Follow ups should be made by the university and students shouldn t be let free during the course of internship. Moreover, the industry s concern also demanded the duration of such programs be raised to more than 4-6 weeks in a modular format i.e. is somewhat similar to article ship training program of professional accounting bodies. Work and Study Options [Universities can send their students on joint work-study programs and also appoint industry professionals as full time or part time faculty members. Students should get actual trainings on the events that are based in real business environment.] O-A-6 Suggestions were also given to have a policy for combined work and study programs. So that the learning is applied in a real time fashion in the industry and knowledge base of students is more practical concrete then just merely learning theories. Islamic finance education is more than just ever demanding and dynamic therefore cross-trained personnel are required to take-over the industry to the next level. Industry Academia Twin Supervision [I think students should be given assignments in which they have two supervisors, one from the industry side and the other from academia side. Both should teach, train and evaluate students in offcampus learning modules. Resource allocation should be properly made so that all stakeholders can contribute positively.] O-A-6 It was also found that there should be a twin supervisor program one from within the academia and the other one from industry. Both supervisors should train students throughout the education period in a university in academic learning, research and internships. Students should be graded on the feedback of both. This type of exercise will create an enabling environment for students of professional degrees in Islamic Finance. 218 P a g e

219 Revisiting the Curriculum at Secondary and Higher Secondary Level [It is very important to restructure the course and include the content relevant to IBF. On primary level we can have halaal haram. On secondary and higher secondary level we can include concepts and theories. On more advanced levels we can have specialized courses.]o-a-6 There is an emergent need of revising the curricula of secondary and higher secondary levels to make the adaptation process easy. Students with become bankers after choosing the same majors or they become customers of banks if they opt for other professions. Therefore, in both the cases they will interact with the bank one way or another. If foundations are strongly built via early school education by teaching students basics of Islamic Finance solutions then opting for Shariah compliant products or services won t be a problematic endeavor. Sharia, Maqasid-e-Sharia and Islamic Finance Industry [In banking career, students are expected to have skills in IT, Finance, Treasury, Credit & Operations. All these departments deal in Islamic Products in their own language that addresses their need. The underlying reality on which these products are based is Sharia and its Maqasid. Therefore, the same should be taught to them so that the overall structure make sense to them.] O-A-6 Islamic finance industry agents are bound to each other on one uniting reality i.e. Shariah and its objectives. If all stakeholders and members of Islamic Finance industry understand this uniting base. The industry will move smoothly and progress with less activities of nitpicking and non-productive criticism. One respondent also noted that Maqasid should be taught to everyone as they re biding on each member. An IT professional will understand how to develop systems for Islamic finance professionals if he understands it, an accountant will know how to record transactions that are based on these principles, risk analyst will also be able to calculate risk appropriately if he knows the underlying reality, credit department will consider the exact same requirements in advancing financing, customer s will understand the purpose of dealing in Shariah compliant transactions, managers will know why and how to deal with it. Hence, all professionals will be able to translate maqasid into their own language. This would also reduce the Shariah non-compliance costs. The Way Forward [I think industry specific practical research is required. Engineering in products and services is required significantly to take the industry to the next level.. But now people have expectations they want their financial needs to be addressed. They come to IFIs for their needs, if not answered or catered properly, they may go to other places.] O-A-6 The future of Islamic finance demands more technically qualified and cross trained people who would be able to move the industry to the next level. Without a sufficient amount of human resources trained in Shariah compliant businesses it would be difficult to address the concerns of future. The foreseeable future asks the industry players to: 1. Cater the straight forward needs of customer & find solutions for the ones they can t solve right now otherwise they ll lose business. 2. Offer need based services instead of the current way of serviceability. Develop Products that can address customer s needs. 3. Do engineering or re-engineering to exceed the future needs of customers so that the industry can grow further. Conclusion Islamic finance education is the key ingredient in the overall growth and prosperity of industry. Sound decisions will be made by the professionals if they are educated in a more technical and 219 P a g e

220 applied manner owing to the practical nature of discipline and needs of the industry. Therefore, human capital of Islamic Finance industry should be trained in an applied manner to face the real world challenges. The success of industry also depends on the research and development of products base to meet the needs of customer in a more resilient manner keeping in view the ethos of Islamic Shariah. Since, university education is undertaken for a long run period therefore this education should be framed in a manner that is tailored to the needs of industry, creates the right individuals for the right jobs, inculcates sound management principles, enhances research and knowledge base, appreciating two way constructive feedback and most importantly understands Maqasid-e-Sharia in every level to enable the Islamic Finance industry grow further. References Andrade, A.D. (2009) Interpretive research aiming at theory building: Adopting and adapting the case study design, The Qualitative Report, 14 (1), Belouafi Ahmed., Belabes Abderrazak & Trullols, Cristina, (2012). Islamic Finance in Western Higher Education. Retrieved from: Bley, J., & Kuehn K. (2004). Conventional versus Islamic Finance: Student knowledge and perception in UAE. International Journal of Islamic Financial Services. 6. (1) Creswell, J.W. (2013) Research design: Qualitative, quantitative, and mixed methods approach. 4th ed. Thousand Oaks: Sage Gray, D.E. (2004) Doing research in the real world. London: Sages Saunders, M., Lewis, P., and Thornhill, A (2012) Research methods for business students. 6th ed. Harlow: Pearson. Stake, R. (1995) The art of case study research. Thousand Oaks, CA: Sage Yin, R.K. (2012) Applications of case study research. 3rd ed. Thousand Oaks, CA: Sage. 220 P a g e

221 221 P a g e The Key Role of Zakah as an Instrument of Financial System Stability in Pakistan: A Study of Punjab Province Sanaullah Ansari Shaheed Zulfikar Ali Bhutto Institute of Science & Technology (SZABIST), Pakistan (Not Presented) Abstract Zakah is the most important and beneficial system which plays key role as an instrument of financial system stability. According to this system, rich people have to pay Zakah at a certain rate in accordance with their income and wealth. This amount is then distributed among poor and needy people of the society to overcome their financial needs. This system was not properly managed in Pakistan due to which, financial system stability was lacking in the country. To overcome this problem, Zakah and Ushr Ordinance was promulgated in 1980 and the collection of Zakah was started through conventional and Islamic banks and Federal Board of Revenue (FBR). In 2009, Ministry of Zakah and Ushr was established which was responsible of this process in the country. However, under 18 th Constitutional amendment in June 2011, Ministry of Zakah and Ushr was dissolved and this subject was transferred to all provinces of the country with the centeral control of Ministry of Religious Affairs. Since then, provinces are collecting Zakah through their respective departments and distributing it to the needy people of the society. Pakistan has 5 Provinces; Punjab, Sindh, Balochistan, Khyber Pakhtoonkhawa and Gilgit Baltistan. The current population of Pakistan is 197,200,000 and the population of Punjab Province is 100,590,000 which is 51% of total population of the country. Therefore, Punjab is the highest populated province of Pakistan. The budgeted allocation of Zakah of Punjab Province was Pak Rupees Million for the financial year which was increased to Pak Rupees Million in and to Pak Rupees Million for the financial year These funds are obtained from Federal Government, financial institutions, business organizations and individuals in the form of donations. Similarly, these funds are distributed on merit to the needy and poor people for their education, health, rehabilitation, marriages and to meet daily life expenditures. Due to this process, the living standard of poor and needy people is increasing as this system is playing its key role for financial system stability in Punjab Province and in whole country at large. Key Words: Zakah, Collection, Distribution, Punjab Province, Pakistan Introduction Islam is a religion of peace for humanity and encourages social welfare at the most. It teaches all possible ways to help each other so that everyone can survive and enjoy the life. Waqf (endowment) in Sharia h gives us detailed guidelines about how we can help others. This term is being introduced by Holy Prophet Muhammad (PBUH) when he established a welfare society in Medina (Karim, 2011). The great companions of the Prophet participated in Waqf practices with their will and wealth. The very first example was about Hazrat Umar (RA) when he had Waqf his palm orchard in Khyber for the noble cause of Allah (Sahih Al-Bukhari). Historically, this practice was followed by all Muslims in Arab at Prophet s time with great enthusiasm and later, the same was adopted by all Muslims throughout the world. In subsequent centuries, Muslims of different parts of the world participated in Waqf practices by helping others (Isesco, 2011). There are several Waqf management practices but the most beneficial is Zakah system. Zakah is a financial help which is paid by the rich

222 to the poor people of society. The order to pay Zakah has been given by Almighty Allah in several verses of Holy Quran. Further, it has been described by our Holy Prophet Muhammad (PBUH) in detail. As per the teachings of this system, rich people pay Zakah at a certain rate described in Sharia h and in accordance with their income and wealth. This amount then has to be distributed among poor people of the society without any discrimination and according to the philosophy of social welfare. As there was not any statutory body responsible for the collection and distribution of Zakah in Pakistan, Zakah and Ushr Ordinance was promulgated in 1980 (No. XVIII of 1980) and the collection of Zakah was started through conventional and Islamic banks and Federal Board of Revenue (FBR). This amount then transferred to the Ministry of Zakah and Ushr which was responsible for the distribution of Zakah to the needy and poor people. By the establishment of a governmental institution, the collection and distribution system of Zakah became more managed and well organized. Zakah is being collected on saving accounts and on corporate incomes and is distributed to the needy and poor people through a well organized distribution system. Many other NGOs are also involved in collection and distribution of Zakah in Pakistan on the basis of donations from businesses and individuals. Under 18 th Constitutional amendment in June 2011, Ministry of Zakah and Ushr was dissolved and this subject was transferred to all provinces of the country with the central control of Ministry of Religious Affairs. Since then, provinces are collecting Zakah through their respective departments and distributing it to the needy people of the society. The order to pay Zakah in Holy Quran Allah, the Almighty has ordered to pay Zakah and charity in several verses in Holy Quran which shows the importance of Zakah in an Islamic society. The Holy Quran says: And be steadfast in prayer; give Zakah; and bow down your heads with those who bow down (in worship). (2:43) And remember We took a covenant from the Children of Israel (to this effect): Worship none but Allah. Treat with kindness your parents and kindred, and orphans and those in need; speak fair to the people; be steadfast in prayer; and give Zakah. Then did ye turn back, except a few among you, and ye backslide (even now). (2:83) But those among them who are well-grounded in knowledge, and the believers, believe in what hath been revealed to thee and what was revealed before thee: And (especially) those who establish regular prayer and pay Zakah (regular charity) and believe in Allah and in the Last Day: To them shall We soon give a great reward. (4:162) "And ordain for us that which is good, in this life and in the Hereafter: for we have turned unto Thee." He said: "I afflict on whom I will; but My mercy extendeth to all things. That (mercy) I shall ordain for those who do right, and pay Zakah, and those who believe in Our signs. (7:156) But (even so), if they repent, establish regular prayers, and pay Zakah, they are your brethren in Faith: (thus) do We explain the Signs in detail, for those who understand. (9:11) The mosques of Allah shall be visited and maintained by such as believe in Allah and the Last Day, establish regular prayers, and pay Zakah, and fear none (at all) except Allah. It is they who are expected to be on true guidance. (9:18) And We made them leaders, guiding (men) by Our Command, and We inspired them to do good deeds, to establish regular prayers, and to give Zakah; and they constantly served Us (and Us only). (21:73) 222 P a g e

223 By men whom neither trade nor sale can divert from the Remembrance of Allah, nor from regular prayer, nor from paying Zakah: Their (only) fear is for the Day when hearts and eyes will be turned about. (23:60) So establish regular prayer and give Zakah; and obey the Messenger. that ye may receive mercy. (24:56) Those who establish regular prayers and give Zakah, and also have sure faith in the hereafter. (27:3) Those who establish regular prayer, and give Zakah, and have sure faith in the Hereafter. (31:4) Those who pay Zakah, and who even deny the Hereafter. (41:7) And they have been commanded no more than this: to worship Allah, offering Him sincere devotion, being true (in faith); to establish regular prayer; and to give Zakah; and that is the Religion Right and Straight. (98:5) Sahib-e-Nisab The term Sahib-e-Nisab is used for that person who becomes eligible to pay Zakah according to the monetary value of his/her assets. The basis of calculating Zakah is straightforward. The person needs to identify the wealth which is in the form of cash, bank deposits, shares, bonds, securities, cattle, agricultural products, gold and silver; this will all be liable to Zakah. Wealth such as personal clothing, books, property for own use, household goods, cars for own use will not be subject to Zakah. Nisab in Arabic means portion. Here, it refers to threshold after which a person is obliged to pay Zakah. Before the Zakah is applicable, a person must be in possession of grams of gold or grams of silver. This must be in his possession for a year. If he/she doesn t have gold or silver, then he/she works out the equivalent value in monetary terms and pays accordingly. If a person has lent someone money, and expects to receive it back, then this is still legally considered his own money; therefore he will have to pay Zakah on it. Zakah is applicable on the amount the person has after one lunar year, regardless of the fluctuations in between. Zakah is usually payable on the previous year because a person does not know whether he will still be in possession of his wealth in order to pay in advance. Aamleen-e-Zakah Aamleen-e-Zakah are those people who are eligible to receive the Zakah. These include: Needy people Those people who cannot earn their livelihood and they need financial help to live their lives. Disabled people Those people who cannot do work due to their disability and they are dependent on others. Collector of Zakah Those people who collect Zakah from Muslims can take their salaries from the collected amount of Zakah. New Muslims Newcomers in Islam also deserve the Zakah because they might have to leave all their belongings due to the conversion into Islam. Debtors From the amount of Zakah, we can pay the debt of any debtor who is in financial problems and is unable to pay his debt on time. Freedom of slaves 223 P a g e

224 For the freedom of slaves, the amount of Zakah could be used. In the way of Allah Zakah can be paid to those people who leave their home for the cause of Allah, i.e. Mujahid, Student of Islam or preacher of Islam. Passengers Zakah can be paid to those passengers who have lost all their assets during the voyage. Zakah System in Pakistan Majority of Pakistani Muslims pay Zakah on regular basis. The normal payment month is Ramadan. As there were no proper collection and distribution system in existence, people were paying Zakah by their own. There are several welfare and charity organizations that collect and distribute or spend the amount of Zakah to the needy people. Officially, Zakah and Ushr system was introduced by Government of Pakistan through an Ordinance in 1980 as a part of the overall policy of Islamization in the country. An Organization namely Central Zakah Administration (CZA) had been established to implement Zakah System in Pakistan. Central Zakah Administration remained part of Finance Division up to 30 June Later on, Central Zakah Administration was declared as Zakah Ushr Division on 1 July On 25 November 1996, the then Federal Government had abolished Zakah and Ushr Division and merged it with Ministry of Religious Affairs as its wing Zakah & Ushr Wing. On 3 November 2009, an independent Ministry of Zakah and Ushr has been created after bifurcation from Ministry of Religious Affairs. However, under 18 th Constitutional amendment in June 2011, Ministry of Zakah and Ushr was dissolved and this subject was transferred to all provinces of the country with the central control of Ministry of Religious Affairs. Since then, provinces are collecting Zakah through their respective departments and distributing it to the needy people of the society. Functions of Ministry of Zakah and Ushr The main functions of Ministry of Zakah and Ushr were as follows: Development of policies, arrangements for the proper collection, disbursement, utilization of Zakah & Ushr funds and maintenance of their accounts. Maintenance of Liaison with Pakistan Missions abroad for collection of Zakah and other voluntary contributions from Pakistani citizens and others residing outside Pakistan. Organization and administration of Central Zakah Council. Preparation of annual and supplementary budget for disbursement of Zakah by the Central Zakah Council and its approval. Administration of ten per cent Zakah Funds to earmark for Local and District Zakah Committees. Disbursement of Zakah funds to national and other recognized institutions. Monitoring of the collection, disbursement and utilization of Zakah and Ushr Funds and arrangement for their periodical and annual inspection and audit. Coordination with the Auditor-General of Pakistan for the purpose of audit required under the Zakah and Ushr Ordinance, Investments of Zakah funds in non-profit bearing instruments as permitted under Sharia h. Monitoring and evaluation of Zakah and Ushr system in Pakistan as well as study of these systems in other Muslim countries with a view to improve the system in Pakistan. Administration of such organizations performing social security and other complementary functions in relation to Zakah and Ushr system. Formation of recruitment and service rules. 224 P a g e

225 Performance of all other functions required under the Zakah and Ushr Ordinance, 1980 and the rules made there under. 225 P a g e

226 Zakah System in Punjab Province According to Zakah and Ushr Ordinance, Zakah is compulsorily levied on 11 assets as prescribed by the Government. Banks, companies and other financial institutions operating these assets are bound to deduct Zakah at source. The amount of Zakah so deducted is credited into Central Zakah Fund with State Bank of Pakistan. Disbursement of Zakah takes place by transfer of funds from Central Zakah Fund to the Provincial Zakah Fund which in turn transfers it to District Zakah Committees of all the districts on population basis. Actual disbursement of Zakah is made at Local level by Local Zakah Committee of a village or Mohalla (Area) and other institutions such as Deeni Madaris, Government Educational Institutions and Vocational Training Institutes. Punjab Zakah Department is currently running various programs for the poor which include Guzara Allowance for the chronic poor, marriage grant for unmarried poor women, free treatment for the needy patients, and educational stipends for the students of Deeni Madaris and Government Institutes. It arranges, through PVTC, free technical and vocational training of poor and needy youth in order to enhance their chances of independent livelihoods. The Department has earmarked Pak Rupees 3.08 Billion for these interventions for the financial year Zakah and Ushr Department aims to help Government of the Punjab to reduce extreme poverty in line with the injunctions of Islam. The Department contributes towards poverty reduction through investing in the poor for both their subsistence and rehabilitation. Functions of Punjab Zakah Department Punjab Zakah & Ushr Department performs following core functions: Planning and Policy formulation for better working of Zakah system in Punjab. Preparation of annual Zakah budget. Disbursement of Zakah fund. Maintenance of accounts and arrangements for audit. Process cases for exemption from deduction of Zakah at source and issuance of exemption certificates. Dealing all administrative matters of staff. Constitution of Provincial Zakah Council, District Zakah Committees and Local Zakah Committees. Enlistment of Deeni Madaris and Vocational Training Institutes for Zakah grants. 226

227 Organogram of Punjab Zakah Department District Zakah Committees Administratively, the Province Punjab has been divided into following 36 Districts. Attock Bahawalpur Bahawalnagar Bhakkar Chakwal Chiniot D.G.Khan Faisalabad Gujrat Gujranwala Hafizabad Jhang Jehlum Khushab Khanewal Kasur Lahore Layyah Lodhran Mianwali Mandi Bahauddin Multan Muzaffargarh Nankana Sahib Narowal Okara Pakpattan Rahim Yar Khan Rawalpindi Rajanpur Sargodha Sahiwal Sheikhupura Sialkot Toba Tek Singh Vehari Each of the Districts has one Zakah Committee which is notified by the Provincial Zakah Council. The composition of the District Zakah Committee is as follows: A Chairman to be nominated by Provincial Zakah Council. 5 Members to be nominated by Provincial Zakah Council in consultation with Chairman, District Zakah Committee. Two women from within District not less than 45 years of age. District Zakah Officer (ex-officio Member/Secretary). Each of the District Zakah Committee performs following functions: 227

228 Disbursement of Zakah fund at District level. Prepare and maintain accounts. Constitution of Local Zakah Committees in respective District. Arrange audit of the Local Zakah Funds in the district. Local Zakah Committees Total 21,680 Local Zakah Committees have been constituted in all Districts. District No. of LZCs District No. of LZCs Attock 432 Bahawalpur 740 Bahawalnagar 1,077 Bhakkar 392 Chakwal 375 Chiniot 414 D.G.Khan 350 Faisalabad 1,387 Gujrat 634 Gujranwala 1,302 Hafizabad 607 Jhang 747 Jehlum 323 Khushab 417 Khanewal 702 Lahore 1,284 Lodhran 387 Multan 558 Muzaffargarh 481 Nankana Sahib 524 Okara 976 Pakpattan 572 Rahim Yar Khan 830 Rawalpindi Rajanpur 519 Sargodha 932 Sahiwal 585 Sheikhupura 753 Sialkot 852 Toba Tek Singh 605 Vehari 757 The composition of Local Zakah Committees is as follows: Seven male members generally residing in the locality. Three women not less than 45 years of age. Each of the Local Zakah Committee performs following functions: Determine Istehqaq for Subsistence Allowance. Treatment through public hospitals, charitable institutions and other institutions providing health care. Rehabilitation, either directly or indirectly through Deeni Madaris, educational, vocational and social welfare institutions. Disbursement of funds to the Mustehqeen (deserved people) through crossed cheques. Zakah Budget for the Financial Year (Pak Rupees in Millions) (Currency Convertor: Pak Rupees 1 Million = US$ 9,556) 228

229 # Particulars of Receipts Amount 1 Receipts from Central Zakah Fund (MORA) Amount of Voluntary Zakah Collection Amount taken from Reserves ( ) Refunds/Unutilized Amount/Other Receipts ( ) Total Sectorial Allocation Table-I 1 Educational Stipends (Technical) ADMINISTRATIVE EXPENDITURES: 2 (a) Salaries to Zakah Paid Staff (b) Advertisement Charges (c) Campaign for Voluntary Zakah Collection Total (1+2) Table-II 1 Leprosy Patients Provincial Level Hospitals/ Health Institutions Ramzan & Eid Grant Total (1+2+3) Table-III Regular Zakat Programmes 1 Guzara Allowance (65.4% of Guzara Allowance for Blinds+Refunds+Reserves) Educational Stipends (9%) Stipends to the students of Deeni Madaris (8%) Health Care (District) (6%)

230 5 Rehabilitation (3.6%) Marriage Assistance to Unmarried Women (8%) Total ( ) Grand Total (Table-I + Table-II + Table-III) Beneficiaries of Zakah Funds Provincial Level Hospitals This is a health safeguard for poor patients who cannot afford expenses for their treatment. Zakah funds for medical treatment of the Mustahiq patients are provided to Provincial Level Hospitals, District Headquarter Hospitals and Tehsil Headquarter Hospitals. Vocational Training Institutes Educational Stipends (technical) are provided to underprivileged poor young boys girls studying in 185 Vocational Training Institutes established by Punjab Vocational Council under the auspices of Punjab Zakah and Ushr Department. and Training Education Stipends (General) During the year , an amount of Pak Rupees Million was released to all Districts of the Province, and more than 16,140 poor students benefited from this amount. Guzara Allowance (Blinds) During the year , an amount of Pak Rupees Million was released to all Districts of the Province, and more than 6,000 poor blinds benefited from this scheme. Education Stipends (Technical) During the year , an amount of Pak Rupees Million was released to all Districts of Province for this scheme, and more than 48,000 poor students benefited from this amount. Education Stipends (Deeni Madaris) During the year , an amount of Pak Rupees Million was released for scheme, and more than 33,000 students benefited from this amount. this 230

231 Marriage Assistance During the year , an amount of Pak Rupees Million was allocated for scheme, and more than 5,900 deserving families benefited from this amount. this Health Care During the year , an amount of Pak Rupees Million was earmarked for Health Care. More than 188,000 deserving patients across the Province benefited from this scheme. Grant for Leprosy Patients 89 leprosy-stricken families in District Rawalpindi have benefited from an amount of Pak Rupees 1.2 Million, earmarked for the year Conclusion There are several Waqf management practices which Muslims follow throughout the world. Zakah is the most important and beneficial system which plays vital role in the society. Zakah is a financial liability for all those who are Sahib-e-Nisab according to the Sharia h principles. Rich has to pay a certain amount of his wealth to the poor and needy (Aamleen-e-Zakah) for their financial requirements. Muslims in Pakistan pay their Zakah accordingly through various sources. The biggest and official source is Ministry of Religious Affairs which is responsible for the monitoring of collection and distribution of Zakah by respective Departments of all Provinces. As Punjab is the largest populated Province of the country (51% population of the whole country), it is performing much better in collecting and distributing Zakah to fulfill the needs and requirements of poor and needy people. Administratively, Punjab Province is distributed in 36 Districts in which District Zakah Committees (DZCs) are established. Further, each District is administratively distributed in several small units in which, 21,680 Local Zakah Committees (LZCs) are established. The purpose of this system is to provide Zakah funds to each and every poor and needy person of the society at grass root level. Due to this system, Zakah funds are utilizing by Punjab Zakah Department very efficiently and effectively. Due to this process, the living standard of poor and needy people is increasing as this system is playing its key role for financial system stability in Punjab Province and in whole country at large. 231

232 References Al-Quran Badran, Abul Ainain. (1982), Ahkam ul Wasaya wal Awqaf, Muassasah Shabad ul Jamiah, Egypt. Isesco (2011), Phases and Roles of Islamic Waqf Endowments, Available at: Karim, Riazul. (2011), Zakah and Waqf Bank: For Social Development and Improved Management of Endowments. Available at: Kahaf, Monzer. (1999), Towards the Revival of Awqaf: A Few Fiqhi Issues to Reconsider, Paper Presented on the Harvard Forum on Islamic Finance and Economics, Harvard University, USA. Kamali, Hashim Mohammad. (1998), Principles of Islamic Jurisprudence, Islamiah Publishers SDN. BHD, Malaysia. Laldin, Akram Mohammad. (2008), Fundamentals and practices in Islamic Finance. ISRA, Malaysia. Mahdi, Muhammad. (2010), Nizam un Nazarati Alal Awqaf, Awqaf Public Foundation, Kuwait. Ministry of Religious Affairs Sahih Al-Bukhari 232

233 Potential Role of Islamic Finance in Preventing Financial Crises: A Discourse based on three Financial Crises Muhammad Imran Ejaz PhD. Scholar, University of Management and Technology, Lahore Abstract The Capitalist system has undergone numerous crises in its history. The Financial Crisis of shook the International Financial architecture raising questions as to what was inherently wrong with the system. Islamic Finance offered solutions to the problems confronting the financial system. This study analyzes three crises; Black Wednesday 1992-the currency crisis that shook Britain; East Asian Currency Crisis and the Financial Crisis of The causative factors of these crises have been isolated and studied under the light of Islamic Finance principles. This is a theoretical and analytical paper and is unique in analyzing the Black Wednesday Currency Crisis in the light of Islamic Finance principles. The study shows that the underlying causative factors of the three crises are in violation of the principles of Islamic Finance. The main causative factor behind the Currency Crises is shown to be the ability to carry out a Speculative attack which is possible due to the facility of short sales. The study shows that short sales are contrary to the teachings of Islamic Finance. Likewise, the role of speculation in the crisis is also highlighted along with the other causative factors. The study concludes that if the causative factors isolated in the three crises, which are in violation of the rules of Islamic Jurisprudence and still persist in the system, are removed from the International Financial Architecture then this system would be given great stability and the chances of a further crisis would significantly diminish. Keywords:Financial Crisis, Interest, Gharar, Speculation, reserves 233

234 Shari ah Governance Framework for Islamic Banking Institutions Irum Saba Assistant Professor, Institute of Business Administration (IBA), Karachi (Not Presented) Abstract: Real Owner and Creator of all Resources is Allah Man is His Vicegerent in this world and Accountable for resources entrusted to him Property acquired through non-permissible and unjustified means (theft, bribery, cheating, illegal trading, gambling, etc.) does not qualify as Al Mal and is proscribed Property not to be used for impermissible activities Trustworthiness and Faithfulness to Contractual Obligations A person who does not fulfill his promises has no Deen (religion) Profit Maximization Vs. Welfare Maximization of Stakeholders Horizon - Accountability in this world and Life in Hereafter Objective Justice (Adl) with all Social Harmony Highest examples of Governance Standards in the life of Holy Prophet, Righteous Caliphs and Islamic history Corporate Governance is defined as being about: maximizing value subject to meeting the corporation s financial and other legal and contractual obligations This definition stresses the need for the Board of Directors to balance the interests of shareholders with those of other stakeholders employees, customers, investors in order to achieve long term sustained value. 234

235 Promoting Islamic Micro Finance Portfolio, Combining Synergies for Structured Finance Solutions: A case study of Helping Hands and Meezan Bank Pakistan Malik Shahzad Shabbir International Islamic University Islamabad Amir Khalil urrehman International Islamic University Islamabad (Not Presented) Abstract Sustainability and access to traditional funding sources by Micro Finance Institutions have remained a pressing issue for the industry. The traditional sources of finance such as Commercial Banks have been unwilling and reluctant to join hands with Micro Finance Institutions. A unique structuring proposal of business model is being proposed here. It combines synergies of structured finance solution for Islamic Banks to join hands with existing Micro Finance providers. The proposed model which is scalable and replicable have the potential to offer a break-through for providing access to Micro Finance providers from traditional sources of funding like Banks. The proposed business model will enhance the financing capacity of the existing Micro Finance Industry by a staggering two thirds, simply by bringing in matching funds from traditional sources of funds. These funds are based on the strong business model using synergies and financially innovative structured solution proposed for Risk Management etc. It is a commercially viable solution which is capable of being replicated for the entire industry with a huge win-win for all. Keywords: Funding, Micro Finance Institutions, Islamic Bank, Business Model, Risk Management. 1. INTRODUCTION Microfinance is a source of financial services for entrepreneurs and small businesses that are lacking in access with banks and its related services. Microfinance is a broad category of services including microcredit. The microcredit is a provision of credit service to underprivileged clients. It is one aspects of microfinance and rest of two are often confused 59. The concept of microcredit took a big leap in the 1960s and 1970s, when some groups such as ACCION International in Venezuela and Yunus'sGrameen Bank in Bangladesh began to institutionalize the process. By formalizing and expanding the basic concept of sharing programs, these microfinance institutions helped to build capital for small businesses rather than just loaning for basic necessities such as food, water and clothing. 60 Dr. Muhammad Yunus first came across the idea of microcredit while studying the lives of poor entrepreneurs in his native Bangladesh during the famine of He began with loaning to groups of women and his program soon proved that small loans could not only quickly improve lives of the poor s but also sustain paid back on time with interest. 61 The next step was setting up a consistent onthe-ground program. In the case of successful institutions that mean sending a representative or field manager to the prospective region to educate, advise and oversee the loans locally. When a few 59 Feigenberg, Benjamin; Erica M. Field; Rohan Pande.Building Social Capital through MicroFinance. NBER Working Paper No Retrieved 10 March Source: 61 Joanna Ledgerwood, Microfinance Handbook-An Institutional and Financial Perspective, the World Bank, Washington; Introduction, p

236 members of the group were accepted for a loan, the rest had to wait for that initial loan to be repaid before they can obtain their own loans. The peer pressure from the group to repay the initial loan helped to set the bar high. In 1961, another early pioneer ACCION opened its doors in Caracas and Venezuela, when law student Joseph Blatchford raised $90,000 to start a community development program to help the poor to jump-start their own business. Over the next two decades, ACCION set up scores of independent microfinance institutions and expanded across Latin America. It also offered for people a choice besides the local loan shark, who would charge rates as high as 500 percent a year and often pushed people into permanent debt. However, the founders of ACCION and Dr. Yunus realized that if individuals who wanted to start their own businesses could not free themselves from start-up debt, they would never be able to grow. Since the Grameen Bank was founded, it had paid more than $5.7 and $5.1 billion in loans and repaid respectively. The recovery rates of these loans are approximately 98.9 percent. It had made more than 0.95 billion loans and 6.7 million members around the world, whereas 96 percent members are women. The proposed model has the potential to offer a break-through scalable and replicable model for providing access to Micro Finance providers from traditional sources of funding like Bank. Since Banking Industry as a whole has traditionally avoided joining hands with Micro Finance providers for various reason, which are primarily being addressed in the financially innovative proposed model. Considering its immense potential for providing the above break-through it needs to be given a fair hearing chance and full support for deepening. However, there is availability of micro finance funds for the Agriculture-Sector from traditional funding sources. 1.1 Definition of Islamic Microfinance Microfinance is the provision of financial services for low-income populations in which the services provided according to Islamic financing principles. In many respects, Islamic finance is simply ethical finance 62. Islam sets out some broad principles that govern commercial transactions in general and the provision of finance in particular. The Interest is the one of the most important financing principles that prohibited under Islamic law. Many Muslims therefore refrain from using interest based microfinance services for fear of breaching their religious beliefs. Islamic microfinance programs cannot therefore imitate conventional microfinance programs and obliged to provide finance without charging interest. However, it does not mean that capital is free of charge, it should be made available without any cost, or there should be no return on the funds provided. Rather a return on capital is allowed, whether that capital participates in the productive process and exposed to business risk. 2. LITERATURE REVIEW The implementation of the Islamic economic system, which has been started since the early 1960's 63, increased the number of Islamic financial institutions both banks and non-banks. One of the Islamic financial institutions is community-oriented Islamic bottom cooperative, which known as Islamic Microfinance. The birth of Microfinance Institutions (MFIs) is a solution for grassroots economic groups who need funding for small business development. MFI is a basic economic institution that seeks to develop productive ventures and investments in order to increase the Zaher, Tarik S and M. Kabir Hassan, A Comparative Literature Survey of Islamic Finance and Banking, p

237 economic activity of small entrepreneurs with Sharia and cooperative. In Islam this contains agency partnership, cooperation, family, and togetherness healthy business, and lawfulness. Such institutions are highly praised in Islam as the word of God, cooperate in goodness and piety, and do not cooperate in sin and enmity 64. Similar teaching is reiterated in Sura An-Nisa, verse 12. Prophet Muhammad (Peace Be upon Him) said God will answer prayer of two people who collaborate and not betray each other 65. The principle of the MFI business is based on the concept of mutual help and not monopolized by one of the owners of capital. Similarly, both in terms of gains or losses are divided equally and proportionally. However, the purpose of such venture will not be the maximum and cannot be achieved if it is not accompanied by good risk management particularly the management of financial risk. Since the establishment of financial institutions, Islamic microfinance is a funding channel owned entity from the people who have more money to those who need capital. Financing or credit risk management is an integral part of overall risk management. The objectives of financial risk management include monitoring, identifying, measuring and controlling all risks arising from the provision of financing in focused, integrated and sustainable manners. Moreover, it also increases the revenues and minimizes the risk of granting financing through financial portfolio management and establishing policies, procedures and systems. By analyzing the financing, microfinance notices the results of provided finance whether that gives permanent results or not. The financial institutions that provide permanent results obtained through contract of sale (Murabaha) and leasing (Ijara). 66 While financing that provides temporary results are obtained from the contract of (Mudharabah) and (Musharaka). Based on these two things, the product will provide funding in microfinance which has a risk different from one contract to another. The most of investment or business run through financing activities which always associated with risk. The problem is how to manage that investment or business in the minimum financing risk. This risk can be minimized by using good risk management and it can also be initialized with screening to prospective clients through finance the projects. If financing has been realized, the risk control can be done by providing treatment in accordance with the character of clients and characteristics of projects. Morduch and Wrenn (2005) claimed that they maintain a balance between commercial and social objectives of MFI and this can be achieved if client s needs are understood through market and administration of Micro Finance Institutions (MFI) is performed well according to the behavior of the target market. Abbink (2006) examined that micro finance has no effect on poverty due to extreme poorness in the developing nations, which take a back seat with the needs of the poor to focus primarily on sustainability and profit for micro finance banks. Simanowitz and Walter argue that MFIs set new standards in poverty impact that maintain high standards of financial performance and it is now time to design and innovative services. Hassan (2015) concluded that micro finance programs are not effective. However, financial depending and economic growth also promotes consumption smoothing by micro finance.it is noted that micro finance activities are improving client s economic status which accumulates through 64 (Al-Maidah: 2) 65 (Al-Bukhari) 66 Adam, Helmi, 2010, StrategiManajemenRisikoPadaPembiayaan UKM di BMT Al Munawarah& BMT BerkahMadani, p

238 income. In turn results of reduced poverty on increased household income often measured via the impact of micro finance.ibrahim suggested that riba (interest) is forbidden in Islam because in Pakistan many potential clients who prefer to remain poor to accept interest. However, several scholars such as Ferros (2005), Goud (2012), Chowdry (2006), Farook (2007), Ashraf(2007), Zafor (2007), Dhumale and Sapcanin (1999) ensure that they remain competitive and innovative ideas are more inclined for working of MFIs in Pakistan according to Associated Press of Pakistan. Whereas, so many similarities are also found like egalitarian and risk sharing. Islamic micro finance needs to fulfill all highlighted areas which are indicated by scholars under the supervision of Shariah advisory board. Nazirwan (2015) stated a controversy has risen about riba and its permissibility. However, riba is that amount charged on advances or interest paid by banks on deposits. Most of Muslim scholars believe that there are subtle differences in interpretation of riba and it is prohibited in Islam. Ayub (1995) said that the profit earned on those advances and it will be permissible, if someone indulges in trading.meyer (2014) stated his arguments about diminishing men concern whereas small no of people have wealth to accumulate the tendency reinforces interest. However, the risk of potential loss is also exposed financial capital unless Islam does not allow gain from a financial activity. However, the international markets can assimilate Islamic institutions by the legal frame work and a standardized regulatory. Before the financial institutions are making new financial instruments, their religious boards and shariah adviser s approved from most of banks. Islamic principles are not based in some countries when attempting to explain their practices and Islamic bank occasionally experience major difficulties.they get access to finance unless may not strengthen through their productive base and without tangible collateral they didn t build a strong productive base. However, they offer sufficient collateral except in which micro entrepreneurs may not access the finance. Thus financial institutions create a vicious circle and their lack of tangible assets to offer as collateral by a major constraint to finance the poor Abdouli (1991). Agro- economic activity that generates irregular cash flows against the inherent seasonal trend among the rural poor through encounter promoting of non-firm activities by micro-financers.however, into a merely consumption-smoothing act needs turning micro-finance but end up with fulfilling immediate consumption and in many cases the borrowers start up taking loans for micro-business.3. Combining Synergies For Structured Finance Solutions Figure 3.1: Promoting Islamic Micro Finance Portfolio Islamic Commercial Bank's Exposure will remain 100% Secure at all times... 40% Secured by 60% Secured by 40% of Facility Guaranteed / paid / Reimbursed by SBP in case of default Corporate Guarantee of MF provider through additional 40% Cash Security Deposit under Top-up clause in case of default claim lodgement Cash Deposit from Micro Finance provider 238

239 Figure 3.2: Combining Synergies for Structured Finance Solutions Islamic Financial Institution (IFI)'s Exposure will remain 100% Secure at all times 40% Secured by 60% Secured by 40% of Facility Guaranteed / paid / Reimbursed by StateBP in case of default Corporate Guarantee of HHRD through additional 40% Cash Security Deposit under Top-up clause in case of default claim lodgement Cash Deposit from Helping Hands for Relief and Development (HHRD) Islamic Financial Institution (IFI): 1. Present Status: Does not have any Islamic Micro Finance portfolio. 2. Objectives: (a) Contribute and support Islamic Micro Finance sector, inter alia, as part of Corporate Social Responsibility. (b) Build Islamic Micro Finance portfolio; i. as a social and welfare cause ii. as a new source of revenue generation iii. Minimizing costs & risks and maximizing returns iv. Increasing outreach by combining and utilizing synergies of existing players without having to directly incur any network expansion and heavy human resource costs due to the inherent labor intensive nature of managing small ticket size micro finance portfolios and transactions. v. Later on, the scope of this collaboration with helping hands for relief and development (HHRD) has the potential to result in the creation of a new Islamic Micro Finance Bank. Helping Hands for Relief and Development (HHRD) 1. Present Status: Islamic Micro Finance portfolio of approximately Rs.300 Million comprising about 11,000 customers, doing both Interest free Micro Finance, as well as Shariah Compliant Esar Micro Finance. 2. Objectives: a) Increase outreach and enhance Islamic Micro Finance portfolio i. Significant tax savings are expected to accrue. However, they save 3.5 per cent tax presently payable on Murabaha transactions by routing these transactions through 239

240 an Islamic Financial Institution (IFI). A saving of 3.5 per cent on cumulative portfolio of about Rs. 300 Million approximately is expected to yield a tax saving of about Rs Million. ii. Increase ability to do business by about per cent from about Rs. 300 Million existing cumulative portfolio to about Rs. 500 Million through the proposed structured finance solution simply by leveraging of significant synergies which already exist and can be innovatively combined in order to arrive at a major winwin solution for all. iii. Presently, in case of default no part of existing HHRD portfolio is guaranteed. By simply routing this transaction through an acceptable IFI, access to State Bank of Pakistan (SBP) reimbursement of up to 40 per cent of default in each IMF case and portfolio becomes possible. iv. Routing IMF transactions through IFI for small Agri-farmers with holdings of less than 12.5 acres of land may also be covered not just for 40 per cent of SBP reimbursement but on seeking requisite permissions may also potentially qualify for reimbursement for up to 100 per cent via subsidized insurance cover arrangements applicable for small farmers. b) Later on, the scope of this collaboration between IFI and HHRD has to the potential and proposed to result in creation of a new Islamic Micro Finance Bank, preferably as a joint venture with the IFI or even by HHRD alone if the need arises. Proposed Scheme of Arrangements / Transaction Structure 1. IFI and HHRD will sign a MOU based on initially, the Scheme of Arrangements and then legal and Shariah vetted agreements and documents would be finalized. 2. IFI will appoint HHRD as its agent to build Islamic Micro Finance portfolio. IMF portfolio management, staffing, marketing, recoveries, etc. will be the sole responsibility of HHRD. 3. IFI and HHRD will also enter into an MOU/Syndication Arrangement as Co-Financiers, whereby for each IMF customer 60 per cent financing will be provided by HHRD and the remaining 40 per cent will be provided by the IFI at a profit benchmark of up to one year KIBOR plus 5 per cent per annum on a net of cash Security Deposit basis. 4. The disbursement would be done through IFI by HHRD, in capacity as IFI s Agent. 5. IFI s exposure to each IMF customer would be secured by a) Corporate Guarantee of HHRD for 100 per cent of the original disbursement amount b) 60 per cent Cash Security Deposit made by HHRD (separately deposited for each IMF customer transaction at the time of each disbursement) c) Remaining 40 per cent net of security deposit cash funded exposure of the IFI is secured by; i. Additional 40 per cent Security SBP Reimbursement is guaranteed up to 40 per cent in Micro Finance cases. ii. Additional 40 per cent Cash Security Comfort for IFI. This is further secured by additional 40 per cent cash security deposit in top-up clause under which HHRD will give deposit of an additional 40 per cent Cash Security Deposit in each case of IMF default. 240

241 This 40 per cent Cash Security Deposit made by HHRD (under Top-up clause, deposited in case of default by IMF customer will be simultaneously done at the time of reimbursement claim lodgment with SBP by HHRD through IFI. Since IFI would already have received 100 per cent Security Deposit in each Default case. Hence, the benefit of any reimbursement up to 40 per cent received by the IFI would be passed on back to HHRD in the form of returning the 40 per cent Security Deposit obtained by IFI under the Top Up clause. 6. HHRD will market and obtain internal (HHRD) approvals for disbursement based on its existing internal approval process and product programs as applicable. Proposed Process Flow 7. Once an Islamic Micro Finance (IMF) case is internally approved by HHRD, a) HHRD will deposit 60 per cent Cash Security Deposit separately as applicable for each HHRD approved IMF case with the IFI. b) After completion of requisite HHRD formalities, HHRD will issue a DAC (Disbursement Authorization Certificate). This DAC will also be treated as i. A request from HHRD to the IFI to give disbursement to the customer for up to the amount stated therein. ii. DAC will contain confirmation that 60 per cent of the amount proposed to be disbursed has already been deposited with the IFI as Security Deposit. iii. DAC will also refer to Top-up clause under which in case the IMF customer defaults at any later stage. HHRD agrees to indemnify and will Top-up the Security Deposit by 40 per cent, from 60 per cent to 100 per cent of the original amount disbursed to an IMF or outstanding whichever is higher. iv. Simultaneously, at the time of making deposit of the additional 40 per cent Security Deposit by HHRD with the IFI (only in case of default claim lodgment). HHRD through the IFI will also Lodge a Default Claim with the SBP. Hence, it becomes effectively due to the Top-up clause, IFI on a net of cash (Security Deposit) basis will never really be out of pocket or out of funds and will not face any internal cost of funds issue on even the Non-Performing Portfolio, at any stage even in the future. v. Since SBP guarantees and reimburses 40 per cent of the amount disbursed in IMF, Agri and small medium enterprise s (SME) sectors. Hence, finally, on receipt of the 40 per cent reimbursement by the IFI from the SBP. HHRD will also end up getting back its 40 per cent Security Deposit released from the IFI, which were deposited with the IFI, under the top up clause at the time of any claim lodgment with the SBP, through the IFI in default cases only. Win-Win for IFI New Source of Revenue Generation for IFI Build IMF Portfolio IFIwill be able to build IMF portfolio and increase its outreach. Risks Mitigated is de facto mitigated by Corporate Guarantee of HHRD, Cash Security Deposit; initially 60 per cent, additional 40 per cent under Top-Up clause and SBP Reimbursement Guaranteeing 40 per cent in cases of default. 241

242 No Additional Infrastructure Costs since HHRD will develop market manage IMF portfolio and ensure recoveries as IFI s agent. Hence capital intensive infrastructure and staffing costs are not involved. Corporate Social Responsibility (CSR) IFI s CSR met for social welfare. Growth of IMF Bank Collaboration with HHRD can potentially result in creation of an IMF Bank. It is pertinent to note that if the proposed transaction structure is not adopted, the above benefits may not be available to IFI. Win-Win for HHRD Just by simply routing transactions through the IFI in the manner proposed above will have potentially yield the following additional advantages: Substantial Tax Savings of 3.5 per cent on Murabaha Transactions will potentially yield tax savings of up to Rs.10.5 Million on a cumulative Rs.300 Million portfolio size on fresh disbursements. Increase IMF Portfolio size Increase HHRD s portfolio by per cent, such as if it is at Rs. 300 Million outstanding at present, then routing all future disbursements through IFI. IFI disbursing 40 per cent share will increase cumulative capacity from Rs.300 to Rs.500 Million. Increased funds availability will help increase outreach. Risks Mitigated on Defaults due to SBP Guaranteeing 40 per cent of exposure even though HHRD will be issuing Corporate Guarantee in favor of IFI. HHRD will also be making Cash Security Deposit, initially 60 per cent and an additional 40 per cent under Top-Up clause with IFI in case of default. This is mitigated by the SBP Reimbursement Guaranteeing 40per cent of the exposure in case of default. Hence this capacity enhancement is at no extra risk or cost. In fact any default on HHRD s existing IMF portfolio is presently not covered by 40 per cent SBP Guarantee. Whereas, this advantage will provide 40 per cent cushion for existing portfolio also whilst significantly enhancing capacity. IMF for agree 40 per cent also covered or may even also qualify for up to 100 per cent potential cover in case of default: If requisite permissions are sought and obtained routing IMF transactions through IFI for small Agri farmers of less than 12.5 acres may potentially increase the guaranteed portion from 40 per cent to a potentially 100 per cent through insurance cover arrangement applicable for small farmers. Growth of IMF BankCollaboration with IFI can potentially result in the creation of an IMF Bank, either as a Joint Venture or if required even by HHRD alone. It is pertinent to note that if the proposed transaction structure is not adopted, the above benefits may not be available to HHRD. Conclusion The proposed model has the potential to offer a break-through scalable and replicable model for providing access to Micro Finance providers from traditional sources of funding like Banks. Since Banking Industry as a whole has traditionally avoided joining hands with Micro Finance providers for various reasons, which are primarily being addressed in the financially innovative proposed model. 242

243 Considering its immense potential for providing the above break-through it needs to be given a fair hearing chance and full support for deepening. Based on the above, it is requested that the above may be considered for matching grant from the Financial Innovation Challenge Fund in order to encourage and promote traditional providers of funds (Banks) to join hands with Micro Finance Providers of up to 70 per cent matching grant. HHRD would be providing its share of Rs.115 Million to be matched on 60:40 ratios by Meezan Bank Limited about Rs Million and the total Rs Million may be matched on 30:70 bases by the Financial Innovative Challenge. References Abbink, K., Irlenbusch, B., & Renner, E. (2006). Group size and social ties in microfinance institutions Economic Inquiry, 44(4), Abdouli, A. (1991). Access to finance and collaterals: Islamic versus western banking. Islamic Economics, 3(1). Adam, H. (2010). Strategimanajemenrisikopadapembiayaan UKM di BMT al-munawwarahdan BMT BerkahMadani. Ali, K., Akhtar, M. F., & Ahmed, H. Z. (2011) Bank-Specific and Macroeconomic Indicators of Profitability-Empirical Evidence from the Commercial Banks of Pakistan. International Journal of Business and Social Science, 2(6), Ayub, M, (1995). Meaning of Riba Journal of Islamic Banking and Finance Chowdhry, S, (2006). "Creating an Islamic Microfinance Model-The Missing Dimension."Dinar Standard: Business Strategies for the Muslim World Dhumale, R., &Sapcanin, A. (1999).An application of Islamic banking principles to microfinance. Technical Note, A study btyhe Regional Bureau for Arab States, UNDP, in cooperation with the Middle East and North Africa Region, World Bank. Farook, R. (2007). Developing an Islamic microfinance model. Ferro, N. (2005). Value through diversity: microfinance and Islamic finance and global banking. Field, E., Feigenberg, B., &Pande, R. (2011).Building Social Capital through Microfinance. Fisher, T., &Sriram, M. S. (2003). Beyond Micro-Credit: Putting Development Back into Micro- Finance. Small Enterprise Development, 14(1), 69. Goud, B. (2012). Islamic microfinance. Contemporary Islamic Finance: Innovations, Applications, and Best Practices, Haneef, M. A., Muhammad, A. D., Pramanik, A. H., & Mohammed, M. O. (2014).Integrated Waqf Based Islamic Microfinance Model (IWIMM) for poverty alleviation in OIC member countries. Middle-East Journal of Scientific Research, 19(2), Hassan, A. (2015). Financial inclusion of the poor: from microcredit to Islamic microfinancial services. Humanomics, 31(3), Hassan, M. K. (2010). An integrated poverty alleviation model combining zakat, awqaf and microfinance.in Seventh International Conference. The Tawhidi Epistemology (pp ). 243

244 Ibrahim, M. J. The Challenge of Poverty Reduction in IDB Member Countries in the Post-Crisis World. Jan Sofi, F. (2013).Financing Microenterprises: Creating a Potential Value-Based Hybrid Model for Islamic Microfinance. International Journal of Management and Business Research, 2(2), Joanna, L. (2000), Microfinance Handbook-An Institutional and Financial Perspective, the World Bank, Washington; Meyer, R. L. (2014). Innovative microfinance: potential for serving rural markets sustainably. In Finance for Food (pp ).Springer Berlin Heidelberg. Montgomery, H. (2006). 8. Serving the poorest of the poor: the poverty impact of the Khushhali Bank s microfinance lending in Pakistan. Poverty strategies in Asia: a growth plus approach, 222. Nazirwan, M. (2015). "The dynamic role and performance of BaitulMaal Wat Tamwil: Islamic community-based microfinance in Central Java." PhD diss., Victoria University, Seetharaman, A., Helmi Bin ZainiSooria, H., &Saravanan, A. S. (2002).Intellectual capital accounting and reporting in the knowledge economy.journal of Intellectual capital, 3(2), Siddiqi, K. (2008). Potential of Islamic microfinance in Pakistan. Discussion paper series, 1-95, Wrenn, E. (2005). Microfinance- Literature Review. Trocaire ie/documents/microfinance_literature_review. pdf. Yunus, M (2007). "Nobel Lecture, Oslo, December 10, 2006." Explore: The Journal of Science and Healing 3, no. 5: Yunus, M. (2005).Grameen Bank's Struggling (Beggar) Members Programme. Available on org/index. php. Yunus, M (2005). "Eliminating poverty through market-based social entrepreneurship, " Global Urban Development Magazine 1, no. 1 Zafar, A. (2007). The growing relationship between China and Sub-Saharan Africa: Macroeconomic, trade, investment, and aid links. The World Bank Research Observer, 22(1), Zaheer, S. (2013). Financial intermediation and monetary transmission through conventional and Islamic channels 244

245 Sukuk Structuring and Sharia, Issues (A Critical study of Sukuk in the Islamic Debt Market) Dr Mufti Abdul Razaq Department of Islamic Studies Ghazi University Dera Ghazi Khan Abstract Recent Innovation in Islamic finance has changed the dynamics of the Islamic finance industry. Specially in the area of bonds and securities the use of Sukuk or Islamic Securities have become increasingly popular in the last few years, both as a means of raising government finance through sovereign issues, and as a way of companies obtaining tending through the offer of corporate sukuk. Sukuk has developed as one of the most significant mechanisms for raising finance in the international capital markets through Islamically acceptable structures. Multinational corporations, sovereign bodies, state corporations and financial institutions use international sukuk issuance as an alternative to syndicated financing. What are sukuk and how are they structured will be discuss in this project in some detail. Sukuk are therefore attractive investment instruments for Islamic banks, takaful Islamic insurance companies and shariah managed funds that cannot invest in conventional securities that involve payment of Riba or interest. In addition there are an increasing number of Muslims of high net worth who want their asset holdings to comply with Islamic law. This project conducts a comprehensive investigation of application of the concept of maslah as a new approach for Islamic bonds in theory and practice. Integrated into this is a comprehensive analysis of sharia auditing where knowledge in the areas of Islamic economics, finance, and law are brought together to articulate a holistic framework for Islamic finance. Key word.sukuk.securities, Takaful, Riba, Shariah. 245

246 Service Quality and Customer Satisfaction: A Study on Islamic Banks of Pakistan By Asad Ilyas PhD Scholar Institute of Islamic Banking, University of Management and Technology, Lahore, Pakistan Noman Arshed Lecturer School of Business Economics, University of Management and Technology, Lahore, Pakistan Dr. Talat Hussain Assistant Professor Institute of Islamic Banking, University of Management and Technology, Lahore, Pakistan Abstract Service quality in banking sector is becoming more significant as it is the basis of distinction between different types of services and provides an edge over other service providers. Islamic banking as a comparison with conventional banking requires better service quality to attain more customers with limited products. The main reasonfor present research was to find the association of service quality with customer satisfaction in Islamic Banks. Datawas collected through questionnaire which was adopted from literature. Questionnaire had two parts i.e. service quality and customer satisfaction. Service quality wasmeasured through 22 questions with five dimensions of service quality i.e. Tangibles, Reliability, Responsiveness, Assurance and Empathy and similarly Customer Satisfaction was measured through 4 questions. Theoutcomes of this study will help Islamic Banks to find out the important factors which can play avital role in customer satisfaction. So, Islamic Banks will be helped to improve service quality in order to gain competitive advantage with in the same industry. Thisstudy waslimited to five Islamic banks of Pakistan and only data from customers who are residents of Lahore wascollected. This research has both academic and professional contributions as it will add literature in present body of knowledge and helps Islamic banking professionals to have an enhanced understanding about service quality in Islamic banks. Key Words: Service Quality, Islamic Banks, Customer Satisfaction, Servqual INTRODUCTION 246

247 Islamic banking is different from the conventional banking in many aspects. Islamic banks work on the Shariah principles. Shariah compliant finance is another term that can be utilized for Islamic banking (Khan, 2015). Shariah regulations forbade the interest on money loans referred as the usury or riba. The economic activities based on speculation gharar are also avoided. Investment in the some un-islamic businesses which are prohibited is Islam i.e. alcohol business or pork business is not supported by the Islamic banksandproduction of haram products is discouraged(rammal & Zurbruegg, 2007). All the dealings, responsibilities, focus for the investment, product characteristics, transactions, approach for carrying out business in an Islamic banks are done after following Shariah laws ( Zaharuddin & Rahman, 2007). The banking industry performed its role socially and economically. The service sectors are working shoulder to shoulder to the manufacturing sectors (Uddin & Akhter, 2012). Customers are one of the stakeholders in a service organization i.e. banking organizations. The satisfaction or dissatisfaction of a customer is the main element for organizational achievement and success ( Karami & Olfati, 2012). Quality of service offered by an organization is a critical success element for organizational competitiveness (Gounaris, Stathakopoulos, & Athanassopoulos, 2003). The satisfaction of customers is the most remarkable concern of the organizations offering services. Various studies had identified the relation between the satisfaction of customers and service quality ( Helgesen & Nesset, 2007). Services managers in a service organization are very much concerned about their service quality and satisfaction of their customers (Olorunniwo, Hsu, & Udo, 2006). Customers always have some expectations from the service organizations and when the expectations are fulfilled the customers become satisfied with the organization ( Karami & Olfati, 2012). There existed a positive relationship between service quality offered by the organization and the satisfaction of customers so the management of the organization have to keep focus on the quality of service being offered by the organization ( Helgesen & Nesset, 2007). The enhancement in the service quality, customer satisfaction and perceived value was associated with the loyalty of customer toward the service organization (Kuo, Wu, & Deng, 2009). The expectation of each customer about quality of service is dissimilar from each other so there is a lack of standardization and it differs according to the situation ( Douglas, Douglas, & Barnes, 2006). If the service quality offered by an organization is high then its customers will be more satisfied (Petruzzellis, D Uggento, & Romanazzi, 2006). So the satisfaction of a customer is based on expectations of the customer and perception of service quality ( Sigala, 2004). Perceived service quality is the judgment of the customer about the experience with the organization s service quality (Zeithaml, 1987). Service quality measurement has gained attention due to its consequences faced by the organization for example financial profitability, retention of the customers, new customer s attraction through word of mouth recommendation, financial performance, enhancement of the productivity, increase in the market share, decrease in the staff turnover, enhancement in employee morale and reduction in the operational cost (Gounaris, Stathakopoulos, & Athanassopoulos, 2003). LITERATURE REVIEW During last decades various studies have been carried out on service quality and usually the research has been carried out by utilizing model like SERVQUAL which focuses on service quality and SERVPERF which focuses on service performance ( Karami & Olfati, 2012). Customer satisfaction as defined by (Kotler, 2000) A person s feeling of pleasure or disappointment resulting from comparing a product s perceived performance (or outcome) in relation to his or her expectations 247

248 Organization can achieve satisfaction of its customers by fulfilling their wants and needs. The satisfaction of customer is a collective response about the delivery of the service by the organization (Uddin & Akhter, 2012). Customer satisfaction is a principal element in achievement of the goals in an organization and is a basic standard of excellence performance by the service organization (Munusamy & Chelliah, 2011). The importance of the customer satisfaction can be seen through the slogan the customer is always right (Fečiková, 2004). The organizations recognize the idea that to keep the current customers is more important and beneficial as compared to their replacement by the new customers ( Boulter, 2013). If the customers are satisfied then they will be loyal with the organization and the customers who are dissatisfied with the service will express it with others regarding their behavior ( Zeelenberg & Pieters, 2004). The negative behavior of the customer will have an effect on the financial profits of the organization. Consumers can convey their negative feelings to other customers also, so overall effecting the reputation of the organization in a negative manner and a good service delivery will spread the information by word of mouth and will positively impact the reputation of the organization(babin & Harris, 2012). A research study has revealed that an unsatisfied customer will convey his feelings and bad experience to nine other people(hoffman & Bateson, 2010). This negative word of mouth can be very devastating for the reputation of the organization and its profits(hussain, Al Nasser, & Hussain, 2014). Service quality is referred as the gap between the expectation of the customers and real delivery of a service ( Parasuraman, Zeithaml, & Berry, 1985). Service means that how an organization is interacting with the world. The service quality is the strategy of the organization and there exists integrity in service when the organization is doing what it is supposed to do. The service integrity aids the organization in measurement of the strategy of organization and its implementation takes place on contact point of the customers(munusamy & Chelliah, 2011). Measurement of a quality of service is a concept that is not similar or uniform in various industries and there exist differences in every type of service sector. The employees of the organization have a significant part in delivering better service quality and in turn satisfaction of the customers of the service organization. Furthermore, services are of two types the core services and the support services. The customer perceives service quality in terms of the total service quality combining both the core services and the support services (Munusamy & Chelliah, 2011). Customers will be more satisfied with the high service quality. So the satisfaction of customers is dependent on the expectation of the customer about the service quality and perception of the customers about the service quality ( Sigala, 2004; Christou & Sigala, 2002). Service quality and its relationship with the customer satisfaction have to be measured on 3 different levels for example behavioral, affective and cognitive level ( Parasuraman, Zeithaml, & Berry, 1985). In any service organization there exist three success sources of service quality that are customer satisfaction, perceived value and service charges. The loyalty of the customer with any service quality organization is linked with the improved satisfaction, perceived value and service quality (Lai, Griffin, & Babin, 2009). Customers have various ways for arriving at their expectation of the service quality and these expectations are actually met by the service organizations(parasuraman, Zeithaml, & Berry, 1988). The study on the satisfaction of the customers is an important factor in the sector offering service quality because there is a need to retain the customers for survival of the business (Munusamy & Chelliah, 2011). The consultants of the business and service corporations are working for the identification of the organizational features for pleasing the customers and for developing tools to monitor satisfaction of the customers and building systems for improvement in the service quality (Munusamy & Chelliah, 2011). 248

249 The SERVQUAL approach has been criticized in many researches. Famous critics are of (Brown, Churchill, & Peter, 1993). They argue that different score approach causes issues related to the variance restriction related with the scores of the components and produce poor reliability. (Teas, 1993)also criticized SERVQUAL. He argued that SERVQUAL scale utilizes various types of expectations and the subjects may not be able to distinguish between various expectations types while doing their evaluation. The alternative method to the SERVQUAL is the SERVPERF and was developed by ( Cronin & Taylor, 1992). They argued that this model is better but ( Parasuraman, Zeithaml, & Berry, 1985) also used that instrument and concluded that the SERVQUAL provides better diagnostic result for quality of service. The five dimensions of SERVQUAL are suitable for mass service and also suits banking industry (Uddin & Akhter, 2012). The perception of customers about the service quality is based on various factors for example social referrals, communications between sales persons, credibility of the consumers about the organization offering service and the different type of data collection (Gounaris, Stathakopoulos, & Athanassopoulos, 2003). The model SERVQUAL is based on analysis of gap between the expectations of the customers and perceived service quality. There were five dimensions of service quality as mentioned below (Parasuraman, Zeithaml, & Berry, 1988) which were also mentioned by (Shahin, Mehrparvar, & Shirouyehzad, 2013). Tangibles : Physical facilities, equipment and appearance of personnel Reliability : Ability to perform the promised service dependably and accurately Responsiveness : Willingness to help customers and provide prompt service Assurance : Knowledge and courtesy of employees and their ability to inspire trust and confidence Empathy : Caring, individualized attention, the firm provides its customers Research Hypotheses Following hypotheses were developed on the basis of literature review. Table 3 : Research Hypotheses shows evidence from literature which was also mentioned by (Leonga, Hewb, Leea, & Ooic, 2015) Table 3 : Research Hypotheses Hypotheses Evidence from Literature H1: There is a significant relationship between Tangibles and Customer (Aghdaie & Faghani, 2012), (Kim & Lee, 2011) and (Lee, Lee, & Yoou, 2000) Satisfaction. H2: There is a significant relationship between Reliability and Customer (Aghdaie & Faghani, 2012) and (Lee, Lee, & Yoou, 2000) Satisfaction. 249

250 H3: There is a significant relationship between Responsiveness and Customer (Aghdaie & Faghani, 2012), (Kim & Lee, 2011) and (Lee, Lee, & Yoou, 2000) Satisfaction. H4: There is a significant relationship between Assurance and Customer (Clemes, Gan, Kao, & Choong, 2008), (Lee, Lee, & Yoou, 2000), (Yi & La, 2003) Satisfaction. H5: There is a significant relationship between Empathy and Customer Satisfaction. (Aghdaie & Faghani, 2012), (Clemes, Gan, Kao, & Choong, 2008) and (Lee, Lee, & Yoou, 2000) RESEARCH MODEL The research model as shown in Figure 7: Research Modelwascomprised of two sections i.e. Service Quality and Customer Satisfaction. Service quality was consisted of five dimensions i.e. tangible, reliability, responsiveness, assurance and empathy. Tangible was comprised of physical facilities, equipment and appearance of personnel. Reliability wascovered the ability to perform the service in a dependable and accurate manner dimension. Responsiveness was included with willingness to help customers and provide prompt service. Assurance was comprised of knowledge and courtesy of employees and their ability to inspire trust and confidence and Empathy included caring individualized attention the firm provides its customers (Parasuraman, Berry, & Zeithaml, 1991). Customer satisfaction includedthe performance of an organization s product and services as compared to expectation of a customer. 250

251 Tangibles Reliability H: 1 H: 2 Responsiveness H: 3 Customer Satisfaction Assurance H: 4 H: 5 Empathy Figure 7: Research Model Research Methodology Questionnaire was used for data collection which was based on adoption of constructs from literature. Questionnaire was separated into two parts i.e. service quality and customer satisfaction. There were 22 questions for five dimensions of service quality and 4 questions for customer satisfaction. Each question was measured on five point likert scale i.e. 1= Strongly Disagree to 5 = Strongly Agree. The questionnaire was delivered to every third Islamic Bank customers to have a judgment about Service Quality and Customer Satisfaction. Table 4 : Sources of Construct Construct Number of Sources Items Tangibles 4 Reliability 5 Responsiveness 4 (Kumar, Tamilmani, Mahalingam, & Mani, 2010) and (Parasuraman, Berry, & Zeithaml, 1991) (Kumar, Tamilmani, Mahalingam, & Mani, 2010) and (Parasuraman, Berry, & Zeithaml, 1991) (Kumar, Tamilmani, Mahalingam, & Mani, 2010) and (Parasuraman, Berry, & Zeithaml, 1991) Assurance 4 (Kumar, Tamilmani, Mahalingam, & Mani, 2010) and 251

252 (Parasuraman, Berry, & Zeithaml, 1991) Empathy 5 (Kumar, Tamilmani, Mahalingam, & Mani, 2010) and (Parasuraman, Berry, & Zeithaml, 1991) Customer Satisfaction 4 (Olorunniwo & Hsu, 2006) and (Parasuraman, Berry, & Zeithaml, 1991 b) Table 4 shows the sources of constructs adopted from literature which was also mentioned by (Leonga, Hewb, Leea, & Ooic, 2015) Results Demographic Analysis Data was collected through self-administrated questionnaires from customers of Islamic banks in Lahore. Questionnaire was distributed to 218 respondents with a response rate of almost 75%. Gender wise respondents detail is shown in Figure 8 : Gender Wise Respondents' Detail. Approximately 30% of respondents were females while 70% respondents were male. 252

253 Gender Wise Respondents' Detail Female Male Figure 8 : Gender Wise Respondents' Detail Figure 9 : Age Wise Detail of Respondents shows the age wise detail of respondents. 65 respondents belonged to the age bracket of years which was 39% of total respondents. Similarly 27.3%, 17%, 10.9%, 3% and 2.4% of total respondents belonged to age group of 30-39, 21-24, 40-49, and 20 or less than 20 years of age group respectively , 18, 11% 50-59, 5, 3% 20 or less, 4, 3% 21-24, 28, 17% 30-39, 45, 27% 25-29, 65, 39% Figure 9 : Age Wise Detail of Respondents Figure 10 : Bank Wise Detail of Respondents shows the bank wise detail of respondents. Almost 54 % of respondents were belonged to Meezan Bank Limited which is a largest Islamic bank of the country. Similarly, 12.1 % respondents were from each AlBaraka Bank (Pakistan) Limited and Bank Islami Pakistan Limited. Whereas 10.9 % respondents were from each Burj Bank Limited and Dubai Islamic Bank Pakistan Limited 253

254 Meezan Bank Limited, 89, 54% AlBaraka Bank (Pakistan) Limited, 20, 12% BankIslami Pakistan Limited, 20, 12% Burj Bank Limited, 18, 11% Dubai Islamic Bank Pakistan Limited, 18, 11% Figure 10 : Bank Wise Detail of Respondents The reliability for all dimensions was calculated through the value of Cronbach s alpha (α) value. In this research the value of α was for all items which was suitable as per criteria laid down by (Nunnally, 1978). So, the data collected was reliable for this research. As Correlation shows the relationship between variables. In this research correlation matrix was generated as shown in Table 5: Correlations Matrix. All variables i.e. tangibles, reliability, responsiveness, assurance, empathy were correlated with dependent variable i.e. customer satisfaction and there was no multicollinearity between the variables. The relationshipof tangibles, responsiveness, assurance and empathy with customer satisfaction was strong in nature whereas relationship of reliability with customer satisfaction was weak in nature as per criteria laid down by (Field, 2009). Table 5: Correlations Matrix Correlations 254

255 Tangibles Responsiveness Assurance Empathy Reliability Customer Satisfaction Tangibles Responsiveness Assurance Empathy Reliability Customer Satisfaction Pearson Correlation Pearson Correlation Pearson Correlation Pearson Correlation Pearson Correlation Pearson Correlation ** **.399 ** **.517 **.431 ** ** *.277 ** **.710 **.769 **.574 **.259 ** 1 **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). In order to find out the estimation of variables relationship, regression techniques was used which showed the variation in dependent variables due to change in independent variables. Table 6 : Regression Analysis - Model Summary shows the variation in dependent variable due to independent variable. As the value of adjusted R square was which showed that 79.7 % of variation in customer satisfaction was being explained by all independent variables. Table 6 : Regression Analysis - Model Summary Model Summary 255

256 Model R R Square Adjusted R Square Std. Error of the Estimate a a. Predictors: (Constant), Tangible, Reliability, Responsiveness, Assurance, Empathy The ANOVA Table 7 : Significance of Regression Coefficients - ANOVA in regression analysis shows the significance of variation as explained in Table 7.Table 7shows the value of p was less than 0.05 which further predicted that overall the model was statistically significant. Table 7 : Significance of Regression Coefficients - ANOVA ANOVA b Model Sum of Squares df Mean Square F Sig. 1 Regression a Residual Total a. Predictors: (Constant), Tangible, Reliability, Responsiveness, Assurance, Empathy b. Dependent Variable Customer Satisfaction Individual effect of independent variables on dependent variables can be shown through Table 8 : Regression Analysis - Coefficient. Only measures for responsiveness, assurance and reliability were statistically significant as value of p was less than 0.05 and measures for tangibles and empathy were not statistically significant as shown in Table 8 : Regression Analysis - Coefficient. The value of regression coefficient for responsiveness was which shows that every one-unit increase in 256

257 responsiveness will result in increases in customer satisfaction keeping all other variables constant. Similarly, the one-unit increase in assurance and reliability will result in and units increase in customer satisfaction respectively. Table 8 : Regression Analysis - Coefficient Coefficients a Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) Tangibles Responsiveness Assurance Empathy Reliability a. Dependent Variable: Customer Satisfaction CONCLUSION Quality services resulted in high customer satisfaction. In this research responsiveness, reliability and assurance had positive effecton customer satisfaction. Reliable services by Islamic banks can result in customer satisfaction. Islamic banks need to ensure that their services are trustable and reliable which can be done by providing timely service, effective problem solvingand keeping record accurately as reliable services play an important role in enforcing customer confidence on Islamic banks. Responsiveness was also an important factor which had impact on customer satisfaction in Islamic banks. Islamic banks need to respond customers queries timely, willing to help customers when they need it and always attend customers on time. Assurance was also an important factor which had impact on customer satisfaction of Islamic banks. In order to attain high customer satisfaction through assurance, Islamic banks needs to be trust worthy, polite, provide support to their employees to help customers and give confidence to customers to feel safe while doing transaction with Islamic bank. Tangibles and empathy had no impact on customer satisfaction and customers did not giveimportance to these factors or customers felt that a good infrastructure and empathized behavior as a compulsory pillar for customer satisfaction while doing banking with Islamic banks. This research has some limitations as data is only collected from customers of Islamic banks at Lahore so results cannot be generalized. For the purpose of generalization customers from other cities 257

258 need to be included in the sample. This research has both managerial and theoretical implications. Firstly, this research will help Islamic banks to find out the level of service quality and customer satisfaction and how to improve these factors in order to gain competitive advantage over other Islamic and conventional banks. Secondly this research will also have theoretical implications as research can develop additional factors of service quality for Islamic banks. References 258

259 Douglas, J., Douglas, A., & Barnes, B. (2006). Measuring student satisfaction at a UK university. Quality Assurance in Education, 14 (3), Helgesen, Ø., & Nesset, E. (2007). What accounts for students loyalty?some field study evidence. International Journal of Educational Management, 21 (2), Abdullah, F. (2006). The development of HEdPERF: a new measuring instrument of service quality for the higher education sector. International Journal of Consumer Studies, 30 (6), Boulter, J. (2013). Retrieved May 23, 2015, from Cronin, J. J., & Taylor, S. A. (1992). Measuring Service Quality: A Reexamination and Extension. Journal of Marketing, 56 (3), Karami, M., & Olfati, O. (2012). Measuring service quality and satisfaction of students: A case study of students perception of service quality in high-ranking business schools in Iran. African Journal of Business Management, 6 (2), Naveed, M. (2015). The Size of the Islamic Finance Market. Retrieved May 28, 2015, from Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1985). A Conceptual Model of Service Quality and Its Implications for Future Research. Journal of Marketing, 49 (4), Sigala, M. (2004). Investigating the Factors Determining e-learning Effectiveness in Tourism and Hospitality Education. Journal of Hospitality & Tourism Education, 16 (2), Zaharuddin, U. H., & Rahman, H. A. (2007, Febuary 22). Differences Between Islamic Banks & Conventional. Retrieved May 28, 2015, from differences-between-islamic-banks-a-conventional.html Zeelenberg, M., & Pieters, R. (2004). Beyond valence in customer dissatisfaction: A review and new findings on behavioral responses to regret and disappointment in failed services. Journal of Business Research, 57 (4), Aghdaie, S. A., & Faghani, F. (2012). Mobile banking service quality and customer satisfaction (application of SERVQUAL model). International Journal of Management and Business Research, Babin, B., & Harris, W. (2012). Consumer Behavior: CB, third ed.. USA: South-Western Cengage Learning, Mason. Brown, T., Churchill, G. J., & Peter, J. (1993). Improving the measurement of service quality. Journal of Retailing, Christou, E., & Sigala, M. (2002). Conceptualising the measurement of service quality and TQM performance for hotels: the HOSTQUAL model. Acta Touristica, Clemes, M. D., Gan, C., Kao, T. H., & Choong, M. (2008). An empirical analysis of customer satisfaction in international air travel. Innovative Marketing, Fečiková, I. (2004). An index method for measurement of customers' satisfaction. The TQM Magazine, 16 (1), Field, A. (2009). Discovering Statistics Using SPSS (3rd edition). Los Angeles: Sage. 259

260 Gounaris, S. P., Stathakopoulos, V., & Athanassopoulos, A. D. (2003). Antecedents to perceived service quality: an exploratory study in the banking industry. International Journal of Bank Marketing, 21 (4), Hoffman, K., & Bateson, J. (2010). Services Marketing: Concepts, Strategies, & Cases, fourth ed. OH, USA: Cengage Learning. Hussain, R., Al Nasser, A., & Hussain, Y. K. (2014). Service quality and customer satisfac tion of a UAE-base d airline: An empiric al investigation. Journal of Air Transport Management, 1-9. Khan, A. A. (2015). Sharia Compliant finance. Retrieved May 28, 2015, from Kim, Y. K., & Lee, H. R. (2011). Customer satisfaction using low cost carriers. Tourism Management, Kotler, P. (2000). Marketing Management. New Jersey: Prentice-Hall. Kumar, S. A., Tamilmani, B., Mahalingam, S., & Mani, V. K. (2010). Influence of Service Quality on Attitudinal Loyalty in Private Retail Banking: An Empirical Study. The IUP Journal of Management Research, 9 (04), Kuo, Y.-F., Wu, C.-M., & Deng, W.-J. (2009). The relationships among service quality, perceived value, customer satisfaction, and post-purchase intention in mobile value-added services. Computers in Human Behavior, 25 (4), Lai, F., Griffin, M., & Babin, B. (2009). How quality, value, image, and satisfaction create loyalty at a Chinese telecom.. Journal of Business Research, Lee, H., Lee, Y., & Yoou, D. (2000). The determinants of perceived service quality and its relationship with satisfaction. Journal of Service Marketing, Leonga, L.-Y., Hewb, T.-S., Leea, V.-H., & Ooic, K.-B. (2015). An SEM artificial-neural-network analysis of the relationships between SERVPERF, customer satisfaction and loyalty among low-cost and full-service airline. Expert Systems with Applications, Munusamy, J., & Chelliah, S. (2011). An investigation of impact of service strategy on customers' satisfaction in the budget airline industry in Malaysia: a case study of air Asia. Contemporary Marketing Review, 1 (1), Nunnally, J. C. (1978). Psychometric theory (2nd ed.). New York: McGraw-Hill. Olorunniwo, F., & Hsu, M. K. (2006). A typology analysis of service quality, customer satisfaction and behavioral intentions in mass services. Managing Service Quality: An International Journal, Olorunniwo, F., Hsu, M. K., & Udo, G. J. (2006). Service quality, customer satisfaction, and behavioral intentions in the service factory. Journal of Services Marketing, 20 (1), Parasuraman, A., Berry, L. L., & Zeithaml, V. A. (1991). Refinement and reassessment of the SERVQUAL scale. Journal of Retailing, Parasuraman, A., Berry, L. L., & Zeithaml, V. A. (1991 b). Understanding customer expectations of service. Sloan Management Review, Parasuraman, A., Zeithaml, V., & Berry, L. (1988). SERVQUAL: a multiple-item scale for measuring consumer perceptions of service quality. Journal of Retailing, 64 (1),

261 Peter, J., Churchill, G. J., & Brown, T. (1993). Caution in the use of difference scores in consumer research.. Journal of Consumer Research, Petruzzellis, L., D Uggento, A. M., & Romanazzi, S. (2006). Student satisfaction and quality of service in Italian universities. Managing Service Quality, 16 (4), Rammal, H., & Zurbruegg, R. (2007). Awareness of Islamic Banking Products Among Muslims: The Case of Australia. Journal of Financial Services Marketing, 12 (1), Shahin, A., Mehrparvar, E., & Shirouyehzad, H. (2013). Prioritisation of departments based on service quality dimensions in Isfahan Steel Company: a multiple criteria decision making approach. International Journal of Productivity and Quality Management, Teas, R. (1993). Expectations, performance evaluation, and consumers perceptions of quality.. Journal of Marketing, Uddin, M. B., & Akhter, B. (2012). Determinants of Customer Satisfaction of Banking Industry in Bangladesh. Pakistan journal of commerce and social sciences, 6 (2), Yi, Y., & La, S. (2003). The relative effects of three dimensions of service quality on CS-A comparative study of existing vs potential customers. Korean Marketing Association Journal, Zeithaml, V. (1987). Defining and relating price, perceived quality and perceived value. Cambridge, MA: Market. Sci. Inst. 261

262 An Analytical Study of Derivatives in Conventional and Islamic Finance Principal Author and Presenter: Muhammad Imran Ejaz PhD Scholar,University of Management and Technology Lahore, Pakistan Dr. Kausar Abbas Assistant Professor,University of Management and Technology Lahore, Pakistan Abstract Derivatives have a significant presence in the global financial markets. The Bank of International Settlements has estimated that the notional value of derivative contracts around the globe is approximately 710 trillion dollars while other economists puts the size to over quadrillion dollars. It is postulated by some economists that the derivatives market is ten times the size of the total world gross domestic product (GDP). This is a financial bubble and when it bursts there will be complete havoc in the financial system. In fact, the blame for the financial crisis of is placed on derivatives such as CDOs and CDSs. Currently, the global derivatives bubble is twenty percent bigger than when the financial crisis struck. Given this scenario the fears of another crisis due to the bursting of the derivatives bubble is very plausible. This paper is theoretical and analytical in nature. The paper studies the derivatives that exist both in the realms of conventional finance and Islamic finance. Shariah s stance on Conventional Derivatives is put forward and a comparative study of Islamic Derivatives is made. They do exist in the markets such as in Malaysia where they are backed by the Shariah Advisory Council (SAC). The validity of the Islamic Derivatives is questionable in the opinions of some leading Shariah Scholars. The development of Islamic Derivatives is a case of financial engineering having gone too far or at least it can be said that Islamic Derivatives are part of the grey area of Islamic Finance.. Keywords: Derivatives, futures, swaps, Shariah, W ad 262

263 Role of Shari ah Perception Job Satisfaction: A Comparative Study of Conventional Banks and Islamic Banks Khalil ur Rahman Research Scholar,CIIT, Lahore Hassan Akram AVP- Branch Manager, National Bank of Pakistan Dr. Waheed Akhter Asst. Professor, CIIT, Lahore Ghulam Abbas Research Associate, CIIT, Lahore Abstract This article endeavors to investigate the job satisfaction of general banking staff currently employed in Banking Industry of Pakistan (Islamic and conventional banks) in context of Herzberg Motivational theory while having moderation impact of Shari ah Perception. Using the multiple and hierarchal regression model consisting of 6 hygiene and 5 motivational factors 345 usable responses were analyzed which were received from respondents chosen by deploying multi-stage stratified random sampling. The results depicts that both hygiene and motivational factors distinctly impact the job satisfaction across both Islamic and conventional banking employees in scenario of Pakistan. While observing the moderation impact of Shari ah perception, it has been found that Shari ah Perception s moderating role exists significantly across two-factors to trigger job satisfaction in case of Islamic Bank s general banking employees in Pakistan. On the contrary, moderation of Shari ah Perception s does not exist across two-factors to trigger job satisfaction in case of conventional Bank s general banking staff. Key Words: Shari ah Perception, Islamic Banking, Conventional Banking, Herzberg, Hygiene, Motivators, Pakistan 263

264 Interest Tax Shield in perspective of Maqasid al Shariah in Finance Qamar Uz Zaman CIIT, Sahiwal, Pakistan M. Kabir Hassan University of New Orleans, UK Waheed Akhter CIIT, Lahore, Pakistan M. A. Meraj CIIT, Sahiwal, Pakistan Abstract This study aims to establish an opinion about corporate interest tax shield in accordance to maqasid al Shariah in finance and its relation to human welfare. This study provides with the conceptual framework extending the maqasid al Shariah in finance to the theories of capital structure, specifically to the interest tax shield. A survey instrument has been developed based upon the four factor model of (i) interest tax shield and wealth circulation, (ii) interest tax shield and fair and transparent financial practices (iii) interest tax shield and justice at micro and macro levels and (iv) equity advocacy and overall human welfare. A global sample of well-informed individuals of Islamic finance have been surveyed through Qualtirics. Study found that respondents are indifferent regarding impermissibility of interest tax shield. It is found that interest tax shield hampers wealth circulation, fair and transparent financial practices, justice at micro and macro level leaving negative impact on the overall human welfare. This study provides an important insight and highlights the need to reframe the controversial interest tax subsidy. On the other hand, the required reforms in this regard may be a positive policy initiative to promote Islamic finance. Key Terms: Interest Tax Shield, Maqasid al Shariah, Corporate Finance, Policy Reforms 264

265 1. Introduction Islamic financing has emerged as a major contributor to the global financial stability (Ahmed, 2010). However, it is still the beginning towards the theoretical conception and implementation, along with significant gap in accordance to the need of modern financial era (Alexakis and Tsikouras, 2009; Arouri et al., 2013; Hasan, 2010; Usmani, 2010). The scholarly positions have highlighted the need to keep these developments in accordance to Shariah, and achieve the end of overall human welfare (Brendan Mulcahy, 2014; Diaw, 2015; El-Gamal, 2009). It now has provided with the major economic objectives and ways to achieve the ultimate objective (maqsad). These objectives are described as maqasid al-shariah in finance (Auda, 2008; Ismail and Tohirin, 2010; Laldin and Furqani, 2013). Islamic financial institutes and banks have been formed and has delivered short term financial solutions at consumer and corporate levels (Arouri et al., 2013; Guney, 2015; Sanusi, 2014; Shaikh, 2011). However, the corporate sector and its financial structure is awaiting to be aligned with the conceptual framework of maqasid al-shariah in finance. Shariah has provided clear directions to regulate the economic affairs of human beings and entities. It strictly requires to abolish riba to refrain gharar, wealth concentration and social and economic injustice (Iqbal and Mirakhor, 2011; Usmani, 2002). In modern times, the affair of corporate financial practices involves certain regulatory and practical clinches diverted from the Divine guidelines of Shariah and maqasid al-shariah in finance. The issue of debt/equity distinction is vital in this regard. According to this, interest (riba) is exempt from corporate income tax and dividend (profit and loss sharing) is taxable (Bank, 2014; Hutchison, 2015). Considering it main reason to global financial crisis of , there is a contentious debate on this historical legal scholarship of interest tax subsidy, found logically indefensible, and stress the need to reframe this policy. However, lacked by objectivity, the proposed reforms are inconclusive and controversial (Benshalom, 2010; Karpavičius and Yu, 2016; Kashyap and Zingales, 2010; Keightley and Sherlock, 2014; Osofsky, 2013). Further, on its implementation stage, conventional theories of corporate finance backed by the biased corporate income tax law advocates debt and snubs the equity participation. According to the conventional corporate income tax law firms are subsidized and facilitated to incorporate debt in their capital structure. It means that cost of debt is provided with tax subsidy, making debt financing attractive and cheap, and form interest tax shield for the firm. Interest tax shield is meant to provide an advantage to debt financing based on interest tax subsidy. Corporate financial theories led by MM s irrelevance to trade off perspectives, advocate and signifies the presence of interest tax shield. The pioneer and its succeeding theories preach the idea of optimal capital structure subject to the reduced cost of debt financing, elevating indebtedness and the possibility of financial distress and bankruptcy. The prevailing situation of higher indebtedness and risk has neglected the human welfare and caused wealth concentration, social injustice and worst ever financial crisis ( ) of human history. Owing to the recurring modes of financial instability, Islamic finance has been fulfilling to retain the public confidence, and requires to scan the Shariah non-confirmative regulations and practices in whole financial system. This requires to examine the interest tax shield in accordance to Shariah, and specifically to the maqasid al-shariah in finance. This study attempts to extend the concept of maqasid-al-shariah to the corporate financial theory and practice; and seeks to know whether the concept of interest tax shield is in accordance to maqasid al Shariah in finance?. In this regard, the conceptual framework is developed on seminal study of Laldin and Furqani (2013) providing 265

266 fundamental rules regarding maqasid al-shariah, its ends and means to develop Islamic finance. Further, a survey method is used to form an opinion regarding interest tax shield according to maqasid al-shariah in finance. It is found that interest tax shield is harmful to the determinants of maqasid al Shariah in finance and plays a negative role towards overall human wellbeing. 2. Literature and Conceptual Framework This section provides background of controversial debt-equity distinction and its role in corporate financial theory and practice. Further, the concept of maqasid al-shariah in finance and its conceptual build up to reframe the corporate financial theory. 2.2 Debt-Equity Distinction and Corporate Finance In 1918, US congress passed a bill allowing firms to treat interest as an expense, and fully tax deductible. In fact, it was a temporary arrangement to equalize the effect of the World War I excess profit tax and to offset the exclusion of debt from the definition of invested capital in war and excess profit tax (Bank, 2014; Warren Jr., 1974). It was supposed to be repealed but maintained without any legislative justification. This regulatory clinch incentivize debt over equity, allowing firms to deduct interest from taxable income and preventing dividend. It is considered a structural anomaly and mean to create economic fiction, friction, distortion, injustice and higher arbitrage opportunities (Allen, 2012; Benshalom, 2010; Christensen, 2007; Osofsky, 2013). This implicit policy has contributed to frame the financial accounting standards, theories and practices. The novel study of Modigliani and Miller (1958) mapped the irrelevance of corporate financing policy conditioned to indifferent tax treatment, no transaction cost and perfect market etc. to the overall firm value. However, the differential tax treatment (debt-equity distinction) is relevant to firm s choice and establishes a trade-off between debt and equity. To satisfy the guiding objective of wealth maximization, it is theorized that firms can achieve an optimal financing mix at maximum firm value. Further, firms also face cost of financial distress and cost of bankruptcy at this financing mix to be reverted by the present value of interest tax shield (Modigliani and Miller, 1963). The agency theory of capital structure advocate that the debt financing may restrain the managerial discretion to cash outflow. This in fact, also create agency conflict shareholder and debtholder to choose investment projects. In addition to financial distress and bankruptcy cost, the issue of restrained shareholder discretion is also an outcome of firm indebtedness (Jensen and Meckling, 1976). The signaling theory support that firms with increasing level of debt financing are attractive to the investors. This entails that increasing financial requirement is indicator to the business growth and development, transmitting positivity to the potential investors. In this case debt financing would be a wise choice while materializing the benefit of interest tax shield (Ross, 1977). On the contrary, the equity participation could be a viable source of financing in absence of dual tax charges. The aspect of information asymmetries is believed to be reduced in presence of debt financing (Myers and Majluf, 1984). Furthermore, the concept of pecking order theory, recognizes the benefit of interest tax shield and advocate the debt financing premier to the equity financing to raise funds from external sources (Harris and Raviv, 1991). These theories clearly recognize the advantage of interest tax subsidy and advocate the presence of cheap debt financing backed by the subsequent studies (Booth et al., 2001; Donkor and Duffey, 2013; Ghosh et al., 2000; Titman and Wessels, 1988; Wong, 2015). However, from the idea of optimal capital structure to pecking order theory, the empirical findings are still controversial and inconclusive (Haron, 2014). 266

267 Eventually, it appears that historical legal scholarship of debt-equity distinction and subsequent theories of capital structure promote debt financing and riba, which is contrary to the guiding rules and objectivity of Islamic finance. This dilemma logically convinces to examine the interest tax shield in accordance to maqasid al-shariah in finance. 2.3 Maqasid-al Shariah and Corporate Finance Shariah advises to protect mankind and faith in all of its social and economic affairs (Chapra et al., 2008). To the extent of economic affairs, it is fundamentally necessary to refrain from Haram and harmful elements (Kamali and Origins, 2008). Living within the basic rules of Islamic economics, commercial activities are meant to serve society by providing them satisfaction in their basic necessities of life (Daruriyyat) at its first stage. Its further stages are provision of essentials to prevent hardship (Hajiyyat) raised to the level of refined comfortability and refinement of human life (tehsiniyyat). All these stages are subject to serve the purpose of protection and human wellbeing at individual and aggregate level (Ahmad, 2009). The seminal study of Laldin and Furqani (2013) provides fundamental rules regarding maqasid al Shariah, its ends and means to develop Islamic finance. Primarily, it enlists three ends (maqasid) to be achieved by Islamic finance, namely, (i) circulation of wealth, (ii) fair and transparent financial practices and (iii) justice at micro and macro level leading to ultimate goal of overall human welfare. The suggested means to the aforementioned ends are the system of contract facilitation, incorporating standards and values and adherence to the social responsibility. These are the guiding rules to lead the development in Islamic finance both at institutional and economic levels. The Islamic financial institutions are subject to deliver the required ends of Shariah, while designing their products and system both in its form and substance (Mohd Yusop, 2015). The development of Islamic financial market has gained momentum, backed by the ability to sustain and deliver human welfare. On the other side, corporate finance has gained slight attention by the academics and professionals to align its theory and practices to the Shariah, particularly, maqasid al Shariah in finance. To extend the horizon of maqasid al Shariah to corporate financial theories and practices, it seems inevitable to align their ends and means. Conventional theories of capital structure tend to achieve the goal of wealth maximization verses Islamic financial objectivity of maximization of human and social welfare (Ali et al., 2013). Accordingly, the means utilized to meet the required ends are antithetic to each other. Particularly, Islamic finance strictly prohibit riba and conventional practice promote it (interest tax shield). In this context, it appears that the conventional corporate financial framework should be corrected in agreement with the emerging and sustainable Islamic financial ideology. The conceptual framework is meant to concentrate on interest tax shield in line with the ends of Shariah and its ultimate objective of human welfare. In this regard, upcoming discussion conceptualize the determinants of maqasid al-shariah in finance and interest tax shield. Figure 1.1 explains the required ends and means of maqasid al-shariah in finance and extends the framework to align the corporate financing policy Circulation of Wealth and Interest (riba) Tax Shield According to maqasid al Shariah, primary objective of economic and financial activity is to keep wealth in circulation in all spheres of society. Islamic finance provides comprehensive contractual means to facilitate wealth circulation e.g. musharika, mudarabah (Usmani, 2002). These contracts are primarily designed to facilitate partnership, profit and loss sharing and to avoid haram and hardship. Shariah based financial contracts does not consider interest (riba), because of its impermissibility and flagitiousness to the wealth circulation at macro level causing social injustice at micro level. On the other side, Islamic economy is meant to rely on the duty of paying Zakah and Usher, and voluntary contribution to Waqaf and Sadaqat (Hasan, 2010). In Islamic society it is obligatory to keep wealth 267

268 in circulation and avoid hoarding of wealth (Ibrahim et al., 2014). Precisely, to this end, the fundamental means are smooth economic activity, socio economic justice, avoiding exploitation and higher level of risk. Further, the Islamic values and standards requires to reciprocate the balanced rights and obligations guided by fair objective criteria. These factors result in social justice and level playing field (Laldin and Furqani, 2013). The element of interest (riba) is strictly prohibited and is not permissible according to Shariah. Because, it is exploitive and shifts the risk of the lender to the borrower and shields the interests of the former (Farooq, 2012). This initially, nurture greed, wealth concentration, exploit the rights of others, creates economic friction and lead to unfavorable circumstances (Allen, 2012; Bank, 2014; He and Matvos, 2015; Subramanian, 2011). These factors, ultimately, harm the commercial activity, hinder wealth circulation and undermine the objective of overall human welfare. So far, the interest (riba) is meant to transfer the risk and shield the other, is basic violation of level playing field and contractual fairness. In this case, the subsidizing riba and providing tax shield to it, seems atrociously overriding, and extremely harmful to the economic and commercial activity, wealth circulation and overall human wellbeing. Conventional theories of corporate capital structure advocate the significance of interest tax shield and defend its value orientation for the firm (Graham, 2000; Miller, 1977; Neuhauser, 2015). However, the value mechanism has proved to be instable and introduce firms to difficult situations of financial distress and bankruptcy (Ahmed, 2007; Brealey et al., 2007; Campa, 2013). While aligning these theories to maqasid al Shariah, it seems obvious that the element of interest tax shield is fundamentally contradictory to the values and standards of Islamic finance. This is eminent that tax shield is a subsidized tax rate, causing a decrease in the corporate tax contribution to the economy, meant to be utilized for general human welfare. Indeed, the element of interest tax shield is negatively associated to the social responsibility (Hasan et al., 2014; Hasseldine and Morris, 2013). In addition, the negative factors associated with debt and its promotion have proved to be unstable, concentrating resources to few hands and hamper social causes and increase poverty (Affandi and Puji Astuti, 2014; Dusuki, 2008; Hassan et al., 2012). This situation explicitly demonstrate hindrance to the equity advocacy and overall human welfare. So, it needs to be reconsidered and reframed in confirmation with the Islamic financial ideology to facilitate wealth circulation. In this regard it is postulated that circulation of wealth in presence of interest tax shield may have opposing behavior towards the equity participation and overall human welfare Fair and Transparent Financial Practices and Interest Tax Shield To achieve this end, the guiding principle is of impermissibility. Shariah rulings clearly indicate the removal of Haram (impermissible) and hardship, immorality, deception and instigate fairness, justice equity and equality. The primarily, this end requires to restrict and abolish the Haram and impermissible elements. These include interest (riba) and risk (gharar) from economic decisions and transactions. This indicates that contracts incorporating impermissible elements are not valid, even the parties are well aware with the contractual terms and conditions. Normally, such contracts restrict the commercial freedom of associated party or parties. Under these basic principles one party is not allowed to gain on the expense of other (Laldin and Furqani, 2013). The case of corporate finance is real exception to the guiding rules of finance in Shariah. The conventional theories of capital structure do not consider the principle of impermissibility (Brendan Mulcahy, 2014). They are fundamentally defined and defended upon the pillar of interest tax shield. The concept of optimal capital structure accommodates interest (riba) and disoblige the spirit of profit and loss sharing. This also increase the element of gharar, observed in the form of financial distress, bankruptcy and finally financial crisis. According to the principle of fair and transparent financial 268

269 practices, such structural arrangement is void and unjust. Further, the conventional theories are deceptive to downplay the significance of profit and loss sharing over risk shifting. This arrangement certainly promotes higher level of risk taking and restrict commercial freedom of the firm and indulge them in agency conflict amongst associated parties (Jensen and Meckling, 1976). In short, such contractual practices cause injustice at both micro and macro dimensions and hamper the objectivity of equity participation and overall human welfare. The voids associated with interest tax shield and corporate financial theories call for devising a Shariah confirmatory regulations and practices to lead the way towards frictionless economic activity, equality, transparency and attain overall human welfare. While counting on this conceptual opposition, we postulate a negative association between fairness and transparency in financial practices in presence of interest tax shield to equity advocacy and overall human welfare Justice at Micro and Macro Level and Interest Tax Shield Maqasid al Shariah in finance is meant to serve society, primarily by providing them satisfaction in their basic necessities of life (Daruriyyat). The generation of wealth is basic essence to achieve these ends. However, these ends are admissible living within the scholarship of Islamic finance and maqasid al Shariah (Ahmad, 2009; Chapra et al., 2008). It ultimately would lead to justice at micro and macro level. The smooth flow of wealth based on fair and transparent practices would raise the quality of human life from daruriyyat to tehsiniyyat over time and establish justice at macro and micro level (Laldin and Furqani, 2013). In this regard, modern corporation stands as an entity to decide and deliver value to humans. Its financial concepts and practices could not stand apart from overall obligation to society, economy and human wellbeing. The presence of unjustified interest tax shield prevents corporate entity to serve the purpose of wealth circulation and is contradictory to the value and standards of fair and transparent practices. This in return create economic friction, distortion, hinders entrepreneurial spirit and concentrate wealth to a few hands (Bryan, 2012; He and Matvos, 2015; Iannuzzi and Berardi, 2010). The global financial system based on interest based financing, and its facilitating regulations has led to periodic paralysis and continuous source of exploiting the means of others and enforce social injustice (Farooq, 2012; Minsky, 1992). It seems necessary to eliminate such regulatory clinches and normalize them in accordance to Shariah as a prerequisite to establish justice at micro and macro level. In this context, we hypothesis that justice at micro and macro level in presence of interest tax shield may have adverse relation to equity participation and overall human welfare. 3. Equity Advocacy and Overall Human Wellbeing Islamic financial ideology restricts riba and promote the spirit of profit and loss sharing (Ismail and Tohirin, 2010). It provides basic guidelines and comprehensive set of means and instruments to encourage profit and loss sharing (Usmani, 2002). The case of corporate finance is primarily based on equity financing, however, occasionally requires to raise funds from debt financing. This forms a financing mix designed to gain an optimal level between financing cost and firm value. There is very little evidence of accommodating Islamic financial products for short or long term financial needs (Ahmed, 2007; Al-Ajmi et al., 2009; Muhammad-Bashir Owolabi and Alias, 2013; Sanusi, 2014). In fact, the presence of interest tax shield and absence of suitable regulatory structure make Islamic financial products less attractive and costly. On the other hand, it seems necessary to advocate and propagate the regulatory structure to restrain debt financing and riba, and devise policies to make equity participation (profit and loss sharing) more attractive and cost efficient. This in return, will strengthen the ability of global financial system to be sustainable and maximize social justice and welfare. This explain the surmisal that presence of interest tax shield hampers the ends of maqasid al Shariah in finance and destructive to equity advocacy and overall human welfare. Perhaps, the 269

270 required alignment may be attained through restraining riba by imposing tax and promoting profit and loss sharing by provision of tax subsidy. In short, the determinants of maqasid al Shariah in finance are merged with the concept of interest tax shield. These determinants are transformed into (i). Interest tax shield and circulation of wealth (ITSCW), (ii). Interest tax shield and fair and transparent financial practices, (iii). Interest tax shield and justice at micro and macro levels (ITSJMML). We intend to see that how these determinants affect (iv). Equity advocacy and overall human welfare (EAHW). Fig 2 explains the conceptual model to be tested in upcoming section. ITSCW ITSFTFP EAHW ITSJMML Figure 11: Conceptual Framework 4. Method 4.1 Sample A global sample of well-informed individuals and researchers of Islamic finance has been used through Qualtrics. 67 Initially, these individuals were asked for their understanding regarding, maqasid al Shariah, corporate financial theories and Islamic financial instruments. Total of 176 individuals responded to the questionnaire. On average, these respondents have good understanding of the required concepts (see table 1). Further, the sample specifications indicate that more than 90% of the respondents are well educated in the field of Islamic and conventional field of economics and finance (38.36% post graduates and 56.81% PhD s). These respondents in majority (92.04%) believe in Islam and are related to the profession of research (51.13%) and teaching (26.70%) (See table 2). Table 9 Understanding # Items Poor Fair Good Excellent Total Understanding about finance and Maqasid al Shariah is: 2 Understanding about firms' theories of capital structure is: 3.40% 22.45% 53.74% 20.41% % 18.37% 51.70% 23.13% Understanding about Islamic finance and its 3.40% 16.33% 48.98% 31.29% Worldwide electronic survey engine 270

271 instruments is: Table 10 Sample Specifications # Education Profession Religion 1 Post Graduate 38.36% Researchers 51.13% Islam 92.04% 2 PhD 56.81% Practitioner 22.16% Christianity 3.97% 3 Other 5.06% Teacher 26.70% Other 4.54% 4 Total 176 Total 176 Total Instrument development and refinement The conceptual alignment of ends of maqasid al Shariah and interest tax shield is confirmed through survey instrument. This study developed an instrument to test the given conceptual framework on a five point Likert scale from completely true (5) to completely false (1). Primarily, the instrument contained 53 items for all four variables. The instrument was designed to seek opinion of wellinformed individuals in the subjects of Islamic finance and corporate finance. For the purpose, face and content validity of the scale was performed by prominent researchers in the field of Islamic finance. After this practice, total number of questions were reduced to 40. Further, for pilot testing responses were requested from the participants of global forum of Islamic finance The pilot responses were tested for the verification and goodness of fit through exploratory factor analysis (EFA). We accounted for the items having factor loading greater than 0.5, reducing the questions to 33. The sample adequacy test (KMO) is also performed and found appropriate (see table 3) In addition, the convergent and discriminant validity of the constructs was tested by confirmatory factor analysis (CFA). We obtained for various fitness indexes i.e. Tucker-Lewis index (TLI), Comparative Fit Index (CFI), Incremental Fit Index (IFI) and Root Mean Square Error of Approximation (RMSEA) for the overall instrument and its constructs. All indexes are appropriately adequate with values greater than 0.7. Additionally, it is found that there is high inter-item consistency for the model achieved and its constructs where Cronbach s Alpha is greater than 0.70 (See: Annexure I). This indicates that model achieved and its constructs are valid and reliable. 5. Analysis and Results This section explains data analysis and results. These results mainly consist of descriptive statistics, mean comparison, correlation and regression. 5.1 Descriptive Analysis The descriptive statistics provided in table 3 show unified trend of the respondents. The mean (standard deviation) values of ITSCW, ITSFTFP, ITSJMML and EAHW are 4.11 (.50), 4.08 (.53), 4.08(.52) and 1.93(.45) respectively. These statistics indicate inclination of respondents towards similar direction (see table 3). Further, the mean comparison of determinants of maqasid al Shariah in presence of interest tax shield does not show significant difference between and with the groups based on the factors of education, profession, religion and understanding. The mean comparison is separately tested for the levels of understanding for maqasid al Shariah (UndMS), understanding of 271

272 capital structure theories (UndCST) and understanding of Islamic financial instruments (UndIFI) (See table 4). These results confirm the initial finding that most of the respondents agree that interest tax shield is harmful to the determinants of maqasid al Shariah in finance and overall human wellbeing. Table 11 Descriptive Statistics Variables N Minimum Maximum Mean Std. Deviation edu Prof Rel UnD ITSCW ITFTFP ITJMML EAHW Table 4 One Way ANOVA Variables Religion Profession Education UndMS UndCST UndIFI F-Statistics ITSCW ITFTFP * ITJMML EAHW * 3.02* 0.79 **Comparison is significant at the 0.1 level 5.2 Correlation The correlation matrix for determinants of maqasid al Shariah in presence of interest tax shield are significantly and negatively correlated with the dependent variable of EAHW. However, the variable ITSCW is positively and highly significantly correlated (.763) and (.749) with ITFTFP and ITSJMML respectively. Similarly, all three determinants are positively and significantly correlated with each other (See table 5). This potentially indicate a problem of multicollinearity. However, the demographics of the sample does not show a noticeable trend of correlation. Table 5 Correlations edu Prof Rel UnD ITSCW ITSFTFP ITSJMML EAHW 272

273 edu 1 Prof Rel * UnD * ITSCW ITFTFP.163 * * ** 1 ITJMML **.759 ** 1 EAHW ** ** ** 1 **. Correlation is significant at the 0.05 level (2-tailed). ***. Correlation is significant at the 0.01 level (2-tailed). 5.3 Regression Analysis The structured model was regressed to determine the relationship of determinants of maqasid al Shariah in finance in presence of interest tax shield (i.e. ITSCW, ITSJMML and ITSFTFP) with the ultimate end of overall human welfare (EAHW). To avoid the issue of multicollinearity, multivariate regression model is separately run for ITSCW, ITSJMML and ITSFTFP shown in column I respectively. In these regression models we have controlled for understanding (Und), education (edu), profession (Prof) and religion (Rel). The table 6 column I shows significant and negative association of ITSCW, ITSJMML and ITSFTFP with EAHW. The control variables are insignificant at large. However, estimates for standard error and beta are presented in column II and III respectively. The model is overall significant (F = , and p > 0.001) and coefficient of determination is (.399) and (.286) for both of the models respectively. The results approve our hypothesis that interest tax shield is harmful to ends of maqasid al Shariah in finance and has negative relationship with equity advocacy and overall human wellbeing. Table 6 Variable Regression Analysis I II III Coefficients Standard Error Beta Constant 4.439*** 3.810*** ITSCW -.191*** ITSJMML -.388** ITSFTFP -.449*** UnD Edu Prof

274 Rel F-Stat R-Sq Adj R-Sq **. Correlation is significant at the 0.05 level (2-tailed). ***. Correlation is significant at the 0.01 level (2-tailed). 6. Discussion The major findings of this study indicate that interest tax shield is contradictory to Shariah. It means that corporate financing policies are not aligned with guiding principles of Shariah and in particular maqasid al Shariah in finance. The presence of controversial interest tax subsidy harmful to the wealth circulation. It decreases the level of fairness and transparency in financial practices and leads to unequal distribution of wealth causing injustice at micro and macro levels. The study suggests that promotion of riba based financing by subsidizing debt over equity has negative impact on overall human wellbeing. The is realized that conventional corporate financing theories subsidize debt financing over equity financing, stimulating higher level of firm indebtedness causing recurring financial turmoil. The interest tax subsidy is not rationally defensible and disclose firms to the incremental risk of bankruptcy and financial distress. On the other side, it hinders the spirit of profit and loss sharing and does not stands at par with the Shariah rulings. This arrangement hinders firms to account for Islamic financial products for long term financing, coincided with creation and promotion of Islamic financial products. Therefore, it is considered that promotion of risk shifting could not elevate economic activity and production function. At the same time, the interest tax subsidy leaves no option to the financial managers, other than interest based financing to materialize the purpose of cost efficiency. Whereas, it is considered that subsidizing riba may be a wrong direction to achieve economic efficiency and overall human welfare. On the front of fairness and transparency, the principal element is permissibility. The financial contracts including impermissible elements are considered void. In this regard, interest tax subsidy is a contractual anomaly and does not seek fairness. It does not seem ethical to indulge any contractual party in haram and harmful agreement violating level playing field. On the other hand, the notion of wealth maximization involve financial manager to the contracts, void according to Shariah. In fact, managers are unable to incorporate fairness and transparency to the corporate financial practices in presence of interest tax subsidy. Followed by the role of interest tax subsidy in restraining wealth circulation, violating fairness and transparency in corporate financial practices, firms try to achieve the purpose of wealth maximization and greed. The greed leads to wealth concentration and unequal distribution of wealth. According to Islamic financial ideology, riba is key reason of wealth concentration and social injustice. On the other hand, it is believed that profit and loss or equity financing would lead to equal distribution of wealth in society. Similarly, corporate financing theories lying upon the fundamental ingredient of interest tax subsidy contribute to wealth concentration, social injustice and financial crisis violating basic principles of Shariah. Furthermore, it is believed that corporate financial literature and practices lack equity advocacy. To align the corporate taxation policy to the guiding rules of Shairah, it is suggested to restrain debt 274

275 financing and promote equity participation. This requires interest taxability to restrain riba and dividend (profit and loss) tax deductibility to promote profit and loss. This may be helpful to align corporate financial practices to maqasid al-shariah in finance. This may also work as effective tool to restrain financial crisis and achieve the overall human welfare. It is believed that Islamic finance provides required diversity to meet the financial requirement of corporation either for short or long term. This indicates that world would have been a better place to live, if based risk sharing rather risk shifting. Summing up, it is stated that presence of interest tax subsidy in corporate financial practices promote riba based financing and violate the basic indicators of maqasid al-shariah in finance. There is urgent need to reframe the corporate taxation policy to achieve greater good. 7. Conclusion This study aims to evaluate the interest tax subsidy and corporate financial practices in accordance to Maqasid al-shariah in finance. The framework of maqaid al-shariah in finance Laldin and Furqani (2013) include the indicators of wealth circulation, fairness and transparency in financial practices and social justice at micro and micro levels. The study employs survey questionnaire survey from a global sample of well-informed individuals and researchers in the area of Islamic finance. The study has confirmed for the validity and reliability of the measurement scale. Further, the structured model was assess through correlation and regression estimates. The results revealed that conventional theories of capital structure backed by the interest tax shield advocate and promote interest based corporate financing. Further, this is found that the presence of interest tax subsidy hinders wealth circulation and economic efficiency, violating the Islamic principle of permissibility, making the interest subsidizing contracts as void and unjust. These factors further contribute to social justice at micro and macro level promoting greed and wealth concentration. Consequently, it is believed that corporate financial practices may not contribute to the purpose of overall human welfare in accordance to maqasid al-shariah in finance. Further, it is suggested that reframing interest as taxable and dividend tax deductible may contribute to the purpose of equity advocacy and overall human welfare. Conclusively, the suggested arrangement would align corporate financial practices to maqaid al-shariah in finance. Limitations and Implications We feel that there is need to develop a standard measurement scale for the ends of maqasid al Shariah framework and its determinants. This will help future researchers to align potential issues of economics and finance with maqasid al Shariah in finance. This study provides an important insight to the policy makers to reframe the corporate taxation policy. 275

276 8. Bibliography Affandi, A., Puji Astuti, D., Dynamic model of Ibn Khaldun theory on poverty. Humanomics 30, doi: /h Ahmad, A.R.Y., Role of finance in achieving maqasid al-shariah. Islam. Econ. Stud. 19, Ahmed, A., Global financial crisis: an Islamic finance perspective. Int. J. Islam. Middle East. Financ. Manag. 3, doi: / Ahmed, H., Corporate Finance: Capital structure in firms, IRTI Research Paper Series. Al-Ajmi, J., Abo Hussain, H., Al-Saleh, N., Decisions on capital structure in a Zakat environment with prohibition of riba: The case of Saudi Arabia. J. Risk Financ. 10, Alexakis, C., Tsikouras, A., Islamic finance: regulatory framework challenges lying ahead. Int. J. Islam. Middle East. Financ. Manag. 2, doi: / Ali, A.J., Al-Aali, A., Al-Owaihan, A., Islamic Perspectives on Profit Maximization. J. Bus. Ethics 117, doi: /s Allen, J., Seeking true financial reform: Ending the debt-equity distinction. William {&} Mary Bus. Law Rev. 3, 243. Arouri, M.E., Ben Ameur, H., Jawadi, N., Jawadi, F., Louhichi, W., Are Islamic finance innovations enough for investors to escape from a financial downturn? Further evidence from portfolio simulations. Appl. Econ. 45, doi: / Auda, J., Maqasid Al Shari Ah: an Introductory Guide. IIIT Publ. Bank, S.A., Historical perspective on the corporate interest deduction 513. Benshalom, I., How to live with a tax code with which you disagree: doctrine, optimal tax, common sense, and the debt-equity distinction. North Carol. Law Rev. 88, Booth, L., Aivazian, V., Demirguc-Kunt, A., Maksimovic, V., Capital structures in developing countries. J. Finance 56, Brealey, R.A., Myers, S.C., Marcus, A.J., Fundamentals of Corporate Finance McGraw-Hill. Brendan Mulcahy, M., Purifying Islamic equities: the interest tax shield. Int. J. Islam. Middle East. Financ. Manag. 7, Bryan, D., Going forward: The perpetual crisis of finance. Cult. Organ. 18, doi: / Campa, J.M., Lessons From the Crisis for Corporate Finance:Back to Reality. IESEinsight Chapra, M.U., Khan, S., Al Shaikh-Ali, A., The Islamic vision of development in the light of maqasid al-shariah. Iiit. Christensen, N.R., The Case for Reviewing Debt/Equity Determinations for Abuse of Discretion. Univ. Chicago Law Rev. 74, Diaw, A., The global financial crisis and Islamic finance: a review of selected literature. J. Islam. Account. Bus. Res. 6, doi: /jiabr Donkor, E. a., Duffey, M., Optimal Capital Structure and Financial Risk of Project Finance Investments: A Simulation Optimization Model With Chance Constraints. Eng. Econ. 58, doi: / x Dusuki, A.W., Understanding the objectives of Islamic banking: a survey of stakeholders 276

277 perspectives. Int. J. Islam. Middle East. Financ. Manag. 1, doi: / El-Gamal, M.A., A MUSLIM S PERSPECTIVE ON THE FINANCIAL CRISIS. Am. Econ. 53, Farooq, M.O., Exploitation, profit and the riba-interest reductionism. Int. J. Islam. Middle East. Financ. Manag. 5, doi: / Ghosh, A., Cai, F., Li, W., The determinants of capital structure. Am. Bus. Rev. 18, Graham, J.R., How Big Are the Tax Benefits of Debt? J. Finance 55, doi: / Guney, N., Murabahah financing revisited: The contemporary debate on its use in Islamic banks. Intellect. Discourse 23, Haron, R., Capital structure inconclusiveness: evidence from Malaysia, Thailand and Singapore. Int. J. Manag. Financ. 10, doi: /ijmf Harris, M., Raviv, A., The theory of capital structure. J. Finance 46, Hasan, I., Keung, C., Hoi, S., Wu, Q., Zhang, H., Beauty is in the eye of the beholder : The effect of corporate tax avoidance on the cost of bank loans $. J. financ. econ. 113, doi: /j.jfineco Hasan, Z., Islamic Finance: The Structural-Objective Mismatch and its Consequesces. ISRA Int. J. Islam. Financ. 2, Hassan, M.K., Sanchez, B., Ngene, G., Scales and technical efficiencies in Middle East and North African (MENA) micro financial institutions. Int. J. Islam. Middle East. Financ. Manag. 5, doi: / Hasseldine, J., Morris, G., Corporate social responsibility and tax avoidance : A comment and reflection. Account. Forum 37, doi: /j.accfor He, Z., Matvos, G., Debt and Creative Destruction : Why Could Subsidizing Corporate Debt be Optimal? Manage. Sci. 1909, doi: /w17920 Hutchison, C., The Historical Origins of the Debt-Equity Distinction. Florida Tax Rev. 15, Iannuzzi, E., Berardi, M., Global financial crisis: causes and perspectives. EuroMed J. Bus. 5, doi: / Ibrahim, A.A., Elatrash, R.J., Farooq, M.O., Hoarding versus circulation of wealth from the perspective of maqasid (al-shari ah). Int. J. Islam. Middle East. Financ. Manag. 7, doi: /imefm Iqbal, Z., Mirakhor, A., An Introduction to Islamic Finance An Introduction to Islamic Finance. doi: / ch8 Ismail, A.G. b., Tohirin, A., Islamic law and finance. Humanomics 26, doi: / Jensen, M.C., Meckling, W.H., Theory of the firm: Managerial behavior, agency costs and ownership structure. J. financ. econ. 3, Kamali, M.H., Origins, T., Maqasid al-shari ah Made Simple. Int. Inst.of Adv. Islam. Stud. 38, Karpavičius, S., Yu, F., Should interest expenses be tax deductible? Econ. Model. 54, doi: /j.econmod

278 Kashyap, A.K., Zingales, L., The financial crisis: Lessons from corporate finance. J. financ. econ. 97, doi: /j.jfineco Keightley, M.P., Sherlock, M.F., The Corporate Income Tax System : Overview and Options for Reform. Congr. Res. Serv Laldin, M.A., Furqani, H., Developing Islamic Finance in the Framework of Maqasid al- Shari ah. Int. J. Islam. Middle East. Financ. Manag. 6, doi: /imefm Miller, M.H., Debt and taxes. J. Finance 32, Minsky, H.P., The financial instability hypothesis. Jerome Levy Econ. Inst. Work. Pap. Modigliani, F., Miller, M.H., Corporate income taxes and the cost of capital: a correction. Am. Econ. Rev. 53, Modigliani, F., Miller, M.H., American Economic Association The Cost of Capital, Corporation Finance, and the Theory of Investment : Reply The Cost of Capital, Corporation Finance, and the Theory of Investment : Reply 55, Mohd Yusop, M.M., Reviving the Islamic Economic System through Shariah-based Public Policy. Humanomics 31, doi: /h Muhammad-Bashir Owolabi, Y., Alias, M.D., Measurement model of corporate zakat collection in Malaysia: A test of diffusion of innovation theory. Humanomics 29, doi: / Myers, S.C., Majluf, N.S., Corporate financing and investment decisions when firms have information that investors do not have. J. financ. econ. 13, Neuhauser, K.L., The Global Financial Crisis: what have we learned so far? Int. J. Manag. Financ. 11, doi: /ijmf Osofsky, L., Who s Naughty and Who s Nice? Frictions, Screening, and Tax Law Design. Buffalo Law Rev. Forthcom. Ross, S.A., The determination of financial structure: the incentive-signalling approach. bell J. Econ Sanusi, N.A.B.T., The Dynamics of Capital Structure in the Presence of Zakat and Corporate Tax. Int. J. Islam. Middle East. Financ. Manag. 7, doi: /imefm Shaikh, S.A., A Critical Analysis of Mudarabah & A New Approach to Equity Financing in Islamic Finance. J. Islam. Bank. Financ doi: /cbo Subramanian, K., Lessons from the financial crisis: Failure of markets or failure of regulation? Macroecon. Financ. Emerg. Mark. Econ. 4, doi: / Titman, S., Wessels, R., The determinants of capital structure choice. J. Finance 43, Usmani, M.T., Present Financial Crisis, Causes and Remedies from Islamic Perspective, in: Post-Crisis Reforms, Davos Forum, Source: Www. Muftitaqiusmani. Com. Usmani, M.T., An introduction to Islamic finance. Brill. Warren Jr., A.C., The Corporate Interest Deduction : A Policy Evaluation. Yale Law Jounal 83, Wong, K.P., A regret theory of capital structure q. Financ. Res. Lett. 12, doi: /j.frl

279 No. of items Annexure I Scale Items Validity and Reliability TLI CFI IFI RMSEA USRW SE SRW KMO Cronbach's Alpha Overall ITSCW Advocating debt financing may be wrong direction to achieve economic efficiency Promoting profit and loss sharing would elevate wealth circulation Debt provider may influence the investment decisions to cover his risk Firms add more risk to their business by taking tax beneficial debt financing Firms restrain their investment choices by taking leverage Wealth circulates with risk sharing rather than risk shifting Promoting Riba may lead to restrained economic activity No. of items *** *** *** *** *** *** *** TLI CFI IFI RMSEA USRW SE SRW KMO Cronbach's Alpha 2. ITSFTFP Advocating interest tax benefits in corporate capital structure is harmful *** Interest tax deductibility provides a level playing field for both debt and equity *** financing Financial managers are unable to avoid debt, even knowing it as Haram and *** Harmful I believe that avoiding Haram and Hardship is primary right of contractual *** parties No. of TLI CFI IFI RMSEA USRW SE SRW KMO items I believe that Riba is as discouraged as other Haram and Harmful elements in an *** Islamic society 279 Cronbach's Alpha

280 Contract promoting any element prohibited by Shariah is void *** I consider subsidizing debt as favoring a few is promoting Haram *** I believe that favoring debt over equity financing is contractual anomaly *** Providing undue benefit to contractual parties is unjust and unfair *** 3. ITSJMML No. of items TLI CFI IFI RMSEA USRW SE SRW KMO Cronbach's Alpha Promoting Riba is harmful to society by anyway More dependence on debt financing may lead to unequal wealth distribution Avoiding debt financing promotes sharing of economic means Debt is the leading reason of wealth concentration Wealth concentration is primary outcome of "Greed" Interest tax deductibility advocates wealth concentration Subsidizing debt financing may be a reason of unequal distribution of wealth Conventional corporate financial theories advocate "Greed" and unequal distribution of wealth Being greedy is supported by Islamic financing ideology Firms depending upon equity financing may have no threat of bankruptcy With debt corporate capital structure may not be immune to crisis 4. EAHW No. of items *** *** *** *** *** *** *** *** *** *** *** TLI CFI IFI RMSEA USRW SE SRW KMO Cronbach's Alpha 280

281 World would not have been financially stable and better place, *** if based on equity and equality Islamic finance lacks adequate financial diversity to meet the *** corporate requirements Dividend tax deductibility could not be suitable policy to attain *** equity and sustainability Encouraging leverage will avoid financial crisis *** Consideration of dividend as tax deductible could restrain debt *** financing Corporate financial literature highlights equity advocacy *** 281

282 En ds Fi gu re 1: M aq asi d al Sh ari ah an Me an s Co rp or ate Ca pit al Str uct Circulation of Wealth Fair and Transparent Financial Practices Socio-Economic Justice (Micro and Avoid Wealth Concentration and Disparity Remove Hardship and Haram Fairness/Honesty Equity Justice Morality Avoid Deception Elimination of Poverty Stability and Equality Islamic Financial Instruments Zakat/Ushar/Sadaqat Norms and Values Encouraging Risk Sharing Discouraging Risk Shifting Leniency with Borrower Suitable Regulatory Setu Prohibition of Riba, Trade in Debt, Ghabn, and Gharar Production of Halal Econom Needs Riba Un-prohibited Un-prohibited + Promoted Riba Prohibited and Restri Ground Level Playing Field Cost Bankruptcy Cost of Financial Distress External Interference Debt Covenants Risk Shifting No Cost of Bankruptcy No Cost of Distress Promotion of Profit and sharing Equity and Stability Promotion of Islamic Fi Products 282

283 Does Technology Improve Customer Satisfaction and Loyalty? A Comparative Study of Islamic and Conventional Banks Malik Shahzad Shabbir Lecturer, Center of Professional Excellence Awais Ur Rehman (Not Presented) Abstract This study aimed to determine the impact of technology based service qualities! toward customer loyalty mediated by customer satisfaction and further to compare this phenomenon between Islamic and conventional banks. Data was collected via adapted questionnaire. Independent T test revealed that Islamic banks are significantly healthier to provide convenient and troubleshooting aspects of technology based services. Customer satisfaction was found to play a partial mediatory role between the technology service quality and customer loyalty. The comparison of positive mean value results show that Islamic banks employees have sufficient knowledge in order to guide their customers according to their desires on! However,this factor explores the importance of Islamic financial system in current market demand. The overall results show that all variables are statistical significant excludingone variable as convenient technology. Keywords:Islamic Banks,Customer s loyalty, Troubleshooting and Technology. 1. INTRODUCTION This study consists on different modern technology effects on customer satisfaction and loyalty in the banks of Pakistan. Several studies previously focused on customer satisfaction with different independent variables, but this study is first ever attempt, which focus on different technology effects through combining both customer satisfaction and loyalty in order to understand the behavior and amplified in investment from their target customers.banks are tight in competitive pressure. For attracting customers banks have to offer a good quality technology based services, under the supposition that it will bring about satisfaction and in turn loyalty among the customers.in Pakistan, there are three types of banks operate such as, conventional banks, Islamic Banks and Standalone branches, whereas, the Islamic banks are having an advantage and a disadvantage as compared to those in the Arab world. Advantage is the better empowerment of its employees and the experience sharing culture in the banks while the low level of economic development in Pakistan is responsible to bring about the financial constraints to augment the barriers in their way to deliver quality of service. Banking industry, around the globe has undergone some tremendous innovations, those in turn has at one hand greased and geared up the operations, while at the parallel has stressed the banks into fierce competition. At the hour, it is not merely sufficient to win the investors and customers, equivocally necessary are their retention. Knowing the customers makes the bank away from the perils of investor switching cost (Wisner, 2001). This tale is told for the globe and as the matter of fact it is meticulously 283

284 qualified for the scenario in Pakistan as well. This surge for entailing customers and investors behaviour is more likely to be intense in the Islamic banks, since they are new in the play while their conventional counterparts are old-paced and have relatively sought their better economies to scale and having a better investor-base (Bennett & Higgins, 1988). Islamic banking is a novel occurrence, yet won a great attention from the researchers. Its individuality is erected upon their philosophical bases that harness no interest (interest or usury) and no uncertainty paving to conflict (Gharar) (IIIE, 1999). In financials it dwell in the well-regarded assets of US $700 Billion by 2008, (Economist, 2008) and pacing to even bigger level with the rate at 15%, annually. (Khan, 2010). Islamic Financial Institutes, till 2005, were count up to 277 (IIBI, 2005; Zoubi & Taisier, 2008). Determining the ways of keeping clients satisfaction and loyalty had been in the great books such as, (Osman M. Karatepea, 2005; Zhou, Zhang, & Xu, 2002; zlex's Lam, 2002), and comparable is the situation in the Islamic banks also (Kumar, Kee, & Charles, 2010). However, under the competitive business strategy Information Technology (IT) is widely utilized as a part of this focused environment to cater the customer services in best of their quality. Actually, ascent of technology advancements and more specifically the internet have changed the utilization procedure of retail managing of banking businesses as human-based services there are turning out to be progressively minor (Bitner, 1990). Consequently the traditional way of managing a branch banking is going to be replaced with technology based alternatives, ATM, web based banking, to cite a few. Off course these tech services add spice to the service quality, as a matter of fact, that on turn invites the studies to estimate the impact of these technology based services of overall customer satisfaction and loyalty (Ganguli & Roy, 2011), yet no study in the existing literature has taken the comparative study of Islamic and conventional banks in relation to the technology based services quality (Ganguli & Roy, 2011). Hence, the study under consideration is the prime to focus the differences, out of their specificity, in the conventional and Islamic banks, in the impact of technology based service quality to the customer satisfaction and customer loyalty. The comparative analysis of Islamic and conventional banks, with reference to the obstacles to the service quality, reveals that Islamic banks is internally doing better to have less barriers as in its way to tailoring the service quality to its customers, expect in the case of meritocracy in hiring the bankers. Islamic banking is patron and chosen by the customers upon the Sharia grounds among others, hence while the Islamic bank employees are at large untrained and less knowledge bearing due to its specificity and newness of Sharia based operations. Naturally in this scenario Sharia driven customers are not convinced by the employees upon the Sharia compliance nature of these banks and the customers feel down in the terms of service quality of Islamic banks. On the other hand the conventional banking is much older than Islamic, with its well based theory and practice to train the employees. Moreover the conventional banking is rather simpler because they only care for economic gains and never about the complex Sharia issues. Hence this hurdle to service quality is unique to Islamic banks not the conventional. These facts are responsible for this huge and highly significant difference between the Islamic and conventional banks. While on the other hand, the Islamic finance industry being the infant one, facing the challenge of scarcity of trained employees, well trained in both the field of Sharia and finance the basic two pillars of Islamic financial industry (Siddiqui, 2013; SBP, 2012). The first section of this study consists on Introduction, which further discusses the objective and purpose of the study. However, comparisons of Islamic and conventional banks have debated regarding customer satisfaction and loyalty in section two as a literature review. Adapted questionnaires and method of solving customers issues are elaborated in section three and four respectively.whereas, conclusion and references put at end of paper. 2. LITERATURE REVIEW It is the proven matter of fact by the researchers that the selection of Islamic banks is driven by its Sharia compliant image (Dusuki & Abdullah, 2007). While on the other hand, the Islamic finance industry being the infant one, facing the challenge of scarcity of trained employees, well trained in both the field of Sharia and finance the basic two pillars of Islamic financial industry (Siddiqui, 2013; SBP, 2012). Currently the Islamic banks usually prefer to hire their employees with prior experience in the industry of conventional banking (Zainol, Shaari, & Ali, 2008), undermining the fact that Islamic banking is unique and specific and needs the employees the specific knowledge. This way on the short term makes them at ease when confronted with scarcity of Islamic banking human resource. Nevertheless on the long term it adds fuel to the fire by discouraging the Institutes charting the degrees specifically on Islamic finance, like international Islamic universities of Islamabad and some of institutions belongs to Malaysia that in 284

285 turn leads to a bigger level of scarcity. Here the Islamic banking heads, being trained and hence impressed by the conventional counterparts are blameworthy for hiring the Islamic bankers with unintentional lack of meritocracy. To put it short, the Islamic banking is patron and chosen by the customers upon the Sharia grounds among others (Dusuki & Abdullah, 2007), hence while the Islamic bank employees are at large untrained and less knowledge bearing due to its specificity and newness of Sharia based operations. Naturally in this scenario Sharia driven customers are not convinced by the employees upon the Sharia compliance nature of these banks and the customers feel down in the terms of service quality of Islamic banks. On the other hand the conventional banking is much older than Islamic, with its well based theory and practice to train the employees. Moreover the conventional banking is rather simpler because they only care for economic gains and never about the complex Sharia issues. Hence this hurdle to service quality is unique to Islamic banks not the conventional. These facts are responsible for this huge and highly significant difference between the Islamic and conventional banks. The comparative analysis of Islamic and conventional banks, with reference to the obstacles to the service quality, reveals that Islamic banks is internally doing better to have less barriers in its way to tailoring the service quality to its customers, expect in the case of meritocracy in hiring the bankers, due to external factor of specific HR scarcity. Alsadek and Gait (2008) it is noted that the products and services of Islamic financial institutions through different aspects like observations, approaches and idea of knowledge. The customer satisfaction is a major component for the financial institutions to motivate and increasing devotion of their target customers in an environment of competition. However services quality is considered as a primary feature in interest bearing to satisfy their customers. An empirical analysis was done through literature of both (Islamic & conventional) banking system about their goods and services. The promotion of Islamic finance is mainly based on the religious belief while some customers also focus on service quality, reputation of bank and profit ratio on their investments. However, conventional banks are promoted through business firms. Hume (2008) identified that Services qualities have an interrelationship perceived value and satisfaction of customers through peripheral and its core services. The purpose of this new established system was to predict re-purchase the intention and arts of performance. Consumer retention plays a vital role in the development of any organization. However, due to hard competition in the entire market, performing arts have additional controls in handling and manipulative the consumer preservation packages. The data was collected through questionnaires, where 156 respondents were females and 77 were males with 63% response rate and it analyzed through structural equation modeling (SEM). The result shows that there is no direct or significant relationship found among exterior services, core of services qualities and repurchase intention toward perceived value. Whereas, core and peripheral services quality play a vigorous role to determine re-purchase intention of customers. Siddique (2010) examines the interrelationship between customer loyalty, traits of services quality and customers gratification in the retail banking zone of Bangladesh. This study aims to fill the gap through this channel, first he investigates the relationship between services quality features and customer gratification. After a comprehensive relationship found between both variables then he checks the impact of these both variables on customer loyalty in the sector of retail banking. For this purpose a sample of 100 questionnaires was distributed among the customers where males and females respondents are 77 and 23 respectively. He used services qualities model (SERVQUAL) to measure the services quality in retail banking. Overall results shows that these all variables are positively interlinked to each other s, however tangibility indicates a least optimistic correlation while Empathy confirms high encouraging correlation toward customer satisfaction. 3. METHODOLOGY In our study, we investigated the impact of Technology on customer satisfaction and loyalty in both Islamic and conventional banks of Pakistan. For this purpose we prepaid a questionnaire in order to get the opinion about technology effects on different customer s satisfaction and loyalty. We collect primary data from questionnaire and distribute among 200 different customers, whereas response rate is 80%. It includes the opinion of customers of different types of banks via full fledge Islamic banks, conventional banks and standalone Islamic banking branches of conventional banks were considered. The respondents belonged to different age groups, educational and occupational background, irrespective of gender. However, bank branches were selected at random from Lahore city. The sample remained un-weighted in respect of gender to avoid any bias. The areas of questions consist of the following statements;overall 285

286 technology service-quality (TSQ), User friendly Technology (UFT), Convenient Technology (CT), Time effective technology (TET), Troubleshooting Technology (TST), Customer Satisfaction (CS) and Customer Loyalty (CL). Questions were designed keeping these areas in mind and to confirm the objectives of the study. We present the tables in two forms, whereas in first form of tables express only mediating regression analysis for Islamic, conventional and overall the banking system of Pakistan. Whereas, second form represents construct analysis through mediating regression for Islamic, conventional and overall the banks of Pakistan. However, we develop some relational equations(uft + CT + TST + TET CL), UFT + CT + TST + TET CS), (CS CL) and (UFT + CT + TST + TET + CS CL) in order to get better results from construct analysis. The purpose of Construct Analysis through mediation regression analysis elaborate us analytical scores such as written number s, equationsand figures without any kind of analytical diagrams. Table 1: Comparison of Group Means 4. DATA ANALYSIS Independent sample T test Constructs Statements Bank Type Mean Sig Mean Difference Overall Islamic technology service-quality Conventional User friendly Islamic Technology Conventional The technology provided by my Islamic bank is easy to use Conventional 3.62 The technology provided by my Islamic bank is user-friendly. Conventional 3.76 My bank s technology is reliable Islamic Conventional 3.86 Convenient Islamic Technology Conventional My bank s technology is accessible Islamic beyond regular business Hours Conventional 3.36 I find it more convenient to use Islamic technology than interacting with branch employees. Conventional 3.24 Time effective Islamic technology Conventional My bank s technology saves me a Islamic lot of time, especially when I am pressed for time. Conventional 3.40 My bank offers a fair compensation Islamic for its mistakes Conventional 3.30 Troubleshooting Technology Islamic Conventional When I contact my bank s customer service, my calls are always answered promptly. When there are problems, my bank s customer service people are sympathetic and reassuring My bank employees are knowledgeable enough to resolve the problems 286 Islamic Conventional 3.56 Islamic Conventional 3.56 Islamic Conventional 3.34

287 Customer Satisfaction Islamic Conventional Overall, I am satisfied with my bank Islamic Conventional 3.64 I think I did the right thing when I chose this bank Islamic Conventional 3.60 I am delighted with my bank Islamic Conventional 3.76 Customer Loyalty Islamic Conventional 3.73 I would recommend my bank to Islamic others Conventional 3.76 I will always consider this bank as my first choice Islamic Conventional 3.70 Several studies such as Hanif et al, (2012) and Awan et al. (2011) investigated that the comparison between Islamic and convention financial institutions, which are based on their altered mode of financing, communication system and behavior to their customers. However, table 1 reveals the results generated by the independent sample T test. The data was processed under this test with the aim for comparative analysis of challenges in the way of delivering service quality and customer loyalty between the both banks. The significant differences between the banks were observed at the variables ofconvenient technology, my bank s technology is accessible beyond regular business hoursand I find it more convenient to use technology than interacting with branch employees, troubleshooting technology and my bank employees are knowledgeable enough to resolve the problems among these variable values 0.010, 0.040, 0.021, and respectively. However, the above significant value represents that these banks observe statistically different results under the above mention significant variables. While among these variables the biggest mean difference occurs my bank employees are enough knowledgeable to resolve the problems with the mean difference of Positive mean difference is the evidence to explain that Islamic banks employees have sufficient knowledge in order to guide their customers according to their desires and this factor explore the importance of Islamic financial system in current market demand. Table 2: Mediation regression analysis for Islamic banks Mediation regression analysis for Islamic banks TSQ CL Variables Beta Sig. R Square Adjusted R Square F- Stats ANOVA Sig. Constant Technology Services Quality TSQ CS Constant Technology Services Quality CS CL Constant Customer Satisfaction TSQ + CS CL Constant

288 Technology Services Quality Customer Satisfaction Table 2 represents the mediation regression analysis for Islamic banks where in this above table we built four relations among such variables Technology Services Quality (TSQ),Customer Satisfaction (CS) and Customer Loyalty (CL). In each relation one variable donated as constant and rest of variables are to make a perfect relation. In first relation Customer Loyalty is a constant and Technology Services Quality as a variable. F Testand ANOVA show positively significant relationship between TSQ to CL with at levels of significant.however, rest of three relations such as technology service quality to customer satisfaction (TSQ to CS), customer satisfaction to customer loyalty (CS to CL) and technology service quality with customer satisfaction to customer loyalty(tsq + CS to CL) also show significantly positive relationship among all variables with these F-test values , and at same significant levels (0.000) for all the three values respectively. Whereas, the biggest F-test value in the table of mediation regression analysis for Islamic banks is with variables of customer satisfaction to customer loyalty (CS to CL). It means that CS and CL have strong correlation; now both Islamic and conventional financial institutions of Pakistan must focus on the usage of modern technology to entertain their customers. Table 3: Mediation regression analysis for Islamic banks (Construct Analysis) Mediation regression analysis for Islamic banks (Construct Analysis) UFT + CT + TST + TET CL Variables Beta Sig. R Square Adjusted R Square F- Stats ANOVA Sig. Constant User-friendly Technology Convenient Technology Troubleshooting Technology Time-effective Technology UFT + CT + TST + TET CS Constant User-friendly Technology Convenient Technology Troubleshooting Technology Time-effective Technology The purpose of Construct Analysis through mediation regression analysis for Islamic banks elaborate us analytic scores such as written number s, equationsand figures without any kind of analytical diagrams. In the above table we have built one to one (Linear relationship) relation between different variables but in construct analysis, we checked the impact a number of independent variables on dependent variable. The independent variables in regression analysis of Islamic banks comprise on User-friendly Technology (UFT), Convenient Technology (CT), Troubleshooting Technology (TST) and Time-effective Technology (TET) with dependent variable as customer loyalty (CL). However, all the independent variables are statistical significant in both regressions through Beta values expect Convenient Technology ( and -1.00) at (0.222 and 0.209) significant level and in all mediation regressions for Islamic banks through construct analysis is statistical significant via F-test value (11.11) and (7.575) respectively. 288

289 Table 4: Mediation regression analysis for conventional banks Mediation regression analysis for conventional banks TSQ CL Variables Beta Sig. R Square Adjusted R Square F- Stats ANOVA Sig. Constant Technology Services Quality TSQ CS Constant Technology Services Quality CS CL Constant Customer Satisfaction TSQ + CS CL Constant Technology Services Quality Customer Satisfaction The Mediation regression analysis for conventional banks demonstration in table 3, where the above table represents the same four relations technology service quality to customer loyalty (TSQ to CL), technology service quality to customer satisfaction (TSQ to CS), customer satisfaction to customer loyalty (CS to CL) and technology service quality with customer satisfaction to customer loyalty (TSQ + CS to CL) as we have discussed in mediation regression analysis for Islamic banks in table 2. Actually, we are going to find out the usage of technology and its impact on customer satisfaction and loyalty in our study, that s why we built same four relations for both Islamic and conventional banks in order to find out the difference on base of technology. However, the convention banks show lesser values of F- test as comparatively analysis with Islamic banks, which means that Islamic banks are more preferable than convention and customers of Islamic banks, also more satisfied than conventional. Whereas, F-test values (24.240, , and ) show positively significant for all the variables in conventional banks at same levels of significant Table 5: Mediation regression analysis for conventional banks (Construct Analysis) Mediation regression analysis for conventional banks (Construct Analysis) UFT + CT + TST + TET CL Variables Beta Sig. R Square Adjusted R Square F- Stats ANOVA Sig. Constant User-friendly Technology Convenient Technology Troubleshooting Technology Time-effective Technology UFT + CT + TST + TET CS Constant User-friendly Technology

290 Convenient Technology Troubleshooting Technology Time-effective Technology CS CL Constant Customer Satisfaction UFT + CT + TST + TET + CS CL Constant User-friendly Technology Convenient Technology Troubleshooting Technology Time-effective Technology Customer Satisfaction The mediation regression analysis of conventional banks depend upon four relations such as (UFT + CT + TST + TET CL), UFT + CT + TST + TET CS), (CS CL) and (UFT + CT + TST + TET + CS CL)throughConstruct Analysis. The independent variables in regression analysis of conventional banks comprise on User-friendly Technology (UFT), Convenient Technology (CT), Troubleshooting Technology (TST) and Time-effective Technology (TET) with dependent variable as customer loyalty (CL). However, all the independent variables are statistical significant in all regressions through Beta values expect Convenient Technology because it showsnegative values in all relations with higher degree of significant (-0.139, and ) at (0.222, and 0.363). Whereas, F-test values (11.12, 12.23, and 9.506) indicate that overall modelof mediation regression for conventionalbanksis statistical significant with same levels in all relations (0.000) respectively. It is observed through the value of individual and F-test that customer satisfaction has strong positive impact on customer loyalty in all cases. Table 6: Mediation regression analysis for all banks Mediation regression analysis for all banks TSQ CL Variables Beta Sig. R Square Adjusted R Square F- Stats ANOVA Sig. Constant Technology Services Quality TSQ CS Constant Technology Services Quality CS CL Constant Customer Satisfaction SQT + CS CL Constant

291 Technology Services Quality Customer Satisfaction However, our study consists on Islamic and conventional banks and their impact on customer satisfaction and loyalty through technology as a mediating variable. The table 4 epitomizes mediation regression analysis for all banks. Actually we are going to fill the gap with a new dimension takes in our study through mediation regression analysis for all banks (public & private) in Pakistan. The idea of this new dimension occurs when we have done individually analysis of mediating regression for Islamic and convention banks then we think what happened in overall as well as individual results if we combine the analysis for all banks in Pakistan. We are very grateful to see the highly positive significant results (35.117, , and ) of combine analysis in Beta and F-test in all four sector/relations among variables with same levels of significant (0.000) as these variables are mention in above tables.it means that our new experiment of combine the synergies show better effect on customer satisfaction and loyalty as well as for new researcher for further analysis. Table 7: Mediation regression analysis for all banks (Construct Analysis) Table: Mediation regression analysis for all banks (Construct Analysis) UFT + CT + TST + TET CL Variables Beta Sig. R Square Adjusted R Square F- Stats ANOVA Sig. Constant User-friendly Technology Convenient Technology Troubleshooting Technology Time-effective Technology UFT + CT + TST + TET CS Constant User-friendly Technology Convenient Technology Troubleshooting Technology Time-effective Technology CS CL Constant Customer Satisfaction UFT + CT + TST + TET + CS CL Constant User-friendly Technology Convenient Technology Troubleshooting Technology Time-effective Technology Customer Satisfaction

292 Table 7 explores the construct analysis for all combined banks in Pakistan through mediation regression. Actually, this table represent a new dimension in existing results because we are doing a relative research in both Islamic and conventional banks, where this combine synergic in all the banks of Pakistan show better result as individually compared with conventional and Islamic banks in Pakistan. The international bank branches, who are working in Pakistan as well as domestic banks, take part in the above table of our study. This table is furthermore depend upon four relations and also consist on same independent and dependent variables such as (UFT + CT + TST + TET CL), UFT + CT + TST + TET CS), (CS CL) and (UFT + CT + TST + TET + CS CL)through Construct Analysis. However, all the independent variables are statistical significant in all regressions through Beta values expect Convenient Technology because it shows negative values in all relations with higher degree of significant (-0.067, and ) at (0.451, and 0.911). Whereas, F-test values (12.535, , and ) indicate that overall model of mediation regression for all banks in Pakistan is statistical significant with same levels of significant in all associations (0.000) respectively. 5. CONCLUSION However, group mean difference values elaborate that biggest mean difference occurs my bank employees are enough knowledgeable to resolve the problems with the mean difference of Whereas, positive mean difference is the evidence to explain that Islamic banks employees have sufficient knowledge in order to guide their customers according to their desires and this factor explore the importance of Islamic financial system in current market demand.in order to fill the gap of this research, we used some variables to complete this whole process. The variables with their abbreviations are as follow;overall technology service-quality (TSQ), User friendly Technology (UFT), Convenient Technology (CT), Time effective technology (TET), Troubleshooting Technology (TST), Customer Satisfaction (CS) and Customer Loyalty (CL). However, Questionnaire was designed through keeping these areas in mind and to confirm the objectives of the study. We present the tables in two forms, whereas in first form of tables express only mediating regression analysis for Islamic, conventional and overall the banks of Pakistan and in second form represents construct analysis through mediating regression for Islamic, conventional and overall the banks of Pakistan. However, we develop some relational equations (UFT + CT + TST + TET CL), UFT + CT + TST + TET CS), (CS CL) and (UFT + CT + TST + TET + CS CL) in order to get better results from construct analysis. The comparison of positive mean value results show that Islamic banks employees have sufficient knowledge in order to guide their customers according to their desires and this factor explore the importance of Islamic financial system in current market demand.the result of convenient technology shows insignificant, while rest of all variables and whole model are statistical significant through individual as well as F-test values. According to above results, we strongly recommended that Islamic banks provide advance trainings to their staffs in order to facilitate their customers with their due desires. Whereas, the staffs of conventional banks are unable to facilitate their customers properly with several reasons, but most important reason, they have a lot of customer s portfolio that s why they don t care them accurately because they get their targets easily as compared with Islamic banks. While on the other hand, it is also noted in our study that after the financial crises , the customers moved from conventional to Islamic financial Institutions due to investment saving on their portfolio and customer s satisfaction and loyalty. These are the key factors of Islamic banks and if it remains as in future then results must favorable for Islamic financial Institutions. 292

293 6. REFERENCES Alsadek Gait, A. W. (2008). An empirical survey of individual consumer, business firm and financial institution attitudes towards Islamic methods of finance. International Journal of Social Economics, 35(11), Bennett, D., & Higgins, M. (1988). Quality means more than smiles. 46. Dusuki, A. W., & Abdullah, N. I. (2007). Why do Malaysian customers patronise Islamic banks? International Journal of Bank Marketing, 25(3), Gorrell, G., Ford, N., Madden, A., Holdridge, P., & Eaglestone, B. (2011). Countering method bias in questionnaire-based user studies. Journal of Documentation, 67(3), Hanif, M., Tariq, M., Tahir, A., & Wajeeh-ul-Momeneen. (2012). ISSN Issue 83 () Comparative Performance Study of Conventional and Islamic Banking in Pakistan. International Research Journal of Finance and Economics, 83(1), International Monetary Fund. (2004). Pakistan: Financial System Stability Assessment. Washington, D.C.: International Monetary Fund. Karatepea, O. M., Yavasb, U., & Babakus, E. (2005). Measuring service quality of banks: Scale development and validation. Journal of Retailing and Consumer Services, 12(1), SBP. (2012, February 28). Islamic banking industry in Pakistan set to double its market share in next five years: Yaseen Anwar. SBP Press Reports. Siddiqui, A. A. (2013). Islamic Banking Industry Growing amid challenges. Karachi Pakistan: Meezan Bank. Taap, M. A., Chong, S. C., Kumar, M., & Fong, T. K. (2011). Measuring service quality of conventional and Islamic banks: a comparative analysis. International Journal of Quality & Reliability Management, 28(8), Tsaur, S.-H., Chang, H.-M., & Wu, C.-S. (2004). Promoting Service Quality with Employee Empowerment in Tourist Hotels: The Role of Service Behavior. Asia Pacific Management Review, 9(3), Wisner, J. a. (2001). Comparing practices for capturing bank customer. Benchmarking: An International Journal, Vol. 8 No. 3, p Zainol, Z., Shaari, R., & Ali, H. M. (2008). A Comparative Analysis on Bankers Perceptions on Islamic Banking. International Journal of Business and Management, 3(4), Zemke, R., & Schaaf, D. (1989). The service edge: 101 companies that profit from customer care. New York: New American Library. Zhou, L., Zhang, Y., & Xu, J. (2002). A critical assessment of SERVQUAL s applicability in the banking context of China. Asia Pacific Advances in Consumer Research, 5, zlex's Lam, T. (2002). Making sense of SERVQUAL s dimensions to the Chinese customers. Journal of Market-Focused Management, Vol. 5 No. 10, pp

294 Corporate governance in Islamic banking: The role of the board of directors Maroof Khan MS Scholar, Department of Management Sciences, COMSATS Institute of Information Technology, Abbottabad, Pakistan Imran Khan (corresponding author) Assistant Professor, Department of Management Sciences, COMSATS Institute of Information Technology, Abbottabad, Pakistan Abstract The global financial crisis of has raised serious questions on the corporate governance structures of financial entities. Basel Committee on Banking Supervision (BCBS) through Basel-III further tightened the risk-taking exposure of banks and called attention to the need to study, understand and improve the governance practices of banking industry. However, the bad impacts of crisis did not affect the Islamic banking as severally as they affected their counterparts. Islamic banking has shown resilience owing to the principles that govern it i.e. equity, participation, ownership. An extent of literature is available that developed different conceptual frameworks and models of Islamic corporate governance (ICG); however, very few empirical studies tested their validity. This study empirically examines the relationship between governance and performance and tries to fill the void. We analyzed the effects of Shari ah supervisory board (SSB) and board structure for performance during the period The sample size consists of 17 Islamic banks, 5 from Pakistan and 12 from Malaysia. The selection of these two countries for analysis is based on (i) both countries share similar democratic, social and cultural values (ii) dual banking systems (iii) almost same regulatory setups (iv) both countries are considered to be the potential leaders in Islamic finance. We applied panel fixed effects model as the probability value of Hausman test is below 5 percent. The results of the study show that Shari ah supervisory board size (SSB_S) exerts significant and negative effect on value of firm. University education of Shari ah board (SSB_ACF) found positive and significant. While, factors related to board structure were found statistically insignificant, which could indicate that in case of Islamic banks performance Shari ah supervision related corporate governance factors are the significant determinants. To check the impact of supervisory/advisory role of SSB, sample is divided in two parts; the results of advisory were almost similar as of overall sample. However, the results of supervisory role of SSB worsen the results. Few important policy implications have been derived from results (i) Smaller sized SSB having knowledge of finance and accounting increase the value of firm (ii) strict supervisory role of SSBs reduce the performance of Islamic banking since there is a trade-off between profit and ethical compliance further, (iii) the regulators of both the countries need to enforce regular publications of comprehensive annual/quarterly reports on standardized format to support accountability and transparency. Key words: Corporate governance, firm performance, Pakistan, Malaysia 1. Introduction Islamic financial industry has weathered the storm of recent financial crisis that flatten the western financial institutions and jolted the conventional corporate governance structures based on selfinterested opportunistic agents (Green 2010; Hussain, Shahmoradi, & Turk, 2015; Yeates, 2008). These developments attract the interests of policymakers, academia, and regulators towards corporate fairness, transparency and accountability. Basel Committee on Banking Supervision (BCBS, 2010) through Basel- III further tightened the risk-taking exposure of banks and called attention to the need to study, understand and improve the governance practices of banking industry. Islamic corporate governance (ICG) is based on ethics, morals, and social welfare to achieve Shari ah objectives (Hasan, 2008). 294

295 Ibrahim (2007) argued that corporate governance of Shari ah compliant business first look at the transaction structure, as Shari ah is concerned not only with the substance but also with the form of transaction. According to Ginena (2014) Shari ah risk constitutes credible hazards to Islamic banks and the possible consequences of Shari ah non-compliance may lead to bank runs. Another very interesting study conducted by Chapra and Ahmed (2002) reported that 94.6 percent Islamic banks depositors of Sudan, 85.6 percent of Bahrain and 66.8 percent of Bangladesh would withdraw their deposits if their Islamic banks breach Shari ah adherence. ICG resembles stewardship theory as opposed to the agency theory (Lewis, 2005). In the context of ICG, decision-making extends beyond the conventional approach and include all those affected e.g. shareholders, customers, suppliers, workers and society at large. The governance system of Islamic banks is multi-layer as high number of parties are involved in it, in addition to investors and stakeholders, regulators and Islamic community have a direct watch on Islamic banking system (Grassa and Matoussi, 2014).The presence of Shari ah superviosy board (SSB) in Islamic banks, which Choudhury and Hoque (2006) named Supra Authority present an additional layer of governance that decide and supervise all Shari ah related matters and ensures Shari ah compliance, along with regular boards of directors, senior management, and operational subcommittees, change their governance structure into what we call multi-layer governance. SSB is an additional layer of monitoring and oversight that could cause constraint on bank s operations. SSB might restrain boards of directors and senior management from engaging in unethical transactions and aggressive risk taking activities. Since, Islamic banking is based on three principles; (i) interest free financial transactions (ii) profit and loss sharing and, (iii) socially responsible investment (Abel-Baki and Leone, 2014) with the ultimate objective of Shari ah adherence that forbid unethical practices. This paper examines the relationship between multi-layer corporate governance and performance of Islamic banks. Specifically, we analyze the effect of (i) Shari ah supervisory board size, SSB education (ii) structure of board of directors; board size, board independence and, (iii) firm level variables; capital adequacy, leverage and Z-score on performance of 17 Islamic banks for the period of The study further subsamples the analysis by looking into the SSB s supervisory/advisory impact on performance. The sample size consists of 17 Islamic banks, 5 from Pakistan and 12 from Malaysia. The selection of these two countries for analysis is based on (i) both countries shares similar democratic, social and cultural values (ii) dual banking systems (iii) almost same regulatory setups (iv)both countries are considered to be the potential leader in Islamic finance. The rest of the paper is organized as follows. Section 2 review literatures and develop hypotheses. Section 3 present sample and methodology. Section 4 provides results and their discussion and finally, section 5 summarizes the paper. 2. Literature review and hypotheses formulation The role of board of directors (BOD) as a mechanism for corporate governance of banks takes on greater relevance in a framework of intensified competition, strict regulation, and higher informational asymmetries (Andres and Vallelada, 2008). Thus, the board becomes a key mechanism to have diligent oversight on managers behavior towards risk, ethics, and disclosure and to avoid any conflict of interest between the bank and regulator. The complexity of work of BOD s in the Islamic banks, having multilayer corporate governance mechanism, increases their coping with regular monitoring and advising by manifold. They also are responsible and accountable for ensuring Shari ah compliance. As, comprehensive Shari ah Governance Framework (SGF, 2016) of State Bank of Pakistan (SBP) in its first part of the Role of Board of Directors stated that; The BOD shall be ultimately responsible and accountable for ensuring full conformity of the IBI s operations with Shari ah principles. Like other risks faced by an IBI, the BOD needs to be fully cognizant of the risk of Shari ah non-compliance and its potential implications on the reputation and business of the IBI. Towards this end, the BOD shall introduce an effective mechanism including diligent oversight on functioning of the Framework and compliance with the fatawa, instructions, and guidelines of the SB. 2.1 Shari ah Supervision and bank performance Extensive amount of theoretical literature is available on corporate governance of Islamic banks (e.g. Abdel-Baki & Leone 2014; Archer & Karim 2012; Bhatti & Bhatti 2010; Ginena, 2014). However, there exists limited empirical literature on corporate governance of Islamic banks. Mollah and Zaman (2015) 295

296 studied Shari ah supervision s effect on banks performance of 86 Islamic banks of 25 countries for the period of Their results reveal that Shari ah boards are profit driven and play a significant role in protecting the shareholder s interest and positively affect the performance of Islamic banks. BODs of Islamic banks are more independent compared with their conventional counterparts. However, independent directors are associated with a decline in performance. In addition, Muslim population of the country, bank capitalization and risk-taking behavior of IBs have positive and significant effect on value of firm. Grassa and Matoussi (2014) applied descriptive approach to study different characteristics of ICG of Islamic banks for GCC and Southeast Asia countries. In their comparative analysis they used SSB size and education as main variables and found that some of the central banks have SSB size restricts like Bank Negara Malaysia and Bahraini law requires at least 5 and 3 members respectively, while others are silent about its size. They also show that only percent of the SSB members have knowledge about accounting and finance, out of which GCC SSB s represent percent 8.74 percent Southeast Asia. Shahzad et. al., (2013) investigates the perceived importance of management of Islamic banks and Islamic banking windows of conventional banks regarding different dimensions corporate governance practiced in the Pakistan. Their study reveals that the most important dimensions which affect the CG in Islamic banks are BOD and SSB, while almost all dimensions of CG were important for Islamic banking windows. Quttainah (2013) examined how Shari ah boards impacts the earning management behaviors within Islamic banks. They suggested that various board characteristics, such the size, accounting and auditing board of directors, are important determinants of the earning management for Islamic banks. Grassa et al. (2010) argues that no significant relationship has been found between Shari ah board characteristics and financial performance. However, Shari ah governance attributes are efficient in terms of Shari ah compliance transactions. H1: There is a positive effect of SSB size on bank performance. H2: There is a positive effect of SSB financial knowledge/education on bank performance. 2.2 Board Structure and bank performance Board Size Keeping in view the complexity of banking business one might expect boards of directors to be larger, since a larger board exercise better monitoring and brings more human capital to advise managers (Andres and Vallelada, 2008). There is a positive association between board size and Islamic bank s performance (Grassa and Matoussi 2014; Quttainah 2013; Shahzad et. al., 2013). However, Mollah and Zaman (2015) found negative association between board size and firm performance, and Grassa et al. (2010) found no significant relation between board size and performance. H3: There is a positive effect of board size on bank performance Board independence Independent directors have fewer conflicts of interest while performing their duties of monitoring, advising and to avoiding conflict of interest with the regulator. Hence, a positive link between the independent directors and bank value is expected. There is a positive association between board independence and Islamic bank s performance (Quttainah 2013; Shahzad et. al., 2013). However, Mollah and Zaman (2015) found independent directors are associated with a decline in performance. H4: There is positive relationship between independent directors on bank performance Board meetings The analysis of the relationship between board structure and performance is incomplete if we do not take into account the internal functioning of the board. There could be several factors that can affect how boards operate. One particularly important factor is the frequency of board meetings (Vafeas, 1999). Board meetings provide board members the opportunity to come together and to discuss, exchange, and share ideas on the better functioning of bank supervisory strategies and advisory plans. Hence, more frequent board meetings enhanced the control over managers. We found just a single study of (Grassa and Matoussi 2014) discussing the descriptive statistics of board meeting for GCC and Southeast Asian countries. They report that on average 7 meetings a year were conducting in the both regions, around 5 in GCC and 9 in Southeast Asia. 296

297 H5: There is a positive effect of number of board meetings on bank performance. 3. Data and econometric model 3.1 Data and variables To collect the panel data of the selected 17 Islamic banks of Pakistan and Malaysia, we obtained information from the annual reports of respective banks, their websites and the central banks of respective countries. Our sample size covers seven years from The selection of Pakistan and Malaysia is motivated by the following factors; (i) both countries share similar democratic, social and cultural values (ii) dual banking systems (iii) almost same regulatory setups (iv) both countries are considered to be the potential leaders in Islamic finance. Within Asia, Malaysian Islamic finance market is 10 percent of global Islamic assets. Although the share of Pakistan is quite low i.e percent however, it is ranked as an emerging Islamic finance market (Islamic Financial Services Board, 2015). Our task of handpicked data was relatively tedious. The annual reports were not available at a unified format and even in the same country there were many formats, missing data and sometimes within the same bank format changes over time. According to the website of Bank Negara Malaysia there are 16 banks mentioned as Islamic, but due to data non-availability issues we limit at 12 banks. In case of Pakistan, five full-fledged Islamic banks operating in the economy, we took all. As Burj bank merged with Albaraka bank on September, 2016, however, it data set is available till 2015.Therefore, we considered it for analysis as a separate financial entity. We measure bank performance by using accounting measure of return on assets (ROA) and tried to calculate market measure of Tobin s Q but were unable to obtain data of some of the banks. The explanatory variables used in the model are discussed and describe in table 1. Table 1: Variables description Variables Symbols Description Return on assets ROA Net profit after tax to total assets Shari ah supervisory board size SSB_S Total members of Shari ah board Education of Shari ah board SSB_ACF Percentage of members of the SSB having university degree/certificate of accounting, finance, economics and commerce. Shari ah board supervisory /advisory SB_ S/A Dummy variable set equal to 1 if the shari ah board has a supervisory role, 0 otherwise. Board size BS Number of members in the board of directors Board independence B_Ind The proportion of independent directors in the board Meeting year B_Mts Number of meetings held by board of directors during the year. Capital ratio CR Shareholders equity divided by total assets. NLTA NLTA Net loans divided by total assets Z score Z-score Z score measures the distance to default, which is estimated as, ROA plus capital to asset ratio divided by 297

298 standard deviation of ROA. EQTA EQTA Shareholders equity to total assets The study used Shari ah supervisory board s size (SSBS) and education (SSB_ACF) as proxy for Shari ah supervision. While, board structure is presented by the variables board size (BS), board independence (B_Ind), meetings of the board in a year (B_Mts). Three company level variables included are; net loans to total assets (NLTA) as a measure to the proportion of assets tied up to loans, shareholders s equity to total assets as an indicator of level of protection and Z score to measure the risk of default. Panel fixed effects model is used in the study as the probability value of Huasman test came under five (0.0034). 4. Results discussion 4.1 Descriptive statistics Table 2 shows overall statistics of these variables. The average ROA is less than 1 percent, the maximum ROA of 1.72 is of Bank Islam Berhad Malaysia for the year 2012 and maximum value of is of Kuwait FH Behrad Malaysia for We found that mean size of Shari ah supervisory board is which is close to the value of reported by Mollah and Zaman (2015) and 4.28 by Grassa and Matoussi (2014). The maximum value of 7 is of Bank Islam Berhad Malaysia for the year 2010 and minimum value of 1 is of Burj bank Pakistan for throughout the period under analysis. Table 2: Descriptive statistics Variables N Mean SD Min. Max. Return on assets (ROA) Shari ah board size (SSB_S) Education of Shari ah board (SSB_ACF) Shari ah boards sup. /ad. (SB_ S/A) Board size (BS) Board independence (B_Ind.) Meeting year (B_Mts.) Capital ratio (CR) NLTA Z score EQTA The percentage of members of the SSB having university degree is on average percent which is much higher than percent reported by Grassa and Matoussi (2014). The substantial difference exists because Grassa and Matoussi (2014) considered only university education of accounting and finance. The maximum value of 100 percent is of Hong Leong Islamic bank berhad Malaysia for the year 2012 and minimum value of 0 percent is of Burj bank Pakistan. As for board structure variables of board size on average was found which is close to 8.29 reported by Grassa and Matoussi (2014) and less than reported by Mollah and Zaman (2015).Board independence on average is 43 percent higher than Mollah and Zaman (2015) shown percent and lower than Grassa and Matoussi (2014) reported 60 percent. An average number of board meetings of 8.663, which is higher than 7.04 meetings shown by Grassa and Matoussi (2014). Table 3 reports country specific information; on average Malaysian Islamic banks are more profitable, having larger Shari ah boards, higher percentage of university degree holders in Shari ah boards, higher 298

299 proportion of independent directors in the boards, more number of meetings than Pakistani Islamic banks and all these attributes of corporate governance are statistically significant. However, Pakistani banks are better in Shari ah board supervisory status and board size than Malaysian Islamic banks and all these attributes are statistically significant. Table 3: Statistics by country Variables Pakistani Islamic banks sample mean Malaysian Islamic banks sample mean Sample t-test Return on assets (ROA) *** Shari ah board size (SSB_S) *** Education of Shari ah board (SSB_ACF) ** Shari ah board Sup. /Ad. (SB_ S/A) *** Board size (BS) *** Board independence (B_Ind.) *** Meeting year (B_Mts.) *** Capital ratio (CR) ** NLTA *** Z score *** EQTA ** N Note: ***significant at 1%,**significant at 5% 4.2 Regression results Panel data analysis is considered the most efficient method to use when the sample is a mixture of time series and cross sectional data. It allows taking into account the unobservable and constant heterogeneity i.e. the specific features of each bank e.g. management style and quality, business strategy, market perception etc (Andres and Vallelada, 2008). Panel fixed effects model is applied in the study as the probability value of Huasman test came under five (0.0034). 299

300 The overall results reveal that Shari ah supervisory board size (SSB_S) exerts negatively significant effect on value of firm. As literature on corporate governance suggest that larger boards lead to the problems of coordination, control and flexibility of decision-making. The negative effect of (SSB_S) on performance could indicate the small sized Shari ah boards are more efficient in developing consensus and have good control over Shari ah related matters oversight and making decision. However, this result contradicts the findings of Mollah and Zaman (2015) and rejects H1 of the study. The second variable of Shari ah supervisory board related to university education of Shari ah board (SSB_ACF) found positive and significant. This reflects that Shari ah board members having knowledge of finance/economics increase the profitability of Islamic banks. Position of relevant knowledge and expertise enable the boards members to understand the nature, structure and implications of submitted product(s). They need less briefing from supporting staff and could demand more documents and difficult to be deceived. This supports H2 of the study. Table 4: Regression analysis (panel fixed effects), dependent variable ROA Variable Overall sample Advisory board Supervisory board Shari ah board size (SSB_S) ** (0.0002) ** (0.0004) (0.0002) Education of Shari ah board (SSB_ACF) *** (0.0018) * (0.0024) (0.0009) Board size (BS) (0.0033) Board independence (B_Ind.) (0.0017) Meeting year (B_Mts.) (0.0001) NLTA (0.0022) Z score *** (0.0002) EQTA *** (0.0059) Constant (0.0039) (0.0040) (0.0026) (0.0002) (0.0029) *** (0.0003) *** (0.0075) (0.0049) (0.0021) (0.0007) (0.0009) (0.0012) *** (0.0002) *** (0.0032) (0.0026) R-sq F-stat (Prob.) 26.01( ) Wald chi2 (Prob.) 90.33( ) 23.54( ) 55.24( ) 9.43(0.0000) 25.38(0.0000) N Note: ***significant at 1%, **significant at 5% and *significant at 10% levels respectively and standard errors are placed in the parenthesis. 300

301 While, all the variables related to board structure were found statistically insignificant, which could indicate that in case of Islamic banks performance Shari ah supervision related corporate governance factors are significant determinants. Firm specific variables, Z score and EQTA do have a positive and significant effect on firm performance, while NLTA found insignificant. The sample of the study is bifurcated into two parts to examine the Shari ah board s supervisory/ advisory effects on bank performance. The advisory role regression results are almost similar to the results of overall sample. Since, there is a trade-off between Shari ah strict compliance and higher profitability as Shari ah compliance restrict banks to do socially responsible investments and to avoid excessive risk taking. The results of Shari ah board supervisory role worsen the overall results. 5. Conclusion and recommendations The purpose of the study was to examine the effects of ICG on bank performance of 17 Islamic banks, 5 from Pakistan and 12 from Malaysia for the period of The effect of ICG was examined by applying descriptive statistics and regression analysis. In addition, country specific descriptive statistics were also discussed to show comparative strength of ICGs of the two countries. The results of the study show that Shari ah supervisory board size (SSB_S) exerts significant and negative effect on value of firm. The negative effect of (SSB_S) on performance could indicate the small sized Shari ah boards are more efficient in developing consensus and have good control over Shari ah related matters oversight and making decision. University education of Shari ah board (SSB_ACF) found positive and significant. This reflects that Shari ah board members having knowledge of finance increase the profitability of Islamic banks. Possession over relevant knowledge and expertise enable the boards members to understand the nature, structure and implications of submitted product(s) for fatawa. Variables related to board structure were found statistically insignificant, which could indicate that in case of Islamic banks performance Shari ah supervision related corporate governance factors are the significant determinants. Shari ah board s supervisory/ advisory effects were also investigated on bank performance. The advisory role regression results are almost similar to the results of overall sample. Since, there is a trade-off between Shari ah strict compliance and higher profitability as Shari ah compliance restrict banks to do socially responsible investments and to avoid excessive risk taking. The results of Shari ah board supervisory role worsen the overall results. Few important policy implications have been derived from the results; (i) (ii) (iii) Smaller sized SSB having knowledge of finance and accounting increase the value of firm Strict supervisory role of SSBs reduce the performance of Islamic banking since there is a trade-off between profit and ethical compliance. The regulators of both the countries need to enforce regular publications of comprehensive annual/quarterly reports on standardized format to support accountability and transparency. 301

302 References Abdel-Baki, M., & Leone Sciabolazza, V. (2014).A consensus-based corporate governance paradigm for Islamic banks. Qualitative Research in Financial Markets, 6(1), Andres, P., & Vallelado, E. (2008). Corporate governance in banking: The role of the board of directors. Journal of banking & finance, 32(12), Archer, S., & Karim, R. A. A. (2012).The structure, regulation and supervision of Islamic banks. Journal of Banking Regulation, 13(3), Bhatti, M., & Bhatti, M. I. (2010). Toward understanding Islamic corporate governance issues in Islamic finance. Asian Politics & Policy, 2(1), Chapra, M. and Ahmed, H. (2002), Corporate governance in Islamic financial institutions, Islamic Development Bank, Jeddah. Choudhary, M.A and Hoque, M. Z. (2006). Corporate governance in Islamic perspective. Corporate Governance: The international journal of business in society,6(2), Ginena, K. (2014). Sharī ah risk and corporate governance of Islamic banks. Corporate Governance, 14(1), Grassa, R., & Matoussi, H. (2014). Corporate governance of Islamic banks: A comparative study between GCC and Southeast Asia countries. International Journal of Islamic and Middle Eastern Finance and Management, 7(3), Grassa, R., Matoussi, H., & Trabelsi, S. (2010). The impact of Shariah supervisory board characteristic s on Islamic bank performance. In Corporate Governance & the Global Financial Crisis Conference. Green, S. (2010). Global perspective on Islamic finance. LSE-Harvard Public Lecture on Islamic Finance (February 24). Hasan, Z. (2009). Corporate governance: Western and Islamic perspectives. International Review of Business Research Papers, 5(1), Hussain, M., Shahmoradi, A., & Turk, A. (2015). IMF working paper: An overview of Islamic finance. Washington, DC. Ibrahim, A.A. (2007), Convergence of corporate governance and Islamic financial services industry: toward Islamic financial services securities market, Working paper, No. 3, Harvard University, Cambridge, MA. Islamic Financial Services Board. (2015). Islamic financial services industry: Stability report Kuala Lampur, Malaysia. Lewis, M. K. (2005). Islamic corporate governance. Review of Islamic Economics, 9(1), 5. Mollah, S., & Zaman, M. (2015). Shari ah supervision, corporate governance and performance: Conventional vs. Islamic banks. Journal of Banking & Finance, 58, Quttainah, M. A., Song, L., & Wu, Q. (2013). Do Islamic banks employ less earnings management?. Journal of International Financial Management & Accounting, 24(3), Shahzad Bukhari, K., Awan, H. M., & Ahmed, F. (2013). An evaluation of corporate governance practices of Islamic banks versus Islamic bank windows of conventional banks: A case of Pakistan. Management Research Review, 36(4), Shari ah Governance Framework (2016) Vafeas, N. (1999). Board meeting frequency and firm performance. Journal of financialeconomics, 53(1), Yeates, C. (2008). Islamic finance rides the storm. The Sydney morning herald,

303 Who Dominates Asia? Islamic Stock Index versus Conventional Stock Index Usama Qadri MS Scholar, Management Sciences Department, CIIT Wah Campus Dr. Khurram Shafi Assistant Professor, Management Sciences Department, CIIT Wah Campus Farah Riaz (Corresponding Author) Lecturer, Management Sciences Department, CIIT Wah Campus Abstract Islamic Finance industry has shown enormous growth with an increasing growth rate during the last decade. There are several reasons for this growth like transparency, profit and loss sharing principle or the religious factor but with the industry ever increasing trend made it one of the hot research topic for researchers. The objective of this study is to analyze the performance of Islamic stock indexes in Asia by comparing them with their conventional peers. As the previous studies said that in special circumstances Islamic Indexes outperform their conventional Indexes so this study will focus on 3 panels of crisis, noncrisis and overall period to reexamine the results of literature. Several previous researches compared the conventional mode of investment with the Islamic investment but mostly with the limitations of parametric approach. This study focuses on non-parametric approach i.e. Stochastic Dominance (SD) Approach. The variables used in the study in the study will be Risk-Free Rate of Return, Return of the Index and the Global Index Return. CAPM statistics and SD approach will be used to analyze who dominates Asia? Islamic Stock Indexes or Conventional Stock Indexes. 26 Asian stock Indexes will be used in the study out of which 13 are Islamic and 13 are relative Conventional Indexes over the period of 2004 to The entire period will be divided into panels of which includes crisis period, which is post crisis or non-crisis period and which is the overall period. The study will help the individual investors for further enhancement of their portfolio; academia can also take help study as it uses the robust SD approach which is better option than traditional parametric approach of Mean-Variance mostly used in the stock analysis by the researchers. The policy makers can also use this study for the further improvement of their indexes. Keywords: Stochastic Dominance (SD) Approach, Islamic Stock Indexes, Conventional Stock Indexes, Risk-Free Rate of Return, Global Index Return, Mean-Variance (MV) Approach. 1. Introduction The Islamic finance industry has shown incredible increase and revolution during the last 5 to 10 years with the estimated growth rate of 3.7% in 2014 and expected 5% growth rate in 2015 and forward (IMF forecast). This industry is evaluated at almost $1.66 trillion in terms of assets under management, including Islamic Banking ($1,214 billion), Islamic Funds ($51 billion), Sukuk ($280 billion) and Takaful ($28 billion) which were overall $700 billion in The demand of Islamic financial instruments is growing rapidly and many investors, especially from Islamic countries, seek to invest only in Sharia Compliant Stocks. Although with the high dedication of investors toward this Islamic mode of investing the empirical investments do not outperform conventional counterparts like (Bhatt & Sultan, 2012), (Ho, Abd Rahman, Yusuf, & Zamzamin, 2014), (Hayat & Kraeussl, 2011) but still there is support in Islamic investment outperformance over conventional like (Rubio, Hassan, & Merdad, 2012), (Norma et al., 2010),(Sadeghi, 2015). Some says that Islamic investments perform better in crisis time than the conventional investments but otherwise in case of non-crisis time (O. Al-Khazali, Lean, & Samet, 2014), (Ho et al., 2014), (Abdullah, Hassan, & Mohamad, 2007), (Dharani & Natarajan, 2011). 303

304 In this paper, we extend the literature by comparing the Asian Islamic Indexes with their Conventional peers by using Stochastic Dominance Approach (SD). SD is a non-parametric approach and very much robust as compared to conventional MV criterion or CAPM statistics as these conventional approaches are parametric and rely on normality but test shows that distribution from stock exchange data is not normal so this factor effects the result. So, SD is more suitable as compared to MV or CAPM (O. Al- Khazali et al., 2014). 1.1 Research Problem Area As there is huge growth in the Islamic Finance Sector during the last decade and especially in Asia where is maximum number of Islamic Jurisdictions like Malaysia, Saudi Arabia, Iran, Iraq, Kuwait, Oman, Qatar, Bahrain, UAE, Pakistan and Bangladesh. So the growth in Islamic Finance is very much centered here and as the performance of Islamic Stock Indexes further enhanced in Islamic Countries (Sadeghi, 2015) so this study will focus on the performance of Islamic Stock Indexes in Asia region as compare to their Conventional peers using Stochastic Dominance approach. This study will compare country wise and region wise Islamic Stock Indexes with their relative Conventional Stock Indexes to contribute in the literature that whether Islamic Stock Indexes outperform Conventional Stock Indexes or not using SD approach. So, the study will investigate the performance of Asian Islamic Stock Indexes as compared to the relative Asian Conventional Stock Indexes for the time span of 2004 to 2014 using Stochastic Dominance Approach to examine whether Asian Islamic Stock Indexes outperform Asian Conventional Stock Indexes 1.2 Research Objectives The Research Objectives of this study are: 1. To investigate the performance of Islamic Stock Indexes and Conventional Stock Indexes in Asia. 2. To compare the performance of Islamic Stock Index with its relative Conventional Stock Index. 3. To examine whether Islamic Stock Indexes outperform Conventional Indexes or not. 1.3 Research Questions The Research Questions for this study are: 1. Which stock index has higher return? 2. Which stock indexes perform better in overall period under CAPM Statistics? 3. Which stock indexes perform better in overall period under SD Approach? 4. Which stock indexes perform better in crisis period under SD Approach? 5. Which stock indexes perform better in non-crisis period under CAPM Statistics? 6. Which stock indexes perform better in non-crisis period under SD Approach? 7. Is the result between SD Approach and CAPM Statistics different? 1.4 Research Significance 1. The study will be significant for individual investors as they can use the study analysis for better and profitable investment as the study will provide them a path toward safe haven by comparing the conventional and Islamic stock index performance. 2. The study will help the academia as the paper provide them with the literature regarding Islamic Indexes as well as the SD approach which can be used in other stock return cases as a better substitute of conventional parametric approaches like CAPM or MV. 3. The paper will help the finance mangers to efficiently manage their investments considering the performance analysis of this study. 4. The paper will help the policy makers as they can consider the analysis of this study to make more efficient policies keeping in view the previous performance and further enhancement. 2. Literature Review 2.1 Sharia/Islamic Investments Sharia Investment or Islamic investments are those which are according to the Islamic Law i.e. Sharia. These investments are not allowed in companies whose business involves Alcohol, Gambling, Conventional Financial Services, Entertainment, Pork-related Products, Tobacco or Weapons. In addition, other company screenings are applied based on certain financial ratios. Like, companies with 304

305 unacceptable levels of debt (more than 1/3 of market capitalization) or impure interest income are excluded from the set of investable stocks. Similarly, companies with accounts receivables more than 33% of the market capitalization are also excluded. Lastly, investments in securities that promise interest payment or investments in derivative securities are not allowed under the Islamic law, such as bonds, options, and futures contracts (Naughton & Naughton, 2000). Past studies have shown substantial dissimilarities between Islamic and Conventional financial system but (Hammoudeh, Mensi, Reboredo, & Nguyen, 2014) explained that Dow Jones Global Islamic Index shows quite dependency of major conventional indexes i.e. Asia, Europe and United States as well as global factors like oil prices, stock market implied volatility, US treasury bond rate etc. that are common to world financial system. The Sharia Compliance rules are not restraining enough to cut Islamic from conventional and still can coup together to some extent. As far as performance is concerned there is a conflict about which is performing better between Islamic investments and Conventional Investments. Some said that Islamic Investment outperform Conventional Investment like (Sadeghi, 2015) examined that During the period of Islamic Shares performed better than the global share market which shows that these investments are more resistant and viable as compared to the conventional stocks and this outperformance is further enhanced in the Muslim jurisdiction. It is common believe that the Sharia screening practice decreases the performance of Islamic stocks but when FTSE Islamic Index was compared with FTSE All World Index the results shows that Islamic Index is performing as well as the counterpart in fact it outperform the conventional index in the bull market period. So, the screening does not have any opposing influence on the Islamic Index performance (Hussein, 2004) (Norma et al., 2010) analyzed the efficiency of Conventional and Islamic unit trusts during period in Malaysian economy using Data Envelopment Analysis (DAE) and the results showed that some Islamic Trusts perform better than their conventional colleagues and the technical efficiency is the main contributor to this outperformance. Similarly, (Rubio et al., 2012) analyzed Islamic and conventional mutual funds to check whether the Islamic investments lose their proficiency due to restricted asset universe using parametrical methods as well as non-parametrical methods for robustness. The results showed the strong evidence about the outperformance of Islamic funds over the counterparts. (Dharani & Natarajan, 2011) compared returns of Nifty Sharia index and Nifty Index using t test on mean returns for the period of and showed that the return of both indexes are very much same as well as the performance. A special trend was noticed during the fall period as Muslim investors were more inclined toward the sale of shares but otherwise in spring period so there is seasonal disparity in the market regarding the investments. But there is evidence in the literature which says that during crisis or special events Islamic Investment performs better and for the remaining period conventional excel like in case of (Abdullah et al., 2007), who compared Islamic and Conventional Mutual funds performance in Malaysia, the results showed that Bearish trend Islamic are performance was better than conventional counterparts but otherwise in case of Bullish trend. But still the conventional funds provide better diversification level than Islamic. (O. Al-Khazali et al., 2014) explained that The European, U.S. and Global Islamic Indexes outperform Conventional Indexes during the period of which includes the Global Financial Crisis which means Islamic stocks perform better in the time of crisis but otherwise in non-crisis period so they can be our safe haven against crisis in the future. Similarly, (Ho et al., 2014) compared the Islamic and Conventional indexes by using CAPM statistics and examined that Islamic Indexes outperformed conventional counterparts in crisis period but otherwise in case of non-crisis period which might be because of conformist nature of Islamic investments providing investors superior investment substitutes during crisis. (Boujelbène Abbes, 2012) studied the risk adjusted performance of Islamic and Conventional stock indexes using Sharpe Ratio and found no difference in performance between these counterparts in risk adjusted return basis. (Hayat & Kraeussl, 2011) examined 145 Islamic Equity Funds (IEFs) during and the results showed that they are not performing well according to conventional as well as Islamic equity 305

306 benchmarks and this deficit further increased during the Global Financial Crisis. One of the deficiencies of the earlier studies that compare Islamic investments to their conventional peers is that they mainly bank on the MV approach, which rest on the stock return normality and quadratic utility functions assumptions. Empirically, financial returns are shown not to be normally distributed (O. Al-Khazali et al., 2014) and therefore relying on the MV approach can be ambiguous. In our paper, we present the CAPM statistics of Islamic and conventional Asian Stock Indexes for different countries and regions over a time period of To compare their performance, we go beyond that and we use the robust SD approach. Certainly, the SD approach does not assume any specific distribution for the stock returns and it includes the information on the entire distribution of stock returns and not only the two first moments (i.e., the mean and variance) as it is in the MV (H. Lean, Phoon, & Wong, 2013). 2.2 Stochastic Dominance Approach For the performance evaluation of portfolio there are two approaches. The first one is the customary Mean-Variance Approach that hinge on the stock return normality and quadratic utility functions hypotheses (Markowitz, 1952). But this method is not suitable if the distribution of returns is not normal or if the investors' utility functions are not quadratic (H. H. Lean, Lien, & Wong, 2010). To deal with this (Hadar & Russell, 1969) and (Whitmore, 1970) provides us SD approach which requires less assumptions. The SD approach includes the data of the entire distribution of stock returns and not only on the two first moments (i.e., the mean and variance) as it is in the Mean-Variance Approach (H. Lean et al., 2013). The level of SD being tested conditions the SD requirements on investors' utility functions. Indeed, there are three arrangements of SD. First, utility functions must exhibit non satiation, where more is preferred to less under the first-order SD (FSD). Non-satiation and risk aversion are required under the secondorder SD (SSD). Finally, under the third-order SD (TSD), non-satiation, risk aversion, and decreasing absolute risk aversion (DARA) are required. The SD is more striking than the MV because it is nonparametric where no obvious conditions of the agent's utility function or limitations on the functional form of the probability distribution are compulsory (O. Al-Khazali et al., 2014). SD Approach is used in literature to compare efficient frontiers created under MV models and SD models. (Porter, 1973) compares the MV frontier with the frontier created by SD procedures. He reports that the two efficient frontiers are very much alike and that very slight differences exist. Moreover, (O. M. Al-Khazali, 2001) by using SD Approach shows that January effect in high yield bond markets is strong and earlier results are not an artifact springing from defilements of distributional assumptions. (O. M. Al-Khazali, Koumanakos, & Pyun, 2008) finds that during 1985 and 2004 there was time-based predictability of returns in the Athens Stock Exchange like strong day effect and comparative weak week and January effect. Similarly, (H. H. Lean, Smyth, & Wong, 2007) examined the seasonal effect in Asian market and found the presence of weekday and monthly seasonality effects in some Asian markets, but proposes that first-order SD for the January effect has almost vanished. In order to conduct Empirical testing in this study DD statistics will be used as proposed by (Davidson & Duclos, 2000), (O. Al-Khazali et al., 2014), (Linton, Post, & Whang, 2014), (H. H. Lean et al., 2007), (H.-H. Lean, Wong, & Zhang, 2008) and (H. Lean et al., 2013) to be one of the most powerful but yet less conservative in size. 3. Research Design 3.1 Theoretical Model The variables used in the study will be: 1. Risk Free Rate of Return (R risk-free ) 2. Return of Index (R index ) 3. Asian Index Return (R market ) Now CAPM model will be used to analyze the performance of both the indexes using four performance measures (Ho et al., 2014) i.e. 1. Index Beta Coefficient as per CAPM model which is calculated as: 306

307 2 2. Sharpe Ratio (SR) indicates whether an investment's high return is an outcome of extra risk. It measures the performance of an index by dividing the amount of excess return to total risk, measured by standard deviation and calculated as: 3. Treynor Index (TI) measures the index performance for its given level of market risk (CAPM) and is associated with the general market fluctuations and calculated as: 4. Jensen s Alpha (JI) which represents the average return of an index over and above that predicted by the CAPM given the portfolio's beta and the average market return and calculated as: To give robustness to the analysis DD test proposed by (Davidson & Duclos, 2000) will be used which is described as: 0 1 Where; h = f, g is the probability density function for Indexes Y and Z respectively H= F, G is cumulative distribution function for Indexes Y and Z respectively and j = 1, 2 and 3 are the level of SD The dominance decision can be made as follows: Y dominates Z at first-order SD (FSD) if and only if 1 1 ; Y dominates Z at second-order SD (SSD) if and only if 2 2 ; Y dominates Z at third-order SD (TSD) if and only if 3 3 for all x, and the strict inequality holds for at least one value of x. Now, the following hypotheses are tested: 0, for all ;, for all ; 1, for all, for some ; 1, for all, for some ; 3.2 Study Sample and Data In this study Asian Islamic Stock Indexes are used along with their Conventional counterparts and the list is as: Table 3.1: Islamic and Conventional Stock Indexes Table 3.1 shows an overview of Islamic and Conventional Stock Indexes. Now each Index s return will be calculated on daily basis over the period of 2004 to Now data will be divided into 3 panels. 1 st is 2004 to 2009 which includes Global Financial Crisis, 2 nd is 2010 to 2014 which is non crisis period and 3 rd is 2004 to 2014 which is the overall period. The data will be collected from the stock exchange websites and index websites. 4. Conclusion With the recent development in the Islamic finance sector the researchers had targeted this area. But the problem was the use of parametric approach in the literature, mostly. So in this study non parametric SD approach will be used which is not dependent on the assumption of normality distribution. We will analyze the 13 Asian Islamic Stock Indexes with their conventional peers to examine the performance of these indexes and their comparison to analyze which of them is performing better. The data will be divided in panels of crisis period and non-crisis period to examine performance in these panels as the literature supports that Islamic perform better in crisis and otherwise in non-crisis. 307

308 The study will help the individual investors who can use the result of this investment for the further enhancement of their portfolio; academia can also use this study as it uses the robust SD approach which is better option than traditional parametric approach of Mean-Variance (MV) which is mostly used in the stock analysis by the researchers. The policy makers can also use this study for the further improvement of the indexes. This paper will be a good addition to the existing body of literature as few studies have been conducted on Islamic vs. Conventional Stock Indexes in context of 26 Asian stock indexes. It would be helpful for the individual investors and policy makers to use this study for the further enhancement of their stock indexes. 308

309 References Abdullah, F., Hassan, T., & Mohamad, S. (2007). Investigation of performance of Malaysian Islamic unit trust funds: Comparison with conventional unit trust funds. Managerial Finance, 33(2), doi:doi: / Al-Khazali, O., Lean, H. H., & Samet, A. (2014). Do Islamic stock indexes outperform conventional stock indexes? A stochastic dominance approach. Pacific-Basin Finance Journal, 28, doi: Al-Khazali, O. M. (2001). Does the January effect exist in high-yield bond market? Review of Financial Economics, 10(1), doi: Al-Khazali, O. M., Koumanakos, E. P., & Pyun, C. S. (2008). Calendar anomaly in the Greek stock market: Stochastic dominance analysis. International Review of Financial Analysis, 17(3), doi: Bhatt, V., & Sultan, J. (2012). Leverage Risk, Financial Crisis, and Stock Returns: A Comparison among Islamic, Conventional, and Socially Responsible Stocks. Islamic Research & Training Institute (IRTI), 20(1), 87. Boujelbène Abbes, M. (2012). Risk and Return of Islamic and Conventional Indices. International Journal of Euro-Mediterranean Studies, 5(1), doi: /s Davidson, R., & Duclos, J.-Y. (2000). Statistical Inference for Stochastic Dominance and for the Measurement of Poverty and Inequality. Econometrica, 68(6), doi: / Dharani, M., & Natarajan, P. (2011). Seasonal anomalies between S&P CNX Nifty Shariah index and S&P CNX nifty index in India. Journal of Social and Development Sciences (JSDS), 1(3), Hadar, J., & Russell, W. R. (1969). Rules for Ordering Uncertain Prospects. The American Economic Review, 59(1), doi: / Hammoudeh, S., Mensi, W., Reboredo, J. C., & Nguyen, D. K. (2014). Dynamic dependence of the global Islamic equity index with global conventional equity market indices and risk factors. Pacific-Basin Finance Journal, 30, doi: Hayat, R., & Kraeussl, R. (2011). Risk and return characteristics of Islamic equity funds. Emerging Markets Review, 12(2), doi: Ho, C. S. F., Abd Rahman, N. A., Yusuf, N. H. M., & Zamzamin, Z. (2014). Performance of global Islamic versus conventional share indices: International evidence. Pacific-Basin Finance Journal, 28, doi: Hussein, K. (2004). Ethical investment: empirical evidence from FTSE Islamic index. Islamic Economic Studies, 12(1), Lean, H.-H., Wong, W.-K., & Zhang, X. (2008). The sizes and powers of some stochastic dominance tests: A Monte Carlo study for correlated and heteroskedastic distributions. Mathematics and Computers in Simulation, 79(1), doi: Lean, H., Phoon, K., & Wong, W.-K. (2013). Stochastic dominance analysis of CTA funds. Review of Quantitative Finance and Accounting, 40(1), doi: /s Lean, H. H., Lien, D.-H. D., & Wong, W.-K. (2010). Futures Versus Stocks: A Stochastic Dominance Study in Malaysian Markets. Advances in Investment Analysis and Portfolio Management(4), Lean, H. H., Smyth, R., & Wong, W.-K. (2007). Revisiting calendar anomalies in Asian stock markets using a stochastic dominance approach. Journal of Multinational Financial Management, 17(2), doi: Linton, O., Post, T., & Whang, Y.-J. (2014). Testing for the stochastic dominance efficiency of a given portfolio. The Econometrics Journal, 17(2), S59-S74. doi: /ectj Markowitz, H. (1952). PORTFOLIO SELECTION*. The Journal of Finance, 7(1), doi: /j tb01525.x Naughton, S., & Naughton, T. (2000). Religion, Ethics and Stock Trading: The Case of an Islamic Equities Market. Journal of Business Ethics, 23(2), doi: /a: Norma, Saad, M., Majid, M. S. A., Kassim, S., Hamid, Z., & Yusof, R. M. (2010). A comparative analysis of the performance of conventional and Islamic unit trust companies in Malaysia. International Journal of Managerial Finance, 6(1), doi:doi: / Porter, R. B. (1973). An Empirical Comparison of Stochastic Dominance and Mean-Variance Portfolio Choice Criteria. Journal of Financial and Quantitative Analysis, 8(04), doi:doi: / Rubio, J. F., Hassan, M. K., & Merdad, H. J. (2012). Non parametric performance measurement of international and Islamic mutual funds. Accounting Research Journal, 25(3), doi:doi: /

310 Sadeghi, M. (2015). Is Shariah-Compliant Investment Universally Sustainable? A Comparative Study. Islamic banking and finance Essays on corporate finance, efficiency and product development, 81. Whitmore, G. A. (1970). Third-Degree Stochastic Dominance. The American Economic Review, 60(3), doi: / Annexure Table 3.1: Islamic and Conventional Stock Indexes COUNTRY/REGION ISLMAIC/SHARIA STOCK INDEX CONVENTIONAL STOCK INDEX Hong Kong HK Islamic Index Hang Seng Index Japan FTSE Sharia Japan 100 FTSE Japan China MSCI Islamic China Index SSE Composite Bangladesh DSE S Index DSE X Index Pakistan KMI 30 Index KSE 100 Index India BSE Sharia 50 Index BSE SENSEX Malaysia Kuala Lumpur Syariah Index Kuala Lumpur Composite Index Thailand MSCI Islamic Thailand Index Bangkok SET Index Indonesia JSE Islamic Index Jakarta Composite Index Bahrain Bahrain Islamic Index Bahrain All Share Index Sri Lanka GCC Dow Jones Islamic Market Sri Lanka Index MSCI GCC Countries Islamic Index CSE All Share Price Index MSCI GCC Countries Index FTSE Asia FTSE SGX Asia Sharia 100 Index FTSE CNBC Asia 100 Index 310

311 Evaluation of Factors Contributing towards the Adoption of Islamic Banking: Evidence from Lahore, Punjab, Pakistan Hamayun Afzal MS Scholar, Bahauddin Zakariya University, Multan Muhammad Ali Jibran Qamar COMSATS Institute of Information Technology, Lahore Adeel Ahmad MS Scholar, National University of Sciences & Technology, Islamabad Abstract Since the introduction of Islamic Banking in the international financial paradigm extensive research has been under attention with the purpose of scrutinizing the issues relevant to Islamic banking. With the objective of identifying the factors that influence the selection of Islamic Banking in Pakistan, this study investigates the impact that factors like attitude, social and religious influence, governmental support and pricing have in deciding whether to go for conventional banking or Islamic banking. The sample comprised of 250 respondents and data was collected from customers of Islamic banks by using a structured questionnaire. The questionnaires were distributed to the professionals at their offices who had accounts at Islamic banks like faculty members of the university, organizational employees and banks staff. The study used SPSS to analyze the data using reliability analysis, factor analysis, descriptive analysis, and correlation and regression analysis. The results suggest that attitude, social influence, religious influence and government support were found to be significant factors in inclining a customer towards Islamic banking. The results show that the significant value of attitude.000, social influence.015, religious influence.011 and government support.042 is less than 0.05 which shows that these variables are significant. Correlation between intention to use and attitude 0.788, social influence 0.676, and religious influence was found to be greater than 0.5 which shows that there is a strong correlation among these variables whereas governments support is which is less than 0.5 and shows a weak correlation. The study concludes the need of focusing on governing and utilizing factors like attitude, social influence, religious influence, government support and pricing for ensuring maximum coverage of Islamic Banking. Focus on these factors has the potential of ensuring greater financial inclusion by attracting even those who have reservations on the conventional banking system. Introduction Banking activities are important for the economic stability and growth of any country. Banking gained prominence soon after the Industrial Revolution during the 18 th century. The global marketplace demands greater efforts and efficiencies in today s world. This can be achieved by an effective and efficient product and service quality and greater customer contentment that can ultimately increase the performance of the bank. The banks are the institutes which accept deposits from the people who have a surplus and then use these deposits to provide funds to the businesses and entrepreneurs who desire funds for growing their businesses or to meet their financial requirements. These banks perform the role of intermediary between those who have excess of funds and the ones who have a shortage of funds. This results in greater usage of funds and thus leads towards greater and prosperous economies. 311

312 The push towards a banking system founded on the Islamic principles was stimulated by failures of the conventional financial system (Chapra, 2008). It was due to this failure of the conventional financial system that the economies all over have faced over 100 crises in the recent few decades (Stiglitz, 2003). Thus, the need arose for an adoption of a new architecture that could actually help in preventing the occurrence of crises or could at minimum control the frequency and weightiness of these crises. Chapra (2008) suggests that one of the most vital causes behind these crises was the excessive and imprudent lending by banks to earn higher profits as an interest in lieu of these lending activities. This meant that unless an interest free system was introduced the economies would have continued to experience recurring crises. Islamic banking finds its roots in Shariah Law, which prohibits interest in all forms as it is of the view that interest leads towards undue exploitation of those in need and ultimately results in unequal wealth distribution (Khan & Asghar, 2012). Islamic banks are working with the sole objective of offering riba free alternatives of the conventional banking offerings. The whole concept of Islamic banking is based on offering products and services that are deemed permissible in light Shariah rulings (Jamshidi and Hussin, 2012). The Islamic banking system is based on the guidelines and principles of Shariah while on the other hand the conventional banking system is based on the man-made principles of interest. Islamic banks work on the tune of profit and loss sharing while the conventional banks are only interested in earning profits while imposing all possibilities of risk to the borrower. "Islamic Banking" can be defined as the system in which banking operations and banking services are carried out within the limitations defined in Islam (Mirakhor, 2000). In the course of recent decades, Islamic banking has proven to be the speediest rising industries, at an expected development rate of % for every year. It has been adopted by different economies all over the world, thus receiving acknowledgement from Muslims and non-muslims equally (Aziz, 2006). Problem Statement Today s economic setups are focusing more on the introduction and adoption of Islamic banking. This has happened mainly because of the failures of the conventional banking which led towards financial crisis on the global scale. Following this trend in many Islamic countries, including Pakistan is focusing on not only adopting Islamic banking system, but rather on revamping the whole system as per the guidelines provided by Islam. However, despite all this, Islamic banking still faces certain doubts and it has not been fully accepted and recognized by the customers. This study examines how attitude, social effect, religious impact and government bolster influence on the desire to use Islamic banking. Research gap Banking industry experienced phenomenal growth during 21 st century, this came with the amalgamation of threats and opportunities as new horizons like Islamic Banking emerged during this time. This emergence of Islamic banking created competition in the conventional banking. This study was undertaken with the realization that with the emergence of Islamic banking as an alternative to the global western financial and banking system there is a need to assess the benefits of the Islamic banking with special concentration on the Pakistani banking industry. This study attempts to identify the factors that dictate the intention to use Islamic banking and thus tries to identify the ways through which greater financial inclusion can be achieved through the utilization of Islamic banking medium. Research Hypothesis Hypothesis 1: Attitude affects the intention to use Islamic Banking. Hypothesis 2: Social influence affects the intention to use Islamic Banking. Hypothesis 3: Religious influence affects the intention to use Islamic Banking. Hypothesis 4: Government support affects the intention to use Islamic Banking. Hypothesis 5: Price plays a moderating role between attitude and intention to use Islamic banking. Hypothesis 6: Price plays a moderating role between social influence and the intention to use Islamic Banking. Hypothesis 7: Price plays a moderating role between religious influence and the intention to use Islamic Banking. Hypothesis 8: Price plays a moderating role between government support and the intention to use Islamic Banking. 312

313 Research Questions 1. Is there any relationship between an individual s attitude and his decision to opt for Islamic Banking? If yes than of what kind? 2. Is there any relationship between social influence and decision to opt Islamic Banking? If yes than of what kind? 3. Is there any relationship between religious influence and decision to opt Islamic Banking? If yes than of what kind? 4. Is there any relationship between the government support and the decision to opt Islamic Banking? If yes than of what kind? Significance of the study Though relatively new segment, Islamic banking went under swift development during the past three decades. Islamic banking is essentially important to identify factors that influence the acceptance of Islamic banking. One need to enter a value for the most realistic works of literature in Islamic banking functions. This will allow the governments to ensure greater financial inclusion thus not only supporting the poverty alleviation but also helping with greater mobility in terms of currency management. This research can help policy makers to explore the attitude, social impact and religious influence on the intention of people to use Islamic banking in Pakistan and will identify the areas that need attention to bring the masses under the structured financial system of the country. LITERATURE REVIEW Pakistan was founded in the name of Islam is therefore expected to follow the orders of Quran and Sunnah. Islam is the state religion of Pakistan and therefore all rules, regulations and laws must be in accordance with the instructions and guidelines provided by the Quran and Sunnah. This principle led to the establishment of the Council of Islamic Ideology (CII). In addition, Pakistan's famous 1973 Constitution makes it obligatory Pakistan's economic system to work wholeheartedly for the elimination of interest. The banking industry in Pakistan after independence has seen humungous changes over a period of 69 years. Initially, these resources and the uncertainty faced serious politician and revealing the lack of socioeconomic conditions. Resulting in poor quality of human resources and trained professionals loss products and services. In the 21st century of service quality to satisfy customer needs for improved profitability intensified competition among banks. State Bank has worked effectively to make better engineered and profitability in the banking sector of Pakistan. During the year, bank stability, flexible legislation and transparency make sure you take multiple steps and measures. Unlike conventional banking, Islamic banking business and work within the limits set by Allah through the Shariah to stimulate commercial activities. Galbraith (1975) reported "One of the best is the provision of a financial system that most people want." This means that the ideal economic system in a transparent manner to meet the expectations that people have the ability to "want". Because it is based on sufficient economic growth to ensure that the principles of justice, transparency and accountability is the economic system. Islamic banking success forced many banks to offer Islamic banking products to their clients. Profit and loss sharing system is that it creates more profit. On the other hand, focus on the credit worthiness of the interest based system. Profits funds are the most efficient way to allocate credit worthiness (Iqbal al, 1998). Two rivers, the Islamic banks and conventional banks, Islamic banks exist some questions and poses major challenges in service quality and consumer satisfaction in Pakistan. Islamic Banking Products and the financing pattern Islamic bank offers different kinds of financing services in Pakistan to cater the needs of customers, such facilities includes. 313

314 1. Mudarabah A contract made between an investor (Customer-Rabbul Maal) and an entrepreneur (Bank-Mudaarib) to venture into a business seeking profits in harmony with the Shariah. Both parties agreed to share profits and loss from investment according to a mutually agreed ratio. 2. Diminishing Mushakara This is actually a type of partnership where one of the partners consents to gradually purchase the equity share of the other partner. Islamic banks get involved in Diminishing Musharaka by offering joint ownership with the interested customer. 3. Murabaha Under this type of agreement the bank buys an asset on the request of the customer and then transfers its ownership to the customer upon agreed upon payment of the amount. 4. Ijara Under this agreement one party hires a commodity/asset/labor from the other for specific time period and pays a rent for benefiting usage. Here, lessor / mu jir purchase an asset on behalf of the customer (lessee/musta jir) and leases back the usufruct (right to benefit from the usage) to the customer for an agreed rent and terms and conditions. 5. Qard Under this principle, the bank opens a current account for its customers on the shariah principle of qard. The bank will treat the customer s deposit as a loan from the customer and the bank will guarantee to return on demand without increase or decrease. Theory of Reasoned Action This theory was presented by Fishbein and Ajzen in 1975 with the objective of achieving the end goal of building up connections between convictions, mentalities, aims and practices (Taib et al., 2008). The present study extends the hypothesis to an Islamic individual financing setting. Two special determinants of TRA, in particular, state of mind and subjective standard are connected in the present study subsequent to past studies showed that acknowledgment of Islamic financing could be clarified by the determinants of TRA (Amin et al., 2011; Taib et al., 2008). Attitude Jamshidi and Hussin (2012) referred to Fishben and Ajzen who consider state of mind as an evaluative impact which is a result of an individual's hopeful and negative sentiments following in a specific conduct. Attitude when defined in the context of consumer behavior is the tendency to behave in a definite manner when confronted with the same scenario (Schiff man and Kanuk, 2004). There are various studies relating attitude to conduct. Utilizing the study strategy, Gopi and Ramayah (2007) analyzed Master of Business Administration's understudies' goal to utilize versatile PCs and observed it to be essentially identified by state of mind. Relative advantage The relative favorable position is characterized as the extent to which a development is seen as being superior to the "thought" it supersedes. Rogers (2003) found that adopters constantly saw the relative favorable position regarding the financial advantages, monetary advantages and the expenses coming about because of the selection of advancement and upgrades that are standing to their economic wellbeing. The positive impact of relative point of preference on people's goal to embrace Internet keeping money has been found in a few past studies (Ajam, and Nor, 2013). Ease of Use Many quality researchers speak to the extent to which Islamic keeping money is seen to be hard to comprehend, learn or work. It is undifferentiated from the "ease of use" developments in non-islamic keeping money. In this exploration, the expression "usability" is utilized rather than "multifaceted nature". Demeanors are likewise influenced by seeing convenience. Seen usability identifies with the extent to which people trust that utilizing a specific framework would require no exertion (Nasri, 2011). Seen usability was found to impact the reception of Internet keeping money administration. When a framework is observed and seen as simple or easy clients will have the expectation to utilize the framework (Ajam and Nor, 2013). Compatibility 314

315 Rogers (2003) defines compatibility of any new concept, invention or innovation in perspective of measuring it with the perspective of its consistency or alignment with the past experiences, current values and the needs of potential adopters. Therefore it is actually the alignment of an individual s values and beliefs with the product on offer (Gerard, 2003). In a study led by Tan and Teo (2000), the apparent similarity of a development was found to impact the reception of the said advancement. At the end of the day, clients will just embrace e-managing an account developments that in their perspective are good with their qualities about living and working. Echchabi and Aziz (2012) concentrated on Moroccans clients in connection to the appropriation of Islamic keeping money benefits; the outcome uncovers similarity, significantly affecting the state of mind towards Islamic managing account administrations in Morocco. Social Influence Social influence alludes to subjective standard or standardizing weight. Taib et al. (2008) observed subjective standard to be connected with the level of acknowledgment of lessening association and truth be told, the subjective standard was observed to be a more persuasive indicator of expectation to utilize Islamic financing than a state of mind. Notwithstanding, the consequences of past studies have been blended. Xihao and Yang (2004) state that influence of friends, associates and family play a significant role in shaping the decision of a consumer regarding whether to buy a certain product or not. For instance, in the context of food purchasing behavior, Bonne et al., (2007) conducted an empirical study in France to determine the factors influencing Halal meat consumption within 576 Muslim migrants. Social influence was examined in relation to Muslim self-identity and acculturation as a moderating variable between attitude, subjective norm and intention. Findings from the independent t-tests, correlation and multiple regression analysis indicated that customer claims to be influenced by family, friends and religious institutions and that subjective norm positively predicted Muslim purchase intention of Halal meat. Religious Influence Religion is defined as a system of beliefs and practices through which a group of people interpret and react, compared to what they regard it as mystical and spiritual. Furthermore, religion is a social institution that shapes and controls the beliefs and behaviors of people (Johnston, 1975). Religion influences individual behavior, taking into account two aspects: the first is the principles, rules and obligations that organize individual behavior, and sanctions that control. The second aspect deals with religion as a powerful social institution with a remarkable role in culture and social values development (Ouafy, & Chakir, 2015). According to Metawa & Almossawi (1998) found religion to be the most significant element in influencing Muslim customer s decisions to adopt Islamic Banking. Tara et al., (2014) presented religion as a psychological connection and a prominent emotional relationship to things. Government Support It refers to decisions that affect the citizens in making them to adopt the introduced system. The government actions and objectives that influence an individual s behavior is referred to as government support. Amin et al., (2011) findings suggest that Islamic banking products and government support are positive and significantly associated with each other. For example, before 1993, a pioneer in the Malaysian government, safe before allowing Islamic banking industry to establish an Islamic bank for ten years. Government support plays a vital role for Islamic banks to emerge with the new concept of banking due to high market competition (Hanudin et al., 2011). Pricing Pricing plays an important part in building consumers perception further this perception leads towards a decision whether to buy a product on offer or not at the given price. In case of Islamic banks prices of Islamic personal financing are set keeping in view the need to establish a balance between the interest of the bank and its customers. Profit and Loss sharing mechanism are adopted by Islamic banks in this regard (Olson and Zoubi, 2008). Pricing is an important variable in determining the intention of people to Islamic personal financing is seen in Malaysia (Amin and Rahim, 2009). METHODOLOGY In this research, primary data will be used to do analysis, interpret and elaborate. We were using 250 samples out of the whole population which is based on the population and sample size. The respondents 315

316 were contacted in person by going to different branches of the different banks of Lahore and by distributing questionnaires among faculty members and students of university for getting good response. The questionnaire are separated into two parts. The part 1 is asking the demographic questions about the respondents and in the part 2 questions are designed in which related to our independent variables and the dependent variable. The Likert's 5-point scale is the most suitable to estimate the range. The scale 1-5 represents strongly agree and as strongly disagree. SPSS software is used for the statistical analysis of the data and hypothesis testing. Conceptual Framework 1: Attitude H1A: Relative Advantage H1B: Ease of Use H1C: Compatibility 2: Social Influence 3: Religious Influence 4: Government Support H6: Intention to use Islamic Banking H5: Pricing Statistical Model ModZAFZMPF ModZRAFZMPF ModZEOUFZMPF ModZCFZMPF ModZSIFZMPF ModZRIFZMPF ModZGSFZMPF H6: Intention to use Islamic Banking 1: Attitude H1A: Relative Avantage H1B: Ease of Use H1C: Compatibility 2: Social Influence 3: Religious Influence 4: Government Support Statistical Analysis 316

317 Statistical analysis is performed with the help of SPSS Software which is designed for this purpose. Table 1 - Reliability Analysis Item Cronbach s Alpha Total Items 1 Measuring Price Intention to Use IB Relative Advantage Ease of Use Compatibility Attitude Social Influence Religious Influence Government Support Total Table 1 shows the reliability of the test. As our results are higher than the required level of 0.7 therefore this suggests that the adopted scale is reliable and consistent. Descriptive Analysis: Table 2 - Gender of the Respondents Frequency Percent Valid Percent Cumulative Percent Male Valid Female Total Table 2 shows the descriptive statistics of control variable gender which shows that the male participated in the survey were 179 of the total sample size which is 250. Similarly the female participated in the survey were 71 of the total sample. It means that the majority of the respondents participated in the study were males. Table 3 - Marital Status of the Respondents Frequency Percent Valid Percent Cumulative Percent Married Valid Unmarried Total Table 3 shows the descriptive statistics of control variable marital status which shows that the married participated in the survey were 81 of the total sample size 250. Similarly the unmarried participated in the survey were 169 of the total sample. It means that the majority of the respondents participated in the study were unmarried. Valid Table 4 - Age of the Respondents Frequency Percent Valid Percent Cumulative Percent and Above Total Table 4 shows the descriptive statistics of control variable age which shows that the 178 respondents were age group range 20-29, 52 respondents were age group range 30-39, 14 respondents were age group range 40-49, and 6 respondents were age group range 50 & above. These statistics shows that the majority of the respondents who participated in this study were young adults. Table 5 - Educational Level of the Respondents Frequency Percent Valid Percent Cumulative Percent Matric Valid FA Graduate

318 Master MS/M.Phil PhD Total Table 5 shows the descriptive statistics of control variable educational level which shows that the 4 respondents were matric degree holder, 20 respondents were FA degree holder, 72 respondents were graduate degree holder, 103 respondents were master degree holder, 44 respondents were MS/M.Phil degree holder, and 7 respondents were PhD degree holder. These statistics shows that the majority of the respondents who participated in this study were master degree holders. Regression Analysis Table 6 - Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson a a. Predictors: (Constant), GSF, RAF, RIF, EOUF, SIF, CF, AF b. Dependent Variable: ITUF Table 6 shows model summary in which Durbin-Watson statistic for this analysis is so it can be accepted that there is independence of errors or no auto correlation. The "R" column value of indicates a good level of prediction. The "R Square" column shows the value of that our independent variables explain 67.8% of the variability of our dependent variable. Adj. R2 is an estimate of the effect size, which at (66.8%), is indicative of a large effect size. Table 7 - ANOVA Model Sum of Squares Df Mean Square F Sig. Regression b 1 Residual Total a. Dependent Variable: ITUF b. Predictors: (Constant), GSF, RAF, RIF, EOUF, SIF, CF, AF Table 7 shows the F-ratio in the ANOVA. The table shows that the independent variables statistically significantly predict the dependent variable, F (7, 242) = and the significant value is so our model is significant and fit for data. Correlation Analysis Table 8 - Pearson Correlation ITUF RAF EOUF CF AF SIF RIF GSF ITUF RAF.512* EOUF.457*.622* CF.726*.590*.503* AF.788*.564*.452*.785* SIF.676*.545*.492*.658*.744* RIF.657*.535*.424*.713*.681*.617* GSF.311*.305*.305*.367*.431*.445*.376* Level of significant is 1% This table 8 shows the relationship between two variables. Correlation between intension to use and relative advantage is which is greater than 0.5 which shows that there is strong correlation between two variables. Correlation between intension to use and ease of use is which is less than 0.5 which shows that there is week correlation between two variables. Correlation between intension to use and compatibility is which is strong. Correlation between intension to use and attitude is which is strong. Correlation between intension to use and social influence is which is strong. Correlation between intension to use and religious influence is which is strong. Correlation between intension to use and government support is which is weak. We can see from the Correlations table that the variables are strongly related. 318

319 Table 9 - Coefficients Table Model Unstandardized Coefficients Standardized Coefficients T Sig. Collinearity Statistics B Std. Error Beta Tolerance VIF (Constant) RAF EOUF CF AF SIF RIF GSF This table 9 shows that the significant value of compatibility, attitude, social influence, religious influence and government support is less than 0.05 which shows that these variables are significant. In this data, all the Tolerance values are greater than 0.1 (the lowest is 0.278), so there is no collinearity problem in this particular data. Hypothesis 1 Attitude affects the intention to use Islamic Banking. Hypothesis 2 Social influence affects the intention to use Islamic Banking. Hypothesis 3 ious influence affects the intention use Islamic Banking. Hypothesis 4 Government support affects the intention to use Islamic Banking. Accepted Accepted Accepted Rejected Normality of the Data Figure 1 According to above histogram the standardized residuals are normally distributed. Figure 2 319

320 This figure shows that the residuals are approximately normally distributed. This figure shows the P-P Plot that although the points are not perfectly aligned along the diagonal line but they are close enough to indicate that the residuals are normally distributed so we can accept this result. Moderation A moderator variable is a third variable that affects the strength of the relationship between a dependent and independent variable. Regression Analysis Table 10 - Model Summary Model R R Adjusted R Std. Error of Change Statistics Durbin- Square Square the Estimate R Square Change F Change df1 df2 Sig. F Change Watson a b c d e f g a. Predictors: (Constant), ModZRAFZMPF, RAF b. Predictors: (Constant), ModZRAFZMPF, RAF, EOUF, ModZEOUFZMPF c. Predictors: (Constant), ModZRAFZMPF, RAF, EOUF, ModZEOUFZMPF, CF, ModZCFZMPF d. Predictors: (Constant), ModZRAFZMPF, RAF, EOUF, ModZEOUFZMPF, CF, ModZCFZMPF, AF, ModZAFZMPF e. Predictors: (Constant), ModZRAFZMPF, RAF, EOUF, ModZEOUFZMPF, CF, ModZCFZMPF, AF, ModZAFZMPF, SIF, ModZSIFZMPF f. Predictors: (Constant), ModZRAFZMPF, RAF, EOUF, ModZEOUFZMPF, CF, ModZCFZMPF, AF, ModZAFZMPF, SIF, ModZSIFZMPF, RIF, ModZRIFZMPF g. Predictors: (Constant), ModZRAFZMPF, RAF, EOUF, ModZEOUFZMPF, CF, ModZCFZMPF, AF, ModZAFZMPF, SIF, ModZSIFZMPF, RIF, ModZRIFZMPF, ModZGSFZMPF, GSF Table 10 is of Model summary in which the value of R is which shows that there is moderate linear relationship between the variables. The value of R square is which shows that 72.6% intension to use Islamic banking is explained by independent variables. As the value of of Durbin-Watson is close to 2 so there is no auto correlation. Further table of summary shows R square change because of all variables. Table 11 - ANOVA Model Sum of Squares Df Mean Square F Sig. Regression b 1 Residual Total Regression c 2 Residual Total