Islamic Banking - Another Lens to Watch Islamic Generosity and Reciprocity
Thirty years ago or more, Islamic banking was unheard of. It was considered as wishful thinking especially outside Islamic world. It was only in the early 1970s, and especially after the launch of the First International Conference on Islamic Economics organized by King Abdul Aziz University in Makkah, Saudi Arabia and the establishment of the first commercial Islamic Bank, Dubai Islamic Bank (DIB) in the United Arab Emirates followed by the establishment of the international Islamic Development Bank (IDB) in Jeddah, Saudi Arabia and the many private and semi-private commercial Islamic banks that were established after that in Egypt, Sudan, Kuwait, Bahrain, etc.
that Islamic banking established itself not only as a feasible and viable alternative of financial intermediation but also as an efficient and productive way of undertaking financial intermediation between surplus and deficit economic units. Most countries accepted it with open arms nursed it and encouraged as a viable means of modern banking system. Since then, Islamic banking has gained momentum and has been growing very fast at a double-digit average annual rate of growth.
Now more than ever before, the world have been witnessing a widespread of Islamic banks all over the five continents. Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent future growth. Islamic banks have more than 300 institutions spread over 60 countries, including the United States through companies such as the Michigan-based University Bank, as well as an additional 250 mutual funds that comply with Islamic principles. It is estimated that over US$822 billion worldwide sharia-compliant assets are managed.
This represents approximately 0.5% of total world estimated assets as of 2005. Interestingly, Islamic finance is the fastest-growing segment of the global financial system and sales of Islamic bonds may rise by
24 percent to over $27 billion in 2011. This growth in the industry is a welcome development. This article defines and traces the historical origin and development of Islamic banking from a modest beginning in the 1960s and 1970s to a level where many mega-international banks are offering Islamic banking products and services. The origin and survival underscores the fact that Islamic banking is now well established and recognized at an international level and highlights the various manifestations of Islamic banking and finance in various parts of the globe. The article savors key information about Islamic banks with hints on the positions and options it has over other banking systems with interest on conventional banking. It also analyzed the growth of key variables such as assets, deposits, investments, profits, etc and in extension details the principles, concepts, techniques and adjustments the industry has witnessed over the years. . It finishes by describing some of the benefits that are expected to be derived from the practice of Islamic banking. It concludes with the way forward for Islamic banking in our ever changing and globalize world with recommendations that should be carried out within a targeted timeframe, for an economic prosperous world.
Origin of Islamic Banking
Modern banking system was introduced into the Muslim countries at a time when they were politically and economically at a low ebb, in the late 19th century. The main banks in the home countries of the imperial powers established local branches in the capitals of the subject countries and they catered mainly to the import export requirements of the foreign businesses. The banks were generally confined to the capital cities and the local population remained largely untouched by the banking system. The local trading community avoided the “foreign” banks both for nationalistic as well as religious reasons. However, as time went on it became difficult to engage in trade and other activities without making use of commercial banks. Even then many confined their involvement to transaction activities such as current accounts and money transfers. Borrowing from the banks and depositing their savings with the bank were strictly avoided in order to keep away from dealing in interest which is prohibited by religion.
With the passage of time, however, and other socio-economic forces demanding more involvement in national economic and financial activities, avoiding the interaction with the banks became impossible.
More to this was oil which for years is regarded as one of the world most wanted commodity that requires interdependency of nations, it became unavoidable for these nations to deal with the other using the bank. Local banks were established on the same lines as the interest-based foreign banks for want of another system and they began to expand within the country bringing the banking system to more local people. As countries became independent the need to engage in banking activities became unavoidable and urgent. Governments, businesses and individuals began to transact business with the banks, with or without liking it. This state of affairs drew the attention and concern of Muslim intellectuals. The story of interest-free or Islamic banking begins here.
In recent years, a number of Islamic banks have been created to cater to the growing demand, driven by globalization and the vast wealth of some Muslim states in the Middle East and Southeast Asia, and Islamic finance has moved from a niche position to become a mainstream component of the global banking system. The first modern experiment with Islamic banking was undertaken in Egypt under cover without projecting an Islamic image—for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime.
The pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. In 1975, the Islamic Development Bank was set up with the mission to provide funding to projects in the member countries. The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services. The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalization of the oil prices, which had hitherto been under the control of foreign oil Corporations. These events led Muslims' to strive to model their lives in accordance with the ethics and principles of Islam.
At first it was largely not accepted with open hand. It is also strongly believed that European financiers and businessmen improvised upon numerous theories, concepts and techniques based upon the system of Islamic banking and finance. The authors never gave up. Around
1975-76 Islamic banking was revitalized due to the increase in the financial strength of Muslims especially from the Middle Eastern oil producing nations. This sudden boost in the economy demanded a business model which followed the rules and regulations according to Islam. The increasing importance given to ethics and core value systems also gave a huge push to the Islamic banking and financial sector. Today, Islamic banking is not a negligible or merely temporary phenomenon but it is here to stay and there are signs that it will continue to grow and expand. At the moment, it is one of the fastest growing industry. Its size has grown tremendously from a mere few hundred thousand dollars in 1975 to reach hundreds of billions of dollars by 2010. The practice of Islamic banking is now not limited to only Arab and Muslim countries but has spread from East to West, all the way from Indonesia and Malaysia towards Europe and the Americas, now down to Nigeria, though still in dispute. Not only that, but the fact is that many conventional banks, including some major multinational western banks have also started using Islamic banking techniques. Having known the origin of Islamic banking, what then is Islamic banking?
What is Islamic Banking?
Islamic banking (or participant banking) is banking or banking activity that is consistent with the principles of Islamic law
(Sharia) and its practical application through the development of Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse. A popular belief persists that Islamic banking is simply an interest-free financial structure. But, in fact, Islamic economics is a complete system of social and economic justice. It deals with property rights, the incentive system, the allocation of resources, economic freedom and decision-making and the proper role of government.
Modes of Financing
Performing the same financial intermediation as conventional banks, Islamic banks act in accordance with revenue-sharing principles, and structure transactions so as to avoid paying or receiving interest.
Islamic banking services include a broad range of profit-sharing, safekeeping, leasing, cost-plus financing and joint venture agreements. Innovative new technology solutions have enabled banks to meet the increased demand for these services. Now, virtually every product and service offered by conventional financial institutions has a Sharai'ah-compliant equivalent, from loans to mutual funds, and from electronic payment systems to stock indices.
Islamic banks adopt several modes of acquiring assets or financing projects. But they can be broadly categorized into three areas:
investment, trade and lending. Investment financing: where a bank may join another entity to set up a joint venture, both parties participating in the various aspects of the project in varying degrees. Profit and loss are shared in a pre-arranged fashion. This is not very different from the joint venture concept. The venture is an independent legal entity and the bank may withdraw gradually after an initial period. The bank contributes the finance and the client provides the expertise, management and labor. Both the partners in a pre-arranged proportion share profits, but when a loss occurs the total loss is borne by the bank. Under this scheme, the bank estimates the expected rate of return on the specific project it is asked to finance and provides financing on the understanding that at least that rate is payable to the bank. If the project ends up in a profit more than the estimated rate the excess goes to the client. If the profit is less than the estimate the bank will accept the lower rate. In case a loss is suffered the bank will take a share in it.
Trade financing as another mode of financing is also done in several ways. The main ones are: Mark-up where the bank buys an item for a client and the client agrees to repay the bank the price and an agreed profit later on. Then leasing, where the bank buys an item for a client and leases it to him for an agreed period and at the end of that period the lessee pays the balance on the price agreed at the beginning and becomes the owner of the item. Hire-purchase is where the bank buys an item for the client and hires it to him for an agreed rent and period, and at the end of that period the client automatically becomes the owner of the item. Also, sell-and-buy-back where a client sells one of his properties to the bank for an agreed price payable now on condition that he will buy the property back after certain time for an agreed price. And the last on this are letters of credit where the bank guarantees the import of an item using its own funds for a client, on the basis of sharing the profit from the sale of this item or on a mark-up basis. Lending - main forms of Lending are: (a) Loans with a service charge where the bank lends money without interest but they cover their expenses by levying a service charge. This charge may be subject to a maximum set by the authorities. (b) No-cost loans where each bank is expected to set aside a part of their funds to grant no-cost loans to needy persons such as small farmers, entrepreneurs, producers, etc. and to needy consumers. (c) Overdrafts also are to be provided, subject to a certain maximum, free of charge.
Principle, Concepts and Techniques of Islamic Banking and Finance
Islamic banking is a very strong and viable industry. A number of economic concepts and techniques were applied in early Islamic banking, including bills of exchange, partnership such as partnerships, and forms of capital, capital, cheques, promissory notes, trusts, transactional accounts, loaning, ledgers and assignments. It has its principle, concepts and techniques. Sharia prohibits the payment or acceptance of specific interest or fees
(usury) for loans of money. Investing in businesses that provide goods or services considered contrary to Islamic principles is also forbidden. While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community. Now, a good look and consideration of these principle, concepts and techniques of Islamic banking will help us give a clear verdict on the base, objective, interest and future of this banking system.
Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Islamic rules on transaction. Islamic banking activities must be practiced consistent with the Shari'ah and its practical application through the development of Islamic economics. It is a system that does not believe in change to accommodate outside influence. Authors of this banking system are loyal and transparent in the policies they adopted before it was put on ground. Many of these principles upon which Islamic banking is based are commonly accepted all over the world, for centuries rather than decades. These principles are not new but arguably, their original state has been altered over the centuries.
Islamic banking has the same purpose as conventional banking: to make money for the banking institute by lending out capital. In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank's profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction.
The Shari'ah prohibits the payment of charges for the renting of money for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles. While the conventional banks guarantee the capital and rate of return, the Islamic banking system, working on the principle of profit and loss sharing, cannot, by definition, guarantee any fixed rate of return on deposits. Many Islamic banks do not guarantee the capital either, because if there is a loss it has to be deducted from the capital.
Thus the basic difference lies in the very roots of the two systems.
Consequently countries working under conventional laws are unable to grant permission to institutions which wish to operate under the PLS
scheme to functions as commercial banks. Even if a method could be
found for assessing the risks to calculate the capital necessary, little comfort could be taken from the profitability which is usually relied upon to cover day-to-day losses arising from the bank's business, because a substantial part of an Islamic bank's portfolio is venture capital without any guaranteed return.
Main Features of Islamic Banking
Justice and fairness to all concerned is the main feature of a model of financial intermediation whose core is profit-sharing. Interest is essentially unfair because our environment does not guarantee positive returns to business enterprise financed with borrowed money capital.
Current practice penalizes entrepreneurship by obliging it to return the principal even when part of it is lost due to circumstances beyond the entrepreneur's control. Justice requires that money capital seeking profit share the risk attached to profit-making. A just system of financial intermediation will contribute to a more equitable distribution of income and wealth.
Islamic finance will foster greater stability as it synchronizes the payment obligations of the entrepreneur with his revenues. This is possible only when the obligation to pay back the funds acquired from the financier and also pay a profit is related to the realization of profits in the project in which the funds are invested, as is the case in the profit-sharing model.
By linking the depositors' entitlements to the actual profitability of the projects in which their monies are invested through the services of the financial intermediary, a bank would almost eliminate the risk of runs on the bank insofar as the investment accounts are concerned.
A report or a rumor that the bank's investments were not doing well would not prompt a rash of withdrawals from investment accounts, since depositors would only be able to get what was actually salvageable. A more rational option would be to wait until the situation improved.
Islamic finance is more efficient in that it allocates investable funds on the basis of the expected value productivity of projects rather than on the criterion of the creditworthiness of those who own the projects, which is the case in debt-based finance. There is no guarantee that the most promising projects seeking finance will come from the most wealthy. Indeed, the most innovative may be empty-handed, but debt finance does not serve them. It prefers those who, on the basis of other assets they own, are able to pay back the sum borrowed with interest added, even when the project being financed fails to create additional wealth.
Islam argues that there is no justifiable reason why a person should enjoy an increase in wealth from the use of his money by another, unless he is prepared to expose his wealth to the risk of loss also.
Islam views true profit as a return for entrepreneurial effort and objects to money being placed on a pedestal above labour, the other factor in production. As long as the owner of money is willing to become a shareholder in the enterprise and expose his money to the risk of loss, he is entitled to receive a just proportion of the profits and not merely a merely nominal share based on the prevailing interest rate. Thus, under an Islamic banking system, the cost of capital is not analogous to a zero interest rate, as some people wrongly assume it to be. The only difference between Islamic banking and interest-based banking in this respect is that the cost of capital in interest-based banking is a predetermined fixed rate, while in Islamic banking; it is expressed as a ratio of profit.
Therefore, the salient features of the proposed system are:(1) There is no interest on deposits, but capital is guaranteed.(2) Lending and investing are treated differently; loans are interest-free but carry a service charge, while investing is on a profit-and-loss-sharing basis.
Commercial banks will grant loans but they will not engage in investment-financing. Investment-financing will be done through investment banks and investment companies.(3) Value erosion of capital due to inflation is compensated.
Zero interest and capital guarantee: Muslims are prohibited by their religion to deal in interest in any way. Giving and receiving as well as witnessing are all prohibited. Thus an Islamic banking system cannot pay any interest to its depositors; neither can it demand or receive any interest from the borrowers. Nor could the banks witness or keep accounts of these transactions. But the lender is entitled to the return of his capital in full. The proposed system complies with these fundamental Islamic requirements. Thus, by paying zero interest and guaranteeing capital, the proposed system satisfies both the interest-free-prohibition rule of Islam and the capital guarantee requirement of conventional Banking Acts. This enables it to obtain permission to set up and operate as a deposit bank in all countries of the world, while obeying the interest-free-prohibition rule and qualifying to be an “Islamic” bank. This is of paramount importance to Muslim minorities living in non-Muslim countries. Furthermore, the existence of interest-free banks in all countries will also remove the many difficulties faced today by Islamic banks in transacting international business.
Lending and investing: In conventional banking, depositing is a form of investment for the savers where the capital remains intact while a known income (in the form of interest) is promised. To the banks lending is a form of investment where the capital and a known return are assured; the return will also cover all their costs. Since Islam prohibits dealing in interest in any form this type of banking is not acceptable to the Muslims. In Islam, there is a clear difference between lending and investing — lending can be done only on the basis of zero interest and capital guarantee, and investing only on the basis of profit-and-loss-sharing. Conventional banking does not — and need not — make this differentiation. But an Islamic bank has to take this into consideration in devising a system to cater to the Muslims.
Therefore such a system has to provide for two sub-systems — one to cater to those who would “lend” and another for those who wish to invest.
In the proposed system, the depositors are considered as lenders to the bank and, since a Muslim lender cannot receive any interest, he lends without interest but with the assurance that his capital will be returned in full. This applies to demand (current account) deposits as well as to savings deposits. The bank, in turn, lends (the depositors'
funds) to the borrower who should return the capital in full plus the costs of the bank's services and a remuneration (or profit) to the bank for providing these services. This suits some depositors and some borrowers.
Deposit accounts: current, savings and investment are features of Islamic banking. This will briefly be treated in line with the present idea.
Current accounts: Current or demand deposit accounts are virtually the same as in all conventional banks and also in Islamic banking. Deposit is guaranteed.
Savings accounts :Savings deposit accounts operate in different ways.
In some banks, the depositors allow the banks to use their money but they obtain a guarantee of getting the full amount back from the bank.
Banks adopt several methods of inducing their clients to deposit with them, but no profit is promised. In others, savings accounts are treated as investment accounts but with less stringent conditions as to withdrawals and minimum balance. Capital is not guaranteed but the banks take care to invest money from such accounts in relatively risk-free short-term projects. As such lower profit rates are expected and that too only on a portion of the average minimum balance on the ground that a high level of reserves needs to be kept at all times to meet withdrawal demands.
It is suggested that all Islamic banks guarantee the capital under their savings accounts. This will satisfy the primary need and expectation of an important section of the depositors and, in Muslim countries where both Islamic and conventional banks co-exist, will induce more depositors to bank with the Islamic banks. At the same time, it will remove the major objection to establishing Islamic banks in non-Muslim countries.
No interest was paid on savings accounts, but withdrawals could be made on demand. Small, short-term, interest-free loans for productive purposes could be made. Funds in investment accounts were subject to restricted withdrawals and invested on the basis of profit- sharing.
Shortcomings in Current Practices
Islamic banking is a very young concept. Yet it has already been implemented as the only system in two Muslim countries; there are Islamic banks in many Muslim countries, and a few in non-Muslim countries as well. Despite the successful acceptance there are problems. These problems are mainly in the area of financing. Despite the fact that if the assets of all Islamic banks were pooled, they would still be less than those of any single bank in the top 50 banks in the world, and the assets of the largest Islamic bank are equal to only 1 percent of the assets of the largest bank in the world, this development is a remarkable experience that needs to be assessed, celebrated and guided. Some argue that the model of Islamic banking as a viable alternative to the conventional model of banking and compared their salient features. Some argue that the Islamic banking is by no means inferior to their counterparts model of Islamic banking as a viable alternative to the conventional model of banking and compared their salient features. Others also suggest that despite the remarkable progress within the last thirty years, Islamic banking is still a nascent industry that has a long way to go before it can bear full fruits and rival other well developed models of banking.
The second objection to Islamic banks as they operate today is that their assets are not readily assessable (since they are tied up in equity-type investments where neither capital nor return are guaranteed), and to put a reasonable value on these assets will require enormous amounts of effort and experience. In the proposed system, the depositors' capital and return (albeit zero) are guaranteed; and the bank's assets are also guaranteed and their costs are fully covered; and the accounting procedures are well defined and uncomplicated. As such the bank's assets are assessable. Therefore the proposed method should attract no objection from any banking authority, thereby enabling interest-free (or Islamic) banks to be set up in all countries of the world. In conventional banking those who wish to earn an income using their savings do so by putting their capital in savings deposits or time (fixed) deposits and receive an interest payment. A Muslim cannot earn an income by this means. He has to participate in a project by financing it and by sharing in its loss or profit. The participatory financing described in the next section is devised to cater to this group.
Islamic banks are able to provide nearly all the services that are available in the conventional banks. The only exception seems to be in the case of letters of credit where there is a possibility for interest involvement. However some solutions have been found for this problem -- mainly by having excess liquidity with the foreign bank. On the deposit side, judging by the volume of deposits both in the countries where both systems are available and in countries where law prohibits any dealing in interest, the non-payment of interest on deposit accounts seems to be no serious problem. Customers still seem to deposit their money with interest-free banks.
The main problems, both for the banks and for the customers, seem to be in the area of financing. Bank lending is still practiced but that is limited to either no-cost loans (mainly consumer loans) including overdrafts, or loans with service charges only. Both these types of loans bring no income to the banks and therefore naturally they are not that keen to engage in this activity much. That leaves us with investment financing and trade financing. Islamic banks are expected to engage in these activities only on a profit and loss sharing (PLS) basis. This is where the banks' main income is to come from and this is also from where the investment account holders are expected to derive their profits. And the latter is supposed to be the incentive for people to deposit their money with the Islamic banks. And it is precisely in this PLS scheme that the main problems of the Islamic banks lay.
A basic tenet of commercial banking is capital guarantee. The capital entrusted to the bank by a depositor must be returned to him in full.
The proposed system fully complies with this requirement. Islamic banking as practiced today does not provide capital guarantee in all its deposit accounts. In many countries, this is one of the two main objections to permitting the establishment of Islamic banks. There is no objection to paying zero interest on deposits.
Integrity and future Islamic Banking
Islamic banking is now one of the fastest growing sectors of the financial market place, largely driven by the new wealth of the Middle East and by the need for Muslims, representing one-fifth of the world's population, to find islamically acceptable financial products.
At the centre of the demand for expertise in Islamic financing lies the long-term wealth represented by the future oil and gas earnings of the Middle East. The oil and gas reserves for several of the large Middle East countries are conservatively estimated to last for well over 100 years, a figure which is being continuously revised upwards.
The wealth of the region is increasingly being channeled into Islamic structured financing.
Despite the rapid growth the pace at which Islamic banking and finance training courses are being developed, to match this growth in demand, is slow, very slow, with the availability of world-class quality training in the subject area lagging far behind that of demand.
Islamic banks need to give special care to their integrity and credibility. Some critics are disappointed that Islamic banks have deviated, to a great extent, from the philosophic and idealistic basis that inspired their originators in the 1970s.
Islamic banks come in all shapes and forms: banks and non-banks, large and small, specialized and diversified, traditional and innovative, national and multi-national, successful and unsuccessful, prudent and reckless, strictly regulated and free-wheeling, etc. Some, particularly the “Islamic windows” of conventional banks, are virtually identical to their conventional counterparts, while others are markedly different. Some are driven by real religious considerations, while others use religion only as a way of attracting customers.
There are considerable disagreements among scholars as to which institutions and instruments are religiously acceptable. For some, their legal structure does not allow them to carry out real Islamic business such as trading, leasing or construction activities and hence they end up doing only conventional financial operations with slight changes to appear Islamic. There is a risk that Islamic banking ideals may get diluted with conventional banking unless Islamic banks do something to establish their distinctness as “Islamic banks”.
Non-sharing Islamic modes provide a link between financial transactions and real economic activities, such as trading in tangible assets. But there have to be some underlying goods and services to be the objects of such modes of financing.
Advantages of Islamic Banking and Finance Islamic finance is less prone to inflation and less vulnerable to speculation, which are currently being fueled by the presence of huge quantities of debt instruments in the market. Debt instruments function as money substitutes, while equity-based financial instruments do not. And speculators find it much easier to manipulate debt instruments than those based on profit-sharing. It is true that these advantages belong to a system whose core is profit-sharing. But even cost-plus or mark-up financing keeps the system far less vulnerable to inflation and gambling (e.g., speculation) than do conventional debt-based arrangements. This idea is firmly linked with the exchange of real goods and services. It is a price, to be paid later. It is essentially different from money given as a loan which may or may not be linked to the production or exchange of real goods and services. An Islamic system of finance in which profit-sharing and mark-up financing exist side by side will still retain the advantages noted in the paragraph.
Investing in Islamic financial institutions may provide more profit and less risk because the financial institution has its own interest as it acts as a partner. The progressive theory of profit and loss sharing for financial transactions also helps in demarcating between good, bad and moderate performances by various businesses.
The idea of participatory financing introduced by the Islamic banking movement is a unique and positive contribution to modern banking.
However, as we saw earlier, by making the PLS mode of financing the main (often almost the only) mode of financing the Islamic banks have run into several difficulties. If, as suggested in the previous section, the Islamic banks would provide all the conventional financing through lending from their deposit accounts (current and savings), it will leave their hands free to engage in this responsible form of financing innovatively, using the funds in their investment accounts. They could then engage in genuine financing. Being partners in an enterprise they will have access to its accounts, and the problems associated with the non-availability of accounts will not arise. Participatory financing is a unique feature of Islamic banking, and can offer responsible financing to socially and economically relevant development projects. This is an additional service Islamic banks offer over and above the traditional services provided by conventional commercial banks.
So far discussed, the idea of participatory financing introduced by the Islamic banking movement is a unique and positive contribution to modern banking. The principles that govern the Islamic banking environment are based on common sense and basic rules and regulations.
These sort of simple rules are the base of a legion of religions in the world including Islam. Worldwide, Islamic banking is gaining ground. Many other countries including predominantly Christian ones have established and many are considering establishing Islamic banking. It is more than a quarter of a century now since the practice of Islamic banking and finance began in earnest. We have already seen that this system should face no objection from banking authorities in non-Muslim countries, and since it is compatible with the conventional system it is easy to set up and operate such banks with the minimum of delay and difficulties (including staff training). Furthermore, unlike the conventional system, this system is transparent, rests on a firm theoretical foundation, and provides management information that is very useful for effective monitoring and control. With only minor changes in their practices, Islamic banks can get rid of all their cumbersome, burdensome and sometimes doubtful forms of financing and offer a clean and efficient interest-free banking. All the necessary ingredients are already there. Such a system will offer an effective banking system where Islamic banking is obligatory and a powerful alternative to conventional banking where both co-exist. What is even more important is that the model does not seek to displace the conventional model, but is rather an addition to the league of financial service providers to which citizens can choose from. It certainly offers great potentials for competition and further diversification of banking products and services. While we can understand the natural aversion to change, the fixation with the conventional model to the exclusion of other models even when their merits are unassailable, and in spite of its great appeal to a sizeable segment of the population seems, clearly, unreasonable.