impact of Islamic banking on economic growth thesis in PDF completely free by Qahar Sayedi
1. i
Islamic Republic Of Afghanistan
Ministry of Higher Education
Private Universities Directorate
Tolo-E-Aftab Institute of Higher Education
Impact of Islamic Banking on
Economic Growth
Thesis Report
Submitted in partial fulfillment of the requirements
For the award of the Bachelor Degree in Business Administration
(A FOUR YEAR FULL TIME PROGRAM)
Under the Noble guidance of Mr. Naimatullah Nawabi
Submitted by
Sayed Qahar Sayedi
Reg No: ST-14-ETO-05
B.B.A 2017
2. ii
In the Name of Allah the Most Gracious & the Most Merciful
3. iii
THESIS APPROVAL FORM
The undersigned certify that they have read the following thesis and are satisfied with
the overall exam performance, and recommend the thesis to the Faculty of business
Administration for acceptance:
Thesis/ Dissertation Title: Impact of Islamic Banking on Economic growth
Submitted By: Sayed Qahar “Sayedi ” Registration #: ST-14-ETO-05
Bachelor in Business Administration (BBA)
______________________________________
Percentage in digits: Percentage in letters:
Supervisor
Niamatullah Nawabi Signature
Head of Department
Hashmatullah Noorzai Signature
Vice Chancellor
Ali Ahmadi Signature
April, 2017
4. iv
DECLARATION
I hereby declare that the Monograph Report entitled “Impact of Islamic
Banking on Economic Growth” is a record of independent research work
submitted by me to Tolo-e-Aftab Institute of Higher Education, for developing
the real time experience as well as awards the degree of Bachelor of Business
Administration and has been carried out during the period of my study at Tolo-
E-Aftab Institute of Higher Education, Under the guidance of Mr.
Hashmatullah Noorzai- Head of Department.
I also declare that this monograph has not been submitted nor shall it be
submitted in future to any other University or Institution for the award of any
other Degree or diploma.
Date: 02/5/1396 Signature…………………….
Name
5. ACKNOWLEDGMENTS
It is my great pleasure to present Tolo-E-Aftab Institute of Higher Education my
monograph “Impact of Islamic Banking on Economic Growth”.
I Qahar Sayedi a student of Tolo-E-Aftab Institute of Higher Education is pleased
and immensely happy to extend my sincere and heartfelt gratitude to all B.B.A
department instructors.
I would like to express deepest gratitude and thanks to the Mr. Niamatullah
Nawabi, for his valuable support in doing this monograph. He has been a source
of encouragement and guidance in all my endeavours.
I would like to sincerely acknowledge thanks to Mr. Hashmatullah Noorzai,
B.B.A HOD, for his moral support during the research work.
I express my profound thanks to Mr. Hashmatullah Noorzai monograph guide,
for his consistent encouragement and invaluable suggestion in completing this
monograph, without his effort the completion of this monograph would be
practically impossible.
It gives me great pleasure to acknowledge my indebtedness to my family
members for their substantial moral support and encouragement in my studies.
I also take the opportunity to acknowledge my sincere and deep sense of
gratitude to the B.B.A faculty members whose perception and sagacity is always
opened for us. I also take this opportunity to thank my family members who
helped me in my endeavors.
6. Abstract
Islamic banking is currently one of the fastest growing segments of the financial
market industry. And it is based on Islamic Sha’riah Law which provides all
solutions of financial problems. According to Islamic law interest is totally
prohibited in Islam because interest has lot of bad effects on society such as their
earning capacity, purchasing power and increase poverty, unequal distribution of
wealth and credit crisis in an economy.
Because more then 99% population of Afghanistan are made from Muslim So
Demand for Islamic banking system is on the rise in Afghanistan. With the
availability of Islamic banking service, more people will deposit money in banks
and boost money circulation in the country, “said ABA chief executive Najibullah
Amiri”.
In this thesis I have used standard data and resources to represent the impact of
Islamic banking on economic growth as well as the main challenges of Islamic
banking in the Afghanistan. Also I introduced some Islamic products with figure
for better understanding them such as: Musharaka, Mudarabah, Murabaha, Ijarah,
Salam and Istisna.
7. TABLE OF CONTENTS
TITLE PAGE
DECLARATION iii
ACKNOWLEDGMENTS iv
ABSTRACT v
CONTENTS vi
LIST OF TABLES ix
LIST OF FIGURES x
1 CHAPTER ONE.................................................................................................1
INTRODUCTION TO THE STUDY..........................................................................1
1.1 Introduction 1
1.2 The Key Questions 2
1.3 Tth Sub Questions 2
1.4 Hypothesis 2
1.5 Objectives 3
1.6 Importance Of Research 3
1.7 Research Methodology 4
2 CHAPTER TWO .................................................................................5
ISLAMIC BANKING SYSTEM AND ECONOMIC GROWTH................................5
2.1 Introduction 5
2.2 Theoretical Review of Islamic banking 5
2.3 Theory of economic growth through Financial development 6
2.4 Theory of Profit and Loss Sharing (PLS) 7
2.5 Riba (Interest) 8
2.6 Banking in the Islamic Empire From the Rise of Islam till the 12th Century 9
2.7 Banking in Europe From the Fall of the Roman Empire till the 12th Century 16
2.8 Banking in the Muslim World from the fall of the Islamic Empire to the
Emergence of What is known as Islamic Banking 18
2.9 Islamic Banking in Afghanistan 30
2.10 Islamic financial products 32
2.11 Mudaraba 33
2.12 Musharaka 34
8. 2.13 Murabaha 36
2.14 Ijara (leasing) 38
2.15 Salam (advance purchase) 39
2.16 Istisnaa 40
2.17 Qard Hasan 40
2.18 Chapter Summary 41
3 CHAPTER THREE .......................................................................................43
ISLAMIC BANKING IN THE ISLAMIC REPUBLIC OF AFGHANISTAN ..........43
3.1 Introduction 43
3.2 Impact of Islamic banking on economic growth 44
3.3 Sources of finance in Afghanistan 45
3.4 Commercial banks 45
3.5 Financing under Islamic banking 45
3.6 Mudarabah in afg 46
3.6.1 Purpose 46
3.6.2 Size and tenor 46
3.6.3 Banks 46
3.7 Musharakah (partnership) in afg 47
3.7.1 Purpose 47
3.7.2 Pricing 47
3.7.3 Banks 47
3.8 Murabahah (sale contract) in afg 48
3.8.1 Purpose 48
3.8.2 Size and tenor 48
3.8.3 Pricing 48
3.8.4 Banks 48
3.9 Ijarah (leasing) in afg 49
3.9.1 Purpose 49
3.9.2 Tenor and bank 49
3.10 Data analysis of Islamic banking products From (2012-2014) years 50
3.11 Total Murabaha amount in Islamic Banks of Afghanistan 50
3.12 Total Ijarah amount in Islamic Banks of Afghanistan 51
3.13 Total Mudarebah amount in Islamic Banks of Afghanistan 53
3.14 Total Alwadeaa amount in Islamic Banks of Afghanistan 55
3.15 Total amount of Finance + Investment in Islamic Banks of Afg 56
3.16 Total Profit amount of Islamic Banks in Afghanistan 57
3.17 Ghazanfar Bank 58
3.18 Ghazanfar Bank Islamic accounts and its rules and regulations 59
10. 4.1 Introduction 68
4.2 Conclusion 68
4.3 Recommendations 70
4.4 Suggestions For Further Studies 72
REFERENCES & BIBLIOGRAPHY vii viii
APPENDIXES
LIST OF TABLES
Table 2-1 Comparative Analysis of the Total Deposits in the EBS and in the Mit-
Ghamr Islamic Savings Bank for the period 1964-1967 In Current Prices..23
Table 2-2 The Number of Depositors and their Average Deposits in Mit-Ghamr
Islamic Savings Banks............................................................................. 24
Table 2-3 Mit-Ghamr Islamic Savings Bank’s branches between 1963-1967...... 24
Table 2-4 Percentage Share of Savings and Investment Deposits in Total Deposits
of Different Groupings of Savers in MGISB ............................................ 24
Table 2-5Position of some Islamic Banks among the top 100 Arab Banks ......... 30
Table 3-1 Murabaha products of Islamic windows in Afghanistan from
(2012-2014)............................................................................................. 50
Table 3-2 Ijarah products of Islamic windows in Afghanistan from (2012-2014) 51
Table 3-3 Musharakah products of Islamic windows in Afghanistan from
(2012-2014)............................................................................................. 52
Table 3-4 Mudarabah products of Islamic windows in Afghanistan from
(2012-2014) represent savings ................................................................. 53
Table 3-5 Mudarabah products of Islamic windows in Afghanistan from
(2012 -2014) represent Deposit................................................................ 54
Table 3-6 Alwabeaa products of Islamic windows in Afghanistan from
(2012-2014)............................................................................................. 55
11. Table 3-7 Finance and an Investments of Islamic window in Afghanistan from
(2012-2014)............................................................................................. 56
Table 3-8 Profit of Islamic windows in Afghanistan from (2012-2014).............. 57
Table 3-9 Asset of Islamic windows in Afghanistan from (2012-2014).............. 57
LIST OF FIGURES
Figure 2-1 Mudaraba Model .............................................................................. 34
Figure 2-2 Murabaha Model .............................................................................. 37
Figure 2-3 Ijarah Model..................................................................................... 39
Figure 3-1 Murabaha products of Islamic windows in Afghanistan from
(2012-2014)............................................................................................. 50
Figure 3-2 Ijarah products of Islamic windows in Afghanistan from (2012-2014)
................................................................................................................ 51
Figure 3-3 Musharakah products of Islamic windows in Afghanistan from
(2012-2014)............................................................................................. 52
Figure 3-4 Mudarabah products of Islamic windows in Afghanistan from
(2012 -2014) represent savings ................................................................ 54
Figure 3-5 Mudarabah products of Islamic windows in Afghanistan from
(2012 -2014) represent Deposit................................................................ 54
Figure 3-6 Alwabeaa products of Islamic windows in Afghanistan from (2012-2014)....55
Figure 3-7 Finance and Investments of Islamic window in Afghanistan from
(2012-2014) ……………………………………………………………………....56
Figure 3-8 Profit of Islamic windows in Afghanistan from (2012-2014) ………………. 57
Figure 3-9 Asset of Islamic windows in Afghanistan from (2012-2014)…………………558
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1CHAPTER
INTRODUCTION TO THE STUDY
1.1 INTRODUCTION
The term Islamic finance is used to refer to financial activities
conforming to Islamic Law (Sharia). One of the main principles of the
Islamic finance system is the prohibition of the payment and the
receipt of riba (interest). In addition to prohibition of riba, there are
several other important provisions which may affect financial
transactions. These include the prohibition of ‘gharar’ (uncertainty or
asymmetrical information), ‘maysir’ (gambling, speculation),
hoarding, as well as trading in prohibited commodities (for example,
pork and alcohol).
Over the past decade Islamic finance has emerged as an effective tool
for financing development worldwide, including in non-Muslim
countries. Major financial markets are discovering solid evidence that
Islamic finance has already been mainstreamed within the global
financial system. The Islamic finance industry has expanded rapidly
over the past decade, growing at 10-12% annually. Today, Sharia-
compliant financial assets are estimated at roughly US$2 trillion
covering bank and non-bank financial institutions, capital markets,
money markets and insurance (Takaful). In many majority Muslim
countries Islamic banking assets have been growing faster than
conventional banking.
Islamic finance is equity based, asset-backed, ethical, sustainable,
environmentally and socially responsible finance. It promotes risk
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sharing, connects the financial sector with the real economy, and
emphasizes financial inclusion and social welfare.
The following key principles guide Islamic Finance:
1: Prohibition of interest on transactions (riba)
2: Financing must be linked to real assets (materiality)
3: Engagement in immoral or ethically problematic businesses not
allowed (e.g., alcohol production)
4: Returns must be linked to risks.
the following research questions will be considered:
1.2 THE KEY QUESTIONS
1. how doses islamic banking impact on economic growth ?
1.3 THE SUB-QUESTIONS
1. How do the banks ensure that the deposit and financial facilities
they offer are Shariah-compliant?
2. What will be the effect of interest Free Banking system in
economy growth ?
3. Has the elimination of riba encouraged more people to open
bank accounts?
1.4 HYPOTHESES
The banking system affects economic development by
mobilizing monetary resources and allocating them to the most
efficient projects.
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because of Afghanistan’s economic structure and weakness of
competition in its banking system, the effect of Islamic banking
was not as great as expected.
Due to the religious beliefs of the afghan people and the
profitability of Islamic banks, it has been relatively successful
in the mobilization of monetary resources (deposits).
1.5 OBJECTIVES
The aims and objectives of this research are as follows:
First of all I would like to find the impact of Islamic banks on
economic growth in Afghanistan.
To discuss the Islamic banking system in Afghanistan, its
characteristics and model of operation, especially, its financial
instruments for mobilization and allocation of monetary
resources (deposits).
To discuss ways of making sure that banking activities are
Shariah-compliant.
to describe and analyze how the Islamic banks in Afghanistan
follow the principles of Islamic banking.
1.6 IMPORTANCE OF RESEARCH
The World Bank estimates that only 10 percent of Afghans hold an
account with a financial institution, The reasons for this are numerous:
many Afghans report mistrust of banks, some lack the proper
documentation to access financial services. And according to the
World Bank’s survey nearly one-quarter of Afghans responded that
religious reasons play role in their choice not to have a bank account.
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Similarly, a majority of business owners responded in a
separate survey that they prefer non-interest-based financial products
that are sharia-compliant. So there is a need for Islamic banking and
information about it’s product and services which I will describe it in
this thesis.
1.7 RESEARCH METHODOLOGY
this research has three parts which are:
1. Quantitative research methods: are used for collecting and
analyzing numerical data. These data are called secondary data
which is usually collected from official centers and institutes. In
order to examine the contribution of Islamic banking to
economic development, quantitative research method will be
utilized.
2. qualitative research: qualitative approach is used to review the
existing literature from all resources such as academic,
newspapers and magazines, documents, workshops, and other
related literature of Islamic finance industry.
3. theoretical part: this section discusses the potentiality and
ability of banking systems in general and Islamic banking in
particular to finance economic development. with the opinions
of the economists, especially, Muslim economists and also
some existing literature in this regard will be utilized.
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2CHAPTER
ISLAMIC BANKING SYSTEM AND
ECONOMIC GROWTH
2.1 INTRODUCTION
This chapter examines the literature and investigates theories
regarding the role of banking systems in general and Islamic banking
in particular on economic growth forward to this I will introduces the
main financial instruments offered by Islamic banks. In this context,
the structure of the several products and services will be explained
with practical examples presented graphically for understanding their
concepts better. Moreover, the chapter discusses other Islamic
financial alternatives, such as the Islamic insurance (Takaful) and
Islamic bonds (sukuk).
2.2 THEORETICAL REVIEW OF ISLAMIC
BANKING
The theory of Islamic banking is based on the idea that interest is
strictly forbidden in Islam, and that Islamic teachings provide the
required guidance on which to base the working of banks (Hassan and
Lewis, 2007). The basic principle in Islamic law is that exploitative
contracts or unfair contracts that involve risk or speculation are
impermissible (Hassan and Lewis, 2007). Islamic bank can be defined
as financial, investment and social institution that drives its logic and
beliefs from Islamic principles in all its operations. In Islamic bank
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framework there is a triangular relationship between three parties
(Zineldin, M. 1990, p.63)
“The ultimate or actual user of capital (entrepreneurs)
The bank which serves as partial user of capital and as an
intermediary link
The supplier of savings or capital funds i.e. depositors”
2.3 THEORY OF ECONOMIC GROWTH
THROUGH FINANCIAL DEVELOPMENT
The relationship between financial development and economic growth
has been extensively analyzed in the literature. The relationship
between financial development and economic growth is a
controversial issue. Some authors consider finance an important
element of growth (Schumpeter, 1934; Goldsmith, 1969; McKinnon,
1973, Shaw, 1973; King and Levine (1993), whilst for others it is only
a minor growth factor (Robinson, 1952; Lucas, 1988). Schumpeter
(1934) sees the banking sector as an engine of economic growth
through its funding of productive investment on the contrary, Lucas
(1988) argues that the role of finance has been overstressed.
According to the theory, the development of the banking industry is
favorable to the economic growth because the activity of the banks
increases the mobilization of the saving, improves the efficiency of
the resources allowance, and stimulates the technological innovation.
Explicitly or implicitly, in all studies, we note that an efficient
financial system accelerates the economic development. The main
contribution of financial system to materialize growth as it assures the
functioning of an efficient and evolutionary payment system, and
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mobilizes the saving and improves its affectation to the investment. So
the existence of a reliable and sound financial exchange system is
necessary for growth.
Hence, there are not too many studies available on the relationship
between Islamic finance and economic growth. We find that the
empirical studies that have been conducted so far have mainly
examined the efficiency, superiority and stability of Islamic banks
compared to conventional banks to achieve some intermediate
monetary target for the ultimate target which is concentrated towards
the achievement of sustaining real economic growth, reducing
inflation and lowering unemployment. For example, Darrat (1988)
who found that interest-free banking system is more superior to
achieve the monetary target.
2.4 THEORY OF PROFIT AND LOSS SHARING (PLS)
in the case of loss, all the Muslim jurists are unanimous on the point
that each partner shall suffer the loss exactly according to the ratio of
his investment. Therefore, if a partner has invested 40% of the capital,
he must suffer 40% of the loss, not more, not less, and any condition
to the contrary shall render the contract invalid. There is a complete
consensus of jurists on this principle (Ibn Qudamah, Al-Mughni).
Therefore, according to Imam Shafi, the ratio of the share of a partner
in profit and loss both must conform to the ratio of his investment. But
according to Imam Abu Hanifah and Imam Ahmad, the ratio of the
profit may differ from the ratio of investment according to the
agreement of the partners, but the loss must be divided between them
exactly in accordance with the ratio of capital invested by each one of
them. profit and loss sharing work in a very simple way that profit is
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shared between the bank and the business partner and then the banks
profit is shared between the bank and the holders of investment
deposits (Zineldin, M. 1990). The profit and loss sharing may lead to a
more efficient and optimal allocation of resources than does the
interest-based system (Siddiqui 2001). Accordingly, pust studies have
emphasized that the profit-and-loss sharing contracts promote greater
stability in financial markets In addition, the PLS framework is
expected to reduce significantly the inequitable distribution of income
and wealth and is likely to control inflation to some extent (Zamil,
2014). PLS is a contractual arrangement between two or more
transacting parties, which allows them to pool their resources to invest
in a project to share in profit and loss. PLS is based on two major
modes of financing, namely Mudaraba and Musharaka, which are
desirable in an Islamic context wherein reward sharing is related to
risk-sharing between transacting parties (Farooq, 2006).
2.5 RIBA (INTEREST)
According to Holy Quran, interest (riba) is prohibited and considered
as a major sin, in both payment and receipt of interest. Prohibition of
interest is a way to establish justice between the financer and
entrepreneur. With interest financer is assured of a positive return
without sharing the risk (Zineldin, M. 1990; Al-Omar, 1996).
There are three main reasons for prohibition of interest according to
(Warde, 2000).
1. Riba is unfair
Traditional relationship between borrower and lender is on interest,
borrower has chance to receive all the profit or the risk to face all the
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losses that occur, whereas lender earns money what so ever (Warde,
2000).
2. Riba is exploitative
It is exploitative because favoring rich, as surplus of money and it
force needy and poor to borrow (Warde, 2000)
3. Riba is unproductive
Money should be used in economic ventures and contribute to the
economy and enhance welfare.
2.6 BANKING IN THE ISLAMIC EMPIRE FROM
THE RISE OF ISLAM TILL THE 12TH CENTURY
According to Homoud (1985:19): “the period lasting from the fall of
Rome until the dawn of Islam was the darkest, most corrupt and
unsettled period in the known history of Man. Hence, the dawn of
Islam removed darkness from the face of life and brought an
environment of security and stability to the areas which came under
the influence of Islam”. The rise of Islam brought about a tremendous
change in all economic, political, social and judicial spheres and
brought about a new civilization that is based on the total and
complete submission to Allah and his Shari'ah. Wilson (1950:40-53)
describing the impact of Islam on world history, wrote: "The sudden
eruption of the Arab (Muslim) people in the 7th Century is something
unique in history. In three generations a collection of scattered tribes,
some settled, some nomadic, living by trade and subsistence farming,
had transformed itself into a rich and powerful empire dominating the
whole of southern Mediterranean and the Near-East from Afghanistan
to Spain... They had succeeded in welding together peoples of diverse
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beliefs and languages into a unified society based on a common
religion, a common language and common institutions". Lieber
(1968:230) also contended that: “From the seventh century AD
onwards, Muslims succeeded in developing long distance trade and
international commerce on a scale which surpassed anything known
before. This is, perhaps, because Islam is one great religion which
affords the merchant a highly honoured place in society” and promises
him an elevated position in paradise if he deals with honesty, justice
and benevolence and perhaps, that is why many great Muslim scholars
had, at some stage of their careers, earned their living as merchants
(see Weit 1955). Lieber (1968:230) pointed out that: “Among
Muslims, international trade was particularly stimulated by the
pilgrimage to the holy places of Arabia, in which a great body of men
converged each year from all over the world. Many of these pilgrims
fulfilled their religious obligations and at the same time, marketed
their local products along the route, returning home with foreign
goods on which they hoped to make a handsome profit”. With the
development of trade, comes the development of banking operations,
hence operations such as lending, borrowing, transferring,
guaranteeing, safeguarding, etc., were all used extensively in Arabia.
Commenting on the statement of De Roover (1954:43) which says
“There can be no banking where there are no banks”, Udovitch
(1979:255) argued: “This proposition may hold true for the
development of banking in Medieval Europe but it certainly does not
describe the Medieval Islamic world. In the sporadic information on
this subject from Medieval literary or documentary sources, we
encounter bankers and we encounter extensive and ramified banking
activities but we do not encounter banks. That is, we cannot identify
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any autonomous or semi-autonomous institutions whose primary
concern was dealing in money as specialized if not exclusive pursuit”.
However, the historical writings of al-Qalqashandi (1913), al-
Djahshiyari (1938), Pellat and Schacht (1965), al-Kubaisi (1979), al-
Ali (1953, 1981), al-Sa’di (1985), al-Duri (1986, 1995), Fischel
(1992), al-Hamdani (2000) and Chapra and Ahmed (2002) show that
there were indeed bankers called sarraffeen or sayarifah or jahabidhah
and banks called dawawin al-jahabidhah. From the end of the 8th
century, the term jahbadh (plural jahabidhah) was used in the sense of
a financial clerk, expert in matters of coins, skilled money examiner,
treasury receiver, government cashier, money changer or collector to
designate the well known licensed merchant banker in the time of the
Abbasid caliphs. In 913 AD, the state established what is called diwan
al-jahabidhah (plural dawawin al-jahabidhah) with branches in the
main trade cities conducting almost all modern banking functions
albeit without recourse to interest. In the time of the caliph al-
Muqtadir (980-1032 AD) al-jahbadh assumed an ever increasing
important role and emerged as a modern banker, who in addition to
his functions as administrator of deposits and a remitter of funds from
place to place via the medium of the sakk (cheque) and especially of
the suftajah (bill of exchange), was called upon to grant huge loans to
the caliphs, the viziers and other court officials (al-Qalqashandi 1913;
al-Jahshiyari, 1938, Pellat and Schacht 1965 and Metwalli and
Shahata, 1983). According to Metwalli and Shahata (1983:113-17),
the chief jahbadh or governor of diwan al-jahabidhah was required by
the state to prepare a monthly and a yearly accounting statement
called al-khatmah (the final account or balance sheet) of all the items
of income and expenditure. Historical sources, also, show that many
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of the jahabidhah were Christians or Jews despite their status as
dhimmis (non Muslims living in Muslim society). Among the
jahabidhah listed in the historical sources were: Ibrahim Bin Yuhanna,
Zakariyah Bin Yuhanna, Sulayman Bin Wahb, Ibrahim Bin Ahmad,
Israel Bin Salih and above all two Jewish merchants and bankers:
Yusuf Bin Finkhas and Harun Bin Imran of Baghdad who were
appointed to the office of jahbadh of the Persian province Ahwaz and
later became jahabidhat al-hadrah (the Court bankers) of the Caliph al
Muqtadir and his viziers (see Mez 1937; Goitein 1967, 1973;
Udovitch 1970, 1979 and al-Sayed 1984). As reported by Chapra and
Khan (2000:1-3) and Chapra and Ahmed (2002:2-6) Muslims were,
from the very early stage in Islamic history, able to establish a
financial system without interest for mobilizing resources to finance
productive activities and consumer needs. The system was largely
based on profit and loss sharing modes of mudarabah (passive
partnership) and musharakah (active partnership). These bankers used
to evaluate the authenticity and fineness of coins, which was very
important function at that time when coins were made of precious
metals. They used to put these coins in sealed bags of different sizes
containing specified amounts of coins to relieve the people from the
trouble of counting them every time they made or received a payment.
They transferred funds from place to place without their physical
transport and thereby ensured not only their safety but also the
successful functioning of the payment system. Al-jahabidhah used to
advance loans to the state secured by the government tax revenues,
which they used to collect. When they collect the tax revenues, they
get their principal and an amount above it which some historians
consider as interest (see Pellat and Schacht 1965:383). But if we take
24. 13 | P a g e
into consideration the efforts of collecting and administering the taxes,
we can infer that the amount above the principal was not interest but a
fee for the administration of the taxes, because on one hand, interest is
forbidden and fees are allowed in Islam, and on the other hand,
interest depend on the amount and period of loans, while fees or
commissions are allowed to be paid for rendering services. Udovitch
(1979:267) affirmed that: “whereas it was customary for merchants
and others to keep at least a portion of their money on deposit with
merchant bankers and whereas the merchant banks themselves kept
deposits of various size with several other merchant banks, there is no
evidence whatsoever that any interest or other type of premium was
paid to depositors”. This is so because Allah prohibits riba (interest) in
many verses of the Holy Qur'an and provides several alternatives to
riba such as musharakah (partnership), mudarabah (commenda),
muzara'ah (sharecropping), etc., whereby the riba prohibition could be
avoided. In the early Middle-Ages, the Islamic empire played a great
role in establishing the foundation of an economic golden age of
which the players in the field of trade and banking were Arabs,
Persians, Berbers, Jews, Christians and Armenians. Islamic trade
reached from al-Andalus (Spain) to the sea of China. Pirenne
(1937:49) contended: "In consequence of their worldwide trade
relations, they (the Muslims) brought sugar cane from India, cotton to
Sicily and Africa and rice to Sicily and Spain. They learned from the
Chinese how to produce silk and paper and took this knowledge with
them into all parts of their empire". Lieber (1968:230) also observed
that: "The merchants of Italy and other European countries obtained
their first education in the use of sophisticated business methods from
their counterparts on the opposite side of the Mediterranean, most of
25. 14 | P a g e
whom were Muslims, although a few were Jews or Christians. One
obvious result is the large number of words of Eastern origin mainly
Aramaic, Arabic or Persian, which were introduced into the
commercial terminology of medieval Europe. Some examples of the
terms (whose European usage was not necessarily identical with their
original connotation) are: douane, arsenal, magazine, traffic, tariff,
risk, fondaco, sensali, galeya, aval and maona". To quote just a few
more words, one might mention the English word cheque, which is
originally from the Arabic word sakk; credit from qard, risk from rizq;
the French words acheter from ishtara (to buy), le magasin from al-
makhzen (warehouse), aval from hawala and the Spanish words
almacen from al-makhzen, zoko from souq (market) and many others.
(see Doi 1984:399; Vives 1969:119-20; Torrey 1892, Steigher 1963,
Bantier, 1971). As Labib (1969:80) pointed out: “Everywhere that
Islam entered, it activated business life, fostered an increasing
exchange of goods and played an important part in the development of
credit”. Bantier (1971:72) also pointed out that: "Arab commerce
extended over the whole of the then known world, and trade with
China, Malaysia and India reached considerable proportions".
According to Udovitch (1979:263): “The suftaja (Bill of Exchange)
always and the hawala (credit guarantee or credit transfer) usually
occurred as a written obligation, and were thus the first and most
important forms of commercial credit papers in the Medieval Near
East”. That is so, perhaps because of Allah’s order to Muslims in the
longest verse of the Holy Qur'an (2:282-3) to write down all future
obligations.
After the 13th century, the jahbadh lost his control significantly as a
court banker, his function was reduced to that of a sarraf or sayrafi
26. 15 | P a g e
(money changer) as a result of the slow but prolonged decline of the
Islamic Empire from about the 12th Century BC, due mainly to the
following internal and external factors:
1. The gradual but continuous deviations from Islam and Islamic
Shari'ah especially in the political sphere.
2. The extravagance and lavish expenditure of the courts.
3. The lack of organisation and the inflated bureaucracy.
4. The political breakdown, involving the loss of authority of the
central government in the remote provinces and the emergence
of petty dynasties and quasi-independent governors resulting in
the degradation of the caliphs to the status of mere puppets of
their ministers and military commanders.
5. The rise and development of different and antagonistic sects, all
claiming to be the only real Muslims such as the Sufis, the
Shi’ites, the Ismaelites, the Druzes, etc..
6. The prolonged warfare with the crusaders, Mongols and
Tartars, which caused much destruction in Iraq and Syria.
7. The Turco-Persian wars, which dragged on for nearly three
centuries and which impeded the economic recovery of Iraq.
Due to these and other historical circumstances, the Muslim world lost
its technological and economic activity. Hence a number of the
Islamic institutions, including the Islamic system of financial
intermediation, became displaced by Western institutions (Issawi,
1966:4, Lewis, 1970:102 and Chapra, 2000:173-185, and Chapra and
Khan, 2000).
27. 16 | P a g e
2.7 BANKING IN EUROPE FROM THE FALL OF
THE ROMAN EMPIRE TILL THE 12TH
CENTURY AD
From about 300 AD time of the fall of the Roman Empire till about
1300 AD, Western Europe, with the exception of Spain and Italy,
lived in dismal and bleak centuries called the ‘Dark-Ages’. Spain,
because it was part of the Islamic Empire under the name of al-
Andalus, which was known by its great civilisation between the 8th
and 15th Centuries AD and Italy because of its strategic commercial
position in the Mediterranean and its regular contact with Muslim,
Christian, and Jewish merchants of the Islamic Empire. In fact, Sicily
and Venice were also part of the Islamic Empire for some time.
Following the fall of the Roman Empire, barbaric kingdoms prevailed
throughout Western Europe. Commerce became profoundly depressed
in Western Europe, which was, as Homer (1963:84) put it: “sinking
back into a largely agricultural economy”. This led the famous
European historian Pirenne (1937:20) to say that in Western Europe:
“La terre était tout et le commerce rien” (which means that the land
(or agriculture) was everything and the commerce was nothing). This
is not to suggest that there was no trade at all in Western Europe, but
just to say that it was very limited as a consequence of political
instability, uncertainty, high cost of transportation, heavy taxes and
customs duties, piracy, bribery and illiteracy. Thus, if trade is limited,
so must be the banking operations. During these so called ‘Dark
Ages’, and as reported by Homer (1963:84): "the Latin tongue was
forgotten, culture vanished and superstition throve. However, money
was used regularly throughout the darkest of the Dark-Ages but the
28. 17 | P a g e
lack of commerce reduced its circulation”. Orsingher (1967:11)
pointed out that: “during all the period which extends from the fall of
the Roman Empire till the end of the 11th Century the banking
industry in Western Europe was represented by the money changer.
The age of the crusaders was the starting point for the development of
monetary and credit operations during the 2nd part of the Middle
Ages”. The 10th Century was called the century of transition in which
the crusaders managed, on one hand, to weaken the Islamic Empire -
which had already shown weakness after the destructive raids of the
Mongols and Tartars and after the rise of divergent petty dynasties
within it- and on the other, to transfer the know-how from the Islamic
civilisation to Western Europe, especially on how to promote
irrigation, handicrafts, partnerships, trade and banking so that by the
end of the 11th Century, political and economic revival in Western
Europe generally and in Italy in particular became general. Thus, as
Lopez (1952:273) described: "Italy at last began to exploit the
advantage of her central position in regard to both continental Europe
and the Mediterranean basin. A nation of moderately successful
peasants and farmers who in Roman times were dependent upon
Easterners for their trade and who did not produce enough food for
their overgrown capital, now was on its way to becoming the first
commercial and industrial nation in the world". Venice, was perhaps
the most prosperous town in Italy at that time where there was no
serfdom and where the majority of its population was engaged in
maritime trade, especially with the Muslim world, in spite of
opposition from the Papacy. Coiners and money changers rose
steadily in power and prestige; and commercial contracts, such as the
commenda equivalent to the Islamic partnership contract of
29. 18 | P a g e
mudarabah which involved sleeping partnership, became a very
popular device in Mediterranean commerce (see Homer, 1963:86-88
and Miskimin, 1969:118). This probably explains the observation of
Lieber (1968:230) that: "The merchants of Italy obtained their first
education in the use of sophisticated business methods from their
counterparts on the opposite side of the Mediterranean most of whom
were Muslims, although a few were Jews or Christians". This also
may explain, as Homoud (1985:24) pointed out, the origin of the
concept that the first bank worthy of this nomenclature was that which
was established in Venice in the year 1157 AD, and what became
common knowledge about dating the origin of banking operations
back to the money changers in Lombardia who used to sit behind their
wooden desks, known as banco. Thus, as Lopez (1952:291) remarked:
“Italy was to the Medieval economic process what England was to the
modern. Even as the industrial revolution first transformed economy
and society in some English areas and spread later to the rest of the
world, the commercial revolution (trade and banking) first affected a
few Italian cities and then made its way slowly through the rest of
Europe”.
2.8 BANKING IN THE MUSLIM WORLD FROM THE
FALL OF THE ISLAMIC EMPIRE TO THE
EMERGENCE OF WHAT IS KNOWN AS
ISLAMIC BANKING
From the 11th Century AD, time when the Islamic Empire started
declining till about the mid-20th Century AD the Muslim World
30. 19 | P a g e
underwent long centuries of prolonged decay and deterioration,
known as Usur-al-Inhitat or ‘the Ages of Decline’ just as Western
Europe underwent the ’Dark Ages’ from the fall of the Roman Empire
till the end of the 12th Century. A deterioration which affected all
aspects of life: political, economic, social and cultural. The damaging
consequences were disastrous:
The once united caliphate became divided into tens of petty
dynasties fighting each other. Despotism, tyranny and injustice
became widespread. This made it easy for the Mongols, the
Tartars, the Crusaders and others to invade, dominate and
colonize the Muslim world.
The once just and balanced Islamic society, based on the
principles of the Shari'ah, was transformed into militaristic
feudal societies that were much less conducive to economic and
social development.
Bayt al-mal (the treasury), which used to care about the poor,
the destitute, the old and the young became the monopoly of the
governors, ministers, military commanders and tax farmers. As
a result, the general public lost confidence and withdrew from
urban prosperous centres to hills in the countryside and to
deserts to escape oppression, injustice, execution and
confiscation. Ignorance, illiteracy, superstition, mysticism,
idolatry, etc., all became widespread (see Issawi, 1966:4).
Agriculture shrank to a minute fraction of what it had been in
the 10th Century and the population had correspondingly
diminished. Land was granted or taken by officers. Farm
techniques remained almost unchanged. Perhaps until the 1960s
most farmers used only wooden ploughs instead of iron ones.
31. 20 | P a g e
As a result, yields were very low and both crops and livestock
continued to be affected by droughts, pests and diseases (see
Lewis, 1970:105, 113 and Issawi, 1966:3, 21, 65).
The flood of European machine-made consumer goods brought
by settlers dealt a severe blow to local handicrafts, many of
which were wiped out in the following decades. One has only to
compare the industrial products of the 18th
Century with those
made a few hundred years earlier to realise that the handicrafts
had not only stagnated but had actually retrogressed (Issawi,
1966:4, 18 and 46).
From the 11th Century, trade was transferred from the Muslims
to the Europeans who soon became the main carriers and
traders in the Mediterranean Sea. (Issawi,1966:7; and Lewis,
1970:114).
As reported by Vogel and Hayes (1998:19 and 4) from the middle of
the nineteenth century, nearly every Muslim country, under direct or
indirect pressure from the newly dominant West, adopted laws and
legal systems based on Western models, particularly in the civil and
commercial spheres. The centuries-old practice of finance in Islamic
form was largely eclipsed. Under the European influence, most
countries adopted Western inspired banking systems and business
models and abandoned Islamic commercial practices. With the
achievement of independence, the nationalization of foreign banks and
the development of national banking, the overseas colonization of the
banks disappeared, but it has been replaced by a very similar ‘neo-
colonial’ banking system. It is true that by nationalizing foreign banks
and by establishing new indigenous banks, these banks became
national banks, looking after the national interests, but their operating
32. 21 | P a g e
systems were the same as the foreign ones in that they continued to
operate and deal in interest which is alien to the belief of the Muslim
population. Thus, the idea of establishing ‘Islamic banks’ -which
would not only offer all banking services, but which would not break
or violate the religious beliefs of the people - arose. The idea of
creating ‘Islamic Banks’ or ‘Interest-Free Banks’ as they are also
called, came as a result of the Islamic revival which can be traced
back to the 1930s, 1940s and 1950s, when some of the colonized
Islamic countries became independent. The first attempt to establish
an Islamic Bank was made, as Traute (1983) and Wilson (1983)
pointed out, in the late 1950s in a rural area in Pakistan, though this
had no lasting impact. A small experimental Interest-Free Bank was
founded by a small number of pious landowners who were prepared to
deposit funds without interest rewards. The credit was advanced to
other poorer landowners for agricultural improvements. No interest
was charged for the credit, but a small fixed administrative fee was
levied to cover the operating costs of the bank. However, as Wilson
(1983:75) put it: “although there was no shortage of borrowers, the
depositors tended to view their payments in the institution as a once
and for all effort and the institution soon ran short of funds. In
addition, the depositors took a considerable interest in how their
deposits were loaned out and the bank officials enjoyed little
autonomy with no new deposits forthcoming, and problems over
recruitment of bank staff, who were unwilling to give up lucrative and
secure careers in city commercial banking for an uncertain venture in
the countryside, the institution soon foundered. But just as the
Pakistan venture was being ended a new experiment was being tried in
Egypt” On 25th July 1963, a pioneering experiment, the Mit-Ghamr
33. 22 | P a g e
Islamic Savings Bank (MGISB), started in the county of Mit-Ghamr
in Egypt by el-Naggar who later became Secretary General of the
International Association of Islamic Banks. The model was the
German savings banks adapted to the rural environment of an Islamic
developing country. The purpose was to mobilize the idle savings of
the majority of the Muslim Egyptian population without transgressing
the laws of the Shari'ah and to provide them with halal returns on their
savings as well. Although el-Naggar, was primarily an academic
himself, he managed the bank and carefully selected the bank’s staff
from enthusiast Muslims, who had some banking experiences with
commercial institutions. "The staff soon gained the confidence of the
conservative county community who saw they were devout Muslims
like themselves, as they worshipped locally with their potential
customers. The region’s peasants were suspicious of outsiders and few
had ever used commercial banks, which were seen as alien institutions
belonging to the cities, and mainly to serve westernised Egyptians.
These new bankers were viewed as different, as they shared the same
views and moral values as the peasants themselves, despite their
education” (Wilson, 1983:76). According to its founder and manager,
el-Naggar (1974:246-247), the role of this bank was threefold: first, to
act as an efficient intermediary between the supply and demand of
capital; second, to act as an educational centre for economic
efficiency, saving education and banking habit; and third, to set a
dynamic factor in mobilizing the idle capital for investment, thus,
reducing hoarding and the problems of capital formation. Wilson
(1983:76) reported that: "The bank’s loans were used for a variety of
purposes including house building and repairs, the purchase of simple
machinery for handicraft industries, such as hand-looms for weaving
34. 23 | P a g e
textiles or sewing machines. Some loans helped finance the purchase
of farm animals and basic improvement to the irrigation systems as
efficient water provision was essential in a community based on
agriculture". MGISB soon prospered, and within three and a half
years, the first depositors were joined by more than 251,000 and the
deposits grew at unprecedented higher rates than expected (see Table
2.1 which compares the growth of its total deposits to that of the
Egyptian Banking System (EBS) as a whole in current and constant
prices during the same period and Tables 2-3 and 4 which show the
number of depositors, the size of the average deposit, the number of
branches and the kinds of depositors who were banking with this
Islamic bank).
Table 2.1 Comparative Analysis of the Total Deposits in the EBS and in the Mit-Ghamr Islamic
Savings Bank for the period 1964-1967 In Current Prices
Sources: IMF International Financial Statistics and El-Naggar (1974). Abbreviations: EBS:
Egyptian Banking System; MGISB Mit Ghamr Islamic Saving Bank
35. 24 | P a g e
Table 2.2 The Number of Depositors and their Average Deposits in Mit-Ghamr Islamic Savings
Banks
Table 2.3 Mit-Ghamr Islamic Savings Bank’s branches between 1963-1967
Table 2.4 Percentage Share of Savings and Investment Deposits in Total Deposits of Different
Groupings of Savers in MGISB
It is quite clear from the comparative tabular analysis of the little data
available, that this experiment proved quite successful and the savings
mobilization impressive. Its success in winning the support of a large
36. 25 | P a g e
number of students, farmers and villagers who regarded the bank as
their own, is discussed by Ready (1967); El-Naggar (1974), Harvey
(1981); Traute (1983) and Wilson (1983). El-Naggar (1974:272)
commented: "In spite of the short period during which the bank has
been in operation, it has rendered vital services to the economic
development of the local community, especially in the development
and the establishment of small industries and in providing new
opportunities of work for unemployed workers in Mit-Ghamr and its
53 affiliated villages”. It is said that this bank was so successful that it
would have covered the whole of Egypt by now, if it has not been
stopped for political reasons beyond its control. It came to an end in
February 1967 after only three and a half years during which problems
of rural indebtedness were reduced in the areas where this bank and its
branches were operating. Borrowers, no longer, had to depend neither
on the few local moneylenders, many of whom charged high interest
rates, nor on the non-Islamic banks which consider them as a ‘non
bankable class’ and which, they themselves would not deal with, as
these banks base their operations on Riba (interest) which is Haram
according to their belief in Islam. El-Naggar (1978:230-232) reported
that: Paradoxically, yet not surprisingly, it has been its success, rather
than the reverse, which has created problems for the bank. As soon as
the social role of the bank began to make itself evident in the
successful development of the local area, conflicts started with the
local social authorities who saw it as interfering in their own area of
authority and regarded it as simply reduplicating their own efforts
unnecessarily. In the meantime, because the bank introduced a new
concept of banking more expressive of Islamic belief and practice and
firmly rooted in a popular Muslim base the size of savings and
37. 26 | P a g e
number of savers was increasing rapidly either by the addition of new
savers, or by savers who transferred their money from the commercial
banks to the Islamic one. Inevitably this aroused the traditional banks
against their new popular based and progressive competitor... Thus, in
furthering such changes, the functions and role of the bank could,
from a narrow view-point, be regarded as conflicting with existing
institutions such as the social authorities, the commercial banks and
some of the central holding organisations: industrial or commercial
which were mainly under government control, so it was stopped.
Nevertheless, the venture laid the seeds of modern Islamic banking
and pointed the way for subsequent undertakings. Soon afterwards
many Islamic social, developmental and commercial banks started
doing business following the example of Mit-Ghamr Islamic savings
bank with some improvements. The first of such banks is the Nasser
Social Bank established in 1971 in Egypt, not as profit-oriented
institution but as a social bank to serve the previously ‘unbankable’
low income group; followed by the Islamic Development Bank (IDB),
an Inter-governmental institution established in 1975 in Jeddah (Saudi
Arabia), with the purpose to foster the economic and social
development of its member countries, and by the Dubai Islamic Bank
(DIB) in Dubai (UAE) in 1975, the first major Islamic commercial
bank, the success of which led to the establishment of a series of such
banks elsewhere. Another successful experiment in this regard, that
happened approximately at the same time as Mit-Ghamr savings bank,
is the birth of the Pilgrims Fund Corporation or Tabung Haji, which
started operation in Malaysia in 1963 with the following objectives:
38. 27 | P a g e
To enable Malay Muslims to save gradually, in order to support
their expenditure during Hajj (pilgrimage) and for other
beneficial purposes.
To enable Malay Muslims to have active and effective
participations in investment activities that are permissible in
Islam through their savings.
To protect, safeguard the interests and ensure the welfare of
pilgrims during pilgrimage by providing various facilities and
services.
With such objectives in mind, Tabung Haji has been running
successfully since then. It has provided excellent and comprehensive
services with premium quality to satisfy the pilgrims need prior,
during and after their pilgrimage. Its existence was attributed to a
working paper presented by the Royal Professor Ungku Aziz titled,
“Plan to Improve the Economy of Prospective Pilgrims” in 1959
(Tabung Haji website). Started its business in 1963 with only 1281
members and a total deposits of MR46,600, the quasi-government
body now has a membership (account holders) of around 4 million
and deposits of more than US$2 billion. The number of account
holders when seen in proportion to the total Malaysian Muslim
population, i.e. 12 million, is an indicator of how popular and
successful this experiment is in Malaysia (Rahman, 2004). Tabung
Haji operates as an alternative financial institution to interest-based
banks, providing halal investment opportunities to Malaysian Muslim
savers. Any Malaysian Muslim can open his or her account with
Tabung Haji with a minimum monthly installment of RM10 for adults
and RM2 for children. It has a network of 111 branches that serve its
members, in addition to the use of the services of the post offices, and
39. 28 | P a g e
deductions from salaries. As regards to withdrawal, it is as simple as
in any financing institution. An additional facility for Tabung Haji
account holders is that a special withdrawal network is also available
to them during Hajj in Saudi Arabia. The amounts collected are
invested in selected investment projects spread across a diverse range
of investment portfolios in conformity with Shari'ah guidelines and
strong growth potentials. At present, the total value of its investment
is around US$4billion. This includes short and long-term investments,
equity investments, unit trust investments, schemes offered by
government, real estate investments as well as investments in its 12
subsidiary companies, which are engaged from the traditional sectors
of agricultural, plantation or real estate business to the most modern
Information Technology. Since 1995, Tabung Haji has been allowed
to expand its operating framework, and now it is able to extend its
business activities even outside Malaysia (ibid.). At present, in
addition to the Islamization of the Iranian, Pakistani and Sudanese
banking systems, there are, according to the General Council of
Islamic Banks and Financial Institutions (GCIBFI, 2001), more than
270 Islamic financial institutions worldwide, having assets over
US$300 billion, deposits over US$200 billion and investments over
US$160 billion. Most of these institutions were established in the late
1970s and early 1980s in such countries as Egypt, Kuwait, Jordan,
Bahrain, Qatar, Malaysia, Bangladesh, Senegal, Tunis, Turkey,
Algeria, Senegal, Indonesia, etc., and most of them have been able to
mobilize substantial amounts of deposits, acquire a notable share in
the national market and generate sizable profits from their first year of
operation, in spite of the shortness of the period, the competition from
the interest-based banks and the problems related to the non-Islamic
40. 29 | P a g e
environments in which they operate. In fact, there are Islamic Banks
and Islamic Investment Companies in the West as well, as in
Switzerland, Denmark, Luxembourg, England, etc.. Not only that, but
large and famous non-Islamic banks such as Citibank, HSBC, and
others have opened 'Islamic banking windows' to put their hands on
this fast growing sector. Many other Islamic non-bank financial
institutions were also established in many parts of the world, such as,
insurance companies under the name of Takaful companies and some
other investment companies. The primary objectives of these Islamic
Financial Institutions is to provide an alternative to exploitative
capitalist system and a riba-free mode of banking that mobilizes
dormant resources of devout Muslims who are reluctant to deal with
interest-based banks because of riba. And as pointed out by Tarbush
(1981:6): “they apparently have no problem in achieving this goal. It
is claimed that on its first day of opening to the public the Kuwait
Finance House (the Islamic Kuwaiti bank) received KD50m
(US$140m) transferred from deposits of the commercial banks”. The
available data, on some of the existing Islamic Banks, reveal that
many of them have even been able to acquire considerable amounts of
assets that they qualify for ranking among the top 100 Arab largest
banks and that they are improving (See Table 5. showing the position
of some Islamic Banks, in some Arab countries, among the top 100
Arab Banks).
41. 30 | P a g e
Table 3.6.1 Position of some Islamic Banks among the top 100 Arab Banks
Abbreviations: KFH: Kuwait Finance House; FIBE: Faisal Islamic
Bank of Egypt; QIB: Qatar Islamic Bank; DIB: Dubai Islamic Bank;
JIB: Jordan Islamic Bank; SBB Shamil Bank of Bahrain; RBIC Rajhi
Banking and Investment Corporation. This shows, as Nienhaus
(1988:90) remarked that: “these Islamic Banks have grown to
financial institutions of a respectable size within a relatively short
period of time”. Some of them like KFH, FIBE, JIB and SSB have
become among the seven largest banks in their respective countries
and despite a slow down in their rates of growth their market shares in
the mobilization of deposits and the allocation of funds have grown
considerably.
2.9 ISLAMIC BANKING IN AFGHANISTAN
Islamic banking was introduced in Afghanistan between 2008 and
2009. The first draft banking law was prepared by Da Afghanistan
Bank (Central Bank of Afghanistan) Da Afghanistan Bank established
42. 31 | P a g e
the Islamic banking section that operates under the technical support
of the Shariah Council consisted up of famous religious scholars from
Afghanistan as well from some other countries.
It is estimated that up to US$33 billion are in circulation in
Afghanistan economy while more than US$4.2 billion is deposited in
17 banks and branches of national and international banks. Kabul
Bank has a total deposit of US$850 million amongst these banks.
Beside conventional banking, Kabul Bank has Islamic banking section
started its operation in Feb 2010 and extended Islamic banking
through Islamic Banking Windows Operation in all its branches
throughout Afghanistan. Currently there is no full-pledge Islamic bank
in Afghanistan and all the conventional banks have been providing
Islamic Banking in Afghanistan. Most of them provide liability side
products for deposits while investment side products are on the lowest
level. The only reason for the underdevelopment of Islamic
investment in Afghanistan is the lack of Islamic law and regulations.
There are some parties interested to apply for a full Islamic bank
licenses. To date five conventional banks are licensed to offer Islamic
banking windows in Afghanistan:
1. Kabul Bank
2. Afghan Bank Mille
3. Afghan United Bank
4. Maiwand Bank
5. Ghazanfar Bank
Kabul Bank is the largest bank offering Islamic banking services
through its 123 branches in all 34 provinces of Afghanistan. Total
deposits in Islamic Banking industry in the country reaches up to
US$70 million since last two years. All the above mentioned banks
43. 32 | P a g e
did started Islamic banking in 2009 and 2010. Before this there was no
concept of Islamic banking in Afghanistan and no bank was operating
under Islamic banking principles. Generally all these banks offer
liability products under Mudarabah, Musharakah, Qard Hassan and
Wadiah. Kabul Bank has a Shariah board to advise on the Shariah
compliancy of its products while there are Shariah advisors are on the
board of the rest of the banks which offer Islamic products. All these
banks have a limited number of investment products under
Musharakah, Mudarabah and Ijarah structures. There are more than
10,000 Islamic banking customers in all five banks. About 99% of
Afghans are Muslims and the majority of them do not use banks due
to the involvement of interest. Out of 30 million Afghans, only 1.8
million use banks. Ulamas and religious scholars have been very
cooperative in preaching and promoting Islamic banking in
Afghanistan. Ghazanfar Bank, Maiwand Bank, Kabul Bank, Alfalah
Bank, Bank Millie Afghan and Afghan United Bank are among the
banks which obtained Islamic banking licenses in the country.
Currently all these banks offer Islamic banking products and services
including project financing, equity financing and house financing.
2.10 ISLAMIC FINANCIAL PRODUCTS
Islamic financial systems are based on five major tenets founded on
the shari’a bans and commandments (Iqbal, 1997). They are the
prohibition of riba, profit and loss sharing, the absence of gharar
(speculation and gambling-like transactions), disallowing the
derivation of money on money, and the avoidance of haram
(forbidden) activities. These have been examined in earlier chapters.
Financial instruments based on these principles have been developed
44. 33 | P a g e
to facilitate everyday banking activities by providing halal (shari’a-
compliant) methods of lending or borrowing money and still offering
some acceptable returns for investors. Listed below are some popular
Islamic financial products being marketed worldwide by Islamic
banks and financial institutions.
2.11 MUDARABA
Mudaraba is a form of business agreement between two parties, the
capital owner and the entrepreneur. The capital owner (also called
rabb al-mal ) provides the needed capital, while the other party, the
entrepreneur (mudarib) brings the knowhow and the labor needed for
the project. In fact, mudaraba is a form of sleeping partnership, in
other words, the capital provider does not have the right to interfere in
any of the management decisions. However, the financier has all the
rights to guarantee that his money is well managed and invested
properly. Islamic banks use this technique as a term of finance, where
the bank acts as “rabb al-mal” and the agent as “mudrib” (figure 4).
Profits are shared based on a pre agreed ratio, in contrast, losses are
endured just by the capital provider (kettle 2010, pp. 36-37). In the
latter case, the main cause is that according to Shariah ‘one cannot
lose what he does not contribute’(Visser 2009, p. 54). There are two
types of mudaraba, “Al Mudarabah Al Muqayyadah” (restricted
mudarabah) and “Al Mudarabah Al Mutlaqah” (unrestricted
mudaraba) (Usmani 2002, pp. 98-99). Under the restricted Mudaraba,
the capital provider (rab al-mal) has the right to choose a specific
agent (mudarib) with a specific type of business. In contrast, under the
unrestricted mudaraba, the agent is free to launch any type of
business, however, there are several restrictions governing the rights
45. 34 | P a g e
of the owner. For instance, engaging other mudarib in the business
and/or mixing the investment with others without permission from rab
al-maal.
Figure 2.1 Mudaraba Model
2.12 MUSHARAKA
Musharaka is a form of financial partnership, where two parties or
more agree on launching a set of business, in order to generate profit.
Unlike mudaraba, the parties contribute either with equity or labor
together, in other words, it is a similar form of a joint venture where
the parties have the same rights. Accordingly, they share both profit
and losses based on the equity contribution (Visser 2009, pp. 55-56).
Another type of musharaka is “Diminishing Musharaka” which was
developed recently. This mode of finance is used mainly in financing
the various types of fixed assets. Under this scheme, both financier
and client are participating in the ownership of certain asset with a
predetermined equity percentage. The share of the financier is split
46. 35 | P a g e
into a number of units, and the client will purchase unit after unit
periodically based on a former agreement. In this sequence, the share
of the financier will decrease, whereas the share of the client will
increase until he acquires all financier’s shares (became the ultimate
owner of the asset) (Usmani, 2002, p. 108). For further understanding
of the mechanism, an example of diminishing musharaka model from
Ayub ( 2007, p. 341) will be explained. Under the latter model, the
Islamic bank will finance a house for a client; both parties agree on
the equity percentage, as 20 percent for the client and 80 percent for
the bank (figure 5). The finance duration is 10 years with 7 percent as
a return rate (benchmarked). The bank will lease his share (80
percent) to the client for a return of 7 percent, in addition, the bank’s
share is divided into 120 equal units (equal to the number of months).
The client will have to pay monthly payments divided into two parts,
firstly the rental payment, secondly, an amount of one share. Under
this process, the rental payment will decrease each month as the
bank’s share is decreasing. At the end of the ten years, the financier’s
shares will be fully purchased by the client, and in consequence, the
client will become the owner of the house.
Figure 2.2 Diminishing Musharaka Model
47. 36 | P a g e
Even though it seems that interest-based and PLS systems are looking
alike, there is a significant difference between their mechanisms.
Under the latter system, there is no fixed yield, or maybe there is no
yield based on the profit, whereas, under the former there is a fixed
yield translated into a form of a predetermined interest rate. Moreover,
PLS systems represent a physical share of profits and losses, which
indicates a strong concern from the both sides in terms of project
profitability. In contrast, the interest-based system is just concerned
about the default of the loan, in other words, the periodical interest
payment regardless of the profit or loss of the other party. For this and
other reasons, Scholars asserted that PLS contracts aim to develop and
sustain the financial market, as it encourages banks to focus more on
long term projects instead of the short term lending techniques. In
addition, banks will be obliged to monitor the ongoing projects with
its clients as it became a real partnership and not equity finance.
Indeed, this will increase the overall cost; however, it will develop the
investments in the financial markets (Mirakhor & Zaidi, 2007)
2.13 MURABAHA
Murabaha is derived from the Arabic word ‘ribh’, meaning profit. It
is a commonly used instrument by the Islamic financial institutions. In
Islamic banks, murabaha is a trade contract between the bank and the
client, where the bank purchases a certain good from a third party and
resell it to the client with a markup margin. murabaha contracts are
commonly used for the financing of ‘machinery, consumer durables,
trade supplies and means of transport’ (Visser 2009, p.57-58). In fact,
there are two types of murabaha. Under the first type, the bank
purchases the assets/goods and makes them available for sale.
48. 37 | P a g e
Similarly, the second type, also called “ Murabaha to purchase order”,
the bank purchases the asset on behalf of the customer based on an
agreed promise. The most important concept in this formula is that the
bank commits to reveal the original cost of the purchased goods to the
client. In addition, both parties must agree on the mark-up margin
(figure 6) (Kettell 2010, p. 26-27). In fact, Banks commonly use the
London interbank offered rate (LIBOR) as an indicator for the mark-
up percentage (Visser 2009).
Figure 2.3 Murabaha Model
In fact, It can be seen that the respective model operates similarly as
the interest based model, however, several reasons contradict this
argument. First, the markup margin is for a service done by the bank
(intermediary service), which stands for a certain effort. Second, in
contrast with the interest based model, the mark-up is a pre-agreed
ratio which not linked to a certain time factor. Therefore, it will not
increase if the customer fails to pay in the case of deferred payment.
Finally, all risks which might occur before the possession by the
customer will be borne by the bank, as he is the owner of the goods
(Mirakhor & Zaidi, 2007).
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2.14 IJARA (LEASING)
Ijarah is one the major financial schemes in the Islamic financial
system. The term is permitted by the majority of Islamic scholars as it
was viewed in both the Quran and the Sunnah. Literally, ijarah is
derived from the Arabic word “al-‘Ajr” which means compensation
(Ayub, 2007, p. 279). Ijarah or leasing is a contract between two
parties, the lessor and the lessee, where the lessor transfers the
usufruct (the right to use) of a particular asset to the lessee for an
agreed periodical rent amount (Kettell, 2010, p. 54). The latter is the
first type of ijarah, where the transaction is based just on the transfer
of the usufructs of a certain asset. This type is similar to the operating
lease in the modern finance, however, ijarah is based on shariah
principles (the prohibition of Riba and Gharar). Under this ijarah
type, The bank (lessor) will purchase the required item for the client
(lessee) directly from the supplier and lease it back to the client after
adding a profit margin. All risks associated with the ownership of the
asset shall be borne by the bank during the time of the contract,. Upon
the end of the lease contract, the bank will retrieve the asset again
(Kettell, 2010, p. 55; Ayub, 2007, p. 289). In order to determine the
profit margin, The Islamic bank can use LIBOR interest rate as a
benchmark (Usmani, 2002, pp. 140,145). There is another type of
ijarah similar to the conventional finance lease. This type is called
“Ijarah Wa Iqtina”(leasing and promise to gift) (Usmani, 2002, p.
151). Under this type, the agreement between the lessor and the lessee
is similar to the normal ijarah, however, the lessor is obliged to
transfer the ownership of the asset at the end of the lease period
(figure 9). In practice, the bank amortizes the cost of the asset, in
addition to a profit margin over a certain period (based on an
50. 39 | P a g e
agreement between the two parties), in a way that he receives the
principle and transfer the asset to the lessee at the end of the lease
period (Ayub, 2007).
Figure 2.4 Ijarah Model
Both ijarah and Ijarah –Wa- Iqtina are widely practiced by the
Islamic banks; several assets can be leased under this mode of finance,
for example, aircrafts building, cars and machinery. It is worth
pointing out that the first Islamic lease in the modern history was
between the AL Rajhi Banking and investment corporation (ARBIC)
and the Bubai-based Emirates Airline, where the former leased the
latter an A310-300 Airbus with an amount of $US 60 (Kettell, 2010).
2.15 SALAM (ADVANCE PURCHASE)
Salam literally means ‘futures’. A buyer pays in advance for a
designated quantity and quality of a certain commodity to be delivered
at a certain agreed date and price. It is limited to fungible commodities
and is mostly used for the purpose of agricultural products by
providing needed capital prior to delivery. Generally, Islamic banks
use a salam contract to buy a commodity and pay the supplier in
advance for it, specifying the chosen date for delivery. The bank then
sells this commodity to a third party on a salam or instalment basis.
With two salam contracts, the second should entail delivery of the
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same quantity and description as the first contract and is concluded
after the first contract (El-Gamal, 2000).
2.16 ISTISNAA
is a contract in which a party (for example a consumer) demands the
production of a commodity according to certain specifications and
then the delivery of it from another party, with payment dates and
price specified in the contract. The contract can be cancelled at any
time by any party given a prior notification time before starting the
manufacturing process, but not later than that. Such an arrangement is
widely used for real estate mortgage. Consider a family who would
like to buy a $100 000 house and want to finance this purchase with
the help of an Islamic bank. It may make an up-front payment
equalling 20 per cent ($20 000), leaving the bank to invest 80 per cent,
or $80 000, in the house. The family’s monthly payment will comprise
paying back rent to the bank plus a purchase of a certain portion of
shares from the bank, until they effectively buy it out. The rent
payments are legitimate because they are used to get a tangible asset
that the family does not completely own, and are not paid to return
borrowed money with interest.
2.17QARD HASAN
Qard hasan is a financial instrument without any intention to generate
profit, it means literally “good loan”, and also called a zero-return
instrument. Normally, qard hasan is offered as financial assistance for
solidarity intentions and social activities. For example, poverty
projects and health care projects which mostly run through
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governments in the Muslim countries. In fact, qard hasan’s providers
are seeking the reward in the hereafter; therefore, there is no intention
to make profit out of their deposits. Normally, Full repayment of the
loan at the face value is guaranteed by the government (Khan, 2007, p.
294). Islamic financial institutions can also provide qard hasan to
individuals; this will be also for social activities and training programs
for students who cannot afford studying expenses. For instance, the
Islamic development bank offers several academic scholarship
programs for students; the repayment of the loan would be in easy
installments and after graduation and gainful employment.
2.18 CHAPTER SUMMARY
In conclusion we can say that Islamic banking is based on the idea that
interest is strictly forbidden in Islam, and that Islamic teachings
provide the required guidance on which to base the working of banks
(Hassan and Lewis, 2007). And we find that islamic banking reduce
inflation and lowering unemployment.
And History of Islamic banking shows that Following the birth of
Islam, almost 1400 years ago, new financial principles were
introduced by prophet Mohamed (PBUH), the prophet of Islam. This
was mainly based on the prohibition of riba (usury) and the reliance
on the profit-sharing concept (Lewis & Algaoud, 2001, p. 4), which
modernly known as Islamic finance. Approximately 40 years ago, the
concept was absorbed by the modern financial institutions, as they
started to design products and services in compliance with the Islamic
law (Shariah). In consequence, a new banking system has emerged,
which is known as “Islamic Banking”. And in Afghanistan Islamic
banking was introduced between 2008 and 2009. The first draft
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banking law was prepared by Da Afghanistan Bank (Central Bank of
Afghanistan) Da Afghanistan Bank established the Islamic banking
section that operates under the technical support of the Shariah
Council consisted up of famous religious scholars from Afghanistan
as well from some other countries. In further we know about some
products of islamic banking such as: Mudaraba wich is a form of
business agreement between two parties, the capital owner and the
entrepreneur, Musharaka is a form of financial partnership, where
two parties or more agree on launching a set of business, in order to
generate profit,
murabaha is a trade contract between the bank and the client, where
the bank purchases a certain good from a third party and resell it to the
client with a markup margin, Ijara is a contract under which a bank
buys and leases out an asset or equipment required by its client for a
rental fee, Salam literally means ‘futures’. A buyer pays in advance
for a designated quantity and quality of a certain commodity to be
delivered at a certain agreed date and price, istisnaa is a contract in
which a party (for example a consumer) demands the production of a
commodity according to certain specifications and then the delivery of
it from another party, with payment dates and price specified in the
contract.
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3CHAPTER
ISLAMIC BANKING IN THE ISLAMIC
REPUBLIC OF AFGHANISTAN
3.1 INTRODUCTION
In this chapter I will provides the basic and practical information on
impact of Islamic banking on economic growth, accessing credit in
Afghanistan, I will describes the sources of financing in Afghanistan ,
financial products and practical aspects to obtain credit in
Afghanistan.
In this chapter I have used resources and standard data to represent the
characteristic spread of values of variables. I have shown the accuracy
of our analysis (which define the probable range of the true value in
the Islamic Banks of Afghanistan from which we drew our data). The
values shown vertically in charts represent the amount of each Islamic
product of Islamic Banks, and the values shown horizontally in charts
represent the year and the exact values of amount particularly under
each year mentioned. This chapter also addresses that are Islamic
banks stable and efficient to the economic of Afghanistan, by utilizing
overall data of all Islamic Windows in Afghanistan, data of which is
collected from DAB‘s (Da Afghanistan Bank) Islamic Banking
Supervision Department.
Further I describe Ghazanfar Bank Islamic accounts and products with
its rules and regulations.
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3.2 IMPACT OF ISLAMIC BANKING ON
ECONOMIC GROWTH
Access to finance remains a key element for business development in
an economy. Entrepreneurs, who have new ideas and business plans in
their mind, lack the necessary capital to execute their projects.
Financial intermediation thus helps allocate resources in an economy,
as it makes the private savings accessible to investors and
entrepreneurs. Hence, availability and access to capital remain a key
determinant of investment in an economy. On the other hand a
business cannot successfully operate in the market unless sufficient
capital is allocated to those activities which produce sufficient surplus
to cover all set-up, operating and capital costs of the enterprise. This is
to say that businesses cannot settle for a low level of production
because markets expand, competition increases, and new products are
offered day by day, and those businesses moderately operating in the
margin will no longer be able to survive. An entrepreneur must have
ambitious goals. It should seek to expand its business and increase its
market share. It should look for new products and methods of
production to acquire higher competition power in the market. To do
so, it needs capital to expand its business, benefit from economies of
scale, decrease its total costs and finally increase its profit margin.
Usually, there exist various options to acquire the desired capital.
Therefore, it is important that the entrepreneur have the necessary
knowledge of financing options which play an important role in the
economic growth of country.
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3.3 SOURCES OF FINANCE IN AFGHANISTAN
Formal sources of financing in Afghanistan include commercial
banks, microfinance institutions and other financial institutions.
Commercial banks in Afghanistan offer short- to medium-term loans
to both individuals and businesses, but focus primarily on corporate
clients. Microfinance institutions (MFIs), on the other hand,
concentrate on small & medium enterprises (SMEs) with more or less
similar terms as those of commercial banks. MFIs, unlike commercial
banks, usually require third party guarantee instead of collateral, and
their loans do not exceed AFN 2.5 million or $50,000. There are also
other financial institutions in Afghanistan which provide large-size,
long-term loans with more flexible and easier terms and conditions.
3.4 COMMERCIAL BANKS
There are a total of 17 commercial banks in Afghanistan, including
three state-owned, nine private banks, and five foreign bank branches.
These banks offer both conventional and Islamic banking products.
Fund-based financing methods include term loans, overdraft, Small &
medium enterprises (SME) financing and Islamic financial products
such as murabahah, mudarabah, musharakah and ijarah. Non-fund
based financing is in the form letter of credit and bank guarantee.
3.5 FINANCING UNDER ISLAMIC BANKING
In Afghanistan, there are no fully-fledged Islamic banks, but
commercial banks have Islamic banking windows which offer Islamic
banking products according to the Shariah law. Islamic banking
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windows provide mudarabah, musharakah, murabahah, and ijarah
modes of financing.
3.6 MUDARABAH IN AFG
Mudarabah is a profit-sharing mode of Islamic financing, in which the
bank (called rabbul-mal) provides money for an investment project
and the agent enterprise (called mudarib) invests the capital and
manages the business project. Profit generated from the project is
shared between the two parties according to a pre-determined ratio. In
other words, the bank and the agent receive profit based on a ratio
they have agreed on. In case of loss, however, only the bank (lender of
money) bears all the loss, while the mudarib loses only the services it
provides. It should be noted that mudarabah is a trust-based financing,
and banks only engage in such a partnership with well-known and
trusted clients.
3.6.1 Purpose
Mudarabah can be used for various purposes such as short-term
financing, project financing, SME set-up, and import financing.
3.6.2 Size and tenor
The amount of financing in case of mudarabah can range between
Af.900,000 ($18,000) and Af.100 million ($2 million). The contract
engaged by banks in Afghanistan is usually up to 12 months.
3.6.3 Banks
Afghan United Bank, and Maiwand Bank provide mudarabah
financing in Afghanistan.
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3.7 MUSHARAKAH (PARTNERSHIP) IN AFG
Musharakah is a profit and loss sharing contract in which two or more
parties engage in a partnership agreement on an investment project.
The difference between mudarabah and musharakah is that, in
mudarabah only one party provides the fund, while in musharkah all
parties contribute some capital. In case of a banking musharakah, the
bank and the client company contribute capital to the investment
project. The profit generated from the project is determined according
to a specified ratio, whilst any possible loss is shared among the
parties per their capital contribution. Both parties (bank and client)
may participate in the management of the project.
3.7.1 Purpose
Musharakah can be used for various purposes in Afghanistan such as
short-term financing, project financing, SME set-up, import financing,
and working capital financing.
3.7.2 Pricing
The parties in musharakah can freely agree, with mutual consent, on
the ratio of profit allocated to each party, which may differ from the
ratio of their contributed capital. Banks in Afghanistan usually set for
16 to 22 percent rate of profit in musharakah, and require the profit
payment on quarterly basis. In case of a loss, both parties incur the
loss to the extent of their invested capital.
3.7.3 Banks
Ghazanfar bank, Maiwand bank, and Afghan United Bank provide
musharakah financing.
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3.8 MURABAHAH (SALE CONTRACT) IN AFG
Murabahah is a particular kind of sale contract in which one party
purchases goods and sells it to another party at a price that includes a
profit margin agreed by both parties. In this contract, the market price
(true cost) of the item must be clearly stated at the time of the sale
agreement and both parties should agree on the profit margin which
the seller receives. In the context of a banking murabahah, upon
request by the client, the bank purchases an asset from a third party –
usually a supplier or vendor – and resells the item to the client either
against an immediate payment or on a deferred payment basis
(meaning a delayed payment in the future).
3.8.1 Purpose
Murabahah can be used for purchasing machineries and equipment, or
for importing goods and raw materials from abroad. In the latter case,
it is a form of trade finance based on the letter of credit system.
3.8.2 Size and tenor
The size of loan in murabahah, offered by banks in Afghanistan,
ranges between Af.2.5 million ($50,000) and Af.100 million ($2
million), and may be provided for a few months to a year.
3.8.3 Pricing
The profit margin requested by banks in Afghanistan is usually
between 15 and 20 percent of the total price of the purchased asset.
3.8.4 Banks
Ghazanfar bank, Maiwand bank, and Afghan United Bank engage in
murabahah contract.
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3.9 IJARAH (LEASING) IN AFG
Ijarah is a contract in which the benefits (usage) of an asset is
transferred by the owner (i.e. lessor) to the lessee (i.e. user) for an
agreed period of time at a specified price or rental amount. In the
context of a banking ijarah, the bank purchases the asset (usually
property and machinery) and leases it to the client for an agreed
timeframe. The rental amount to be paid at each period can be either a
fixed or a variable amount. Ijarah can be performed in two ways.
Operating ijarah is a simple form of leasing, in which the asset is
returned to the bank at the end of the period; whilst in an ijarah
muntahi-be altamlik or ijarah wa al-iqtina’ the ownership of the asset
is transferred to the lessee at the end of the contract period.
Afghanistan is very poor in Industry because of its specific conditions
and current political situation. But however there are some industries
and more industries are coming. Islamic Banks use Ijara sumal Bai
(Hire Purchase) to finance the machineries and equipments needed for
Industries, Agricultural and Food processing has been the most
favorable Industry projects in Afghanistan.
3.9.1 Purpose
Ijarah can be used for purchasing or leasing machineries, vehicles,
building, or other types of property.
3.9.2 Tenor and bank
Bank-e-Millie and Afghan United Bank offer ijarah up to a period of 3
years.
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3.10 DATA ANALYSIS OF ISLAMIC BANKING
PRODUCTS FROM (2012-2014) YEARS
3.11 TOTAL MURABAHA AMOUNT IN ISLAMIC BANKS OF
AFGHANISTAN
The table shows the extent of overall Murabaha products of Islamic
windows in Afghanistan for the year 2012 up to Sep-2014, which is
further, described in Graph 3.1 and has been interpreted below
Interpretation: As it is
noticeable in the above
graph there has been a
good increment in the
Murabaha services of
the Islamic windows of
Afghanistan in the year
2014, there were a very
small fall in the year
2013 but the customers
has putted more
attention to this product
in 2014 which is
considered beneficial as
Murabaha indirectly provides a good tool for an efficient deferred
sale, providing business men the asset of its choice and providing
banks profit for the effort and risk that it tool. Murabaha has little
Table 3. 1 Murabaha products of Islamic windows in
Afghanistan from ( 2012 -2014).
Figure 3. 1 Murabaha products of Islamic windows in
Afghanistan from( 2012 -2014).
62. 51 | P a g e
effect on the reduction of unemployment; there is no clear study on
the effect of Murabaha on inflation.
3.12 TOTAL IJARAH AMOUNT IN ISLAMIC BANKS OF
AFGHANISTAN
The table shows the extent of overall Ijarah products of Islamic
windows in Afghanistan for the year 2012 up to Sep-2014, which is
further, described in Figure 3.2 has been interpreted below.
Interpretation: As shown in
the above graph at the
starting stage Afghanistan
was in a very good phase
in terms of Ijarah
investments, but after a
year passed due to doubts
in security satuations and
departure probability of
U.S. Forces from
Afghanistan people and
specially the banks were
afaired of investing in this
service, that is why the amount invested in this particular service got
decreased in 2013, afterward in 2014 the security didn‘t got that much
worst as expected, and people were more hopefull to the future
investments, which is really effective since Ijarah has great potential
for protecting against inflationary harms to middle class people and
entrepreneurs, by allowing the use of assets without sudden cash
Table 3. 2 Ijarah products of Islamic windows in Afghanistan
for the year (2012-2014)
Figure 3. 2 Ijarah products of Islamic windows in Afghanistan
for the year (2012-2014)
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outflows. It enables them to modify or replace, even after some
months or years, their equipment or machinery without much cash
flow swings. But Ijarah, like ordinary lease, can sometimes leads to
inflation itself if the economy is working at the full employment level,
then boosting demand of goods which will further increase prices in
the market.
TOTAL MUSHARAKAH AMOUNT IN ISLAMIC BANKS OF
AFGHANISTAN
The table shows the extent of overall Musharakah products of Islamic
windows in Afghanistan for the year 2012 up to Sep-2014, which is
further, described in Graph 3.3 and has been interpreted below.
Interpretation: The graph
shows that although in
2013 there were security
dificiency rumors in the
capital and provinces,
the Musharakah
Investment in
Afghanistan was in the
peak stage, since most
of the investors wanted
to decrease the
probability of their
losses into half by
involvement of Islamic
Banks into their businesses and banks never wanted to lose their
Table 3. 3 Musharakah products of Islamic windows in
Afghanistan for the year (2012-2014)
Figure 3. 3 Musharakah products of Islamic windows in
Afghanistan for the year (2012-2014)
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customers and also there is another reason that more people got to
know about this product than the previouse year and they tried to
share their profit and loss with islamic windows since it was a good
source of financing for them . But in the year 2014 the number of the
projects got decreased by departure of foreign troops from
Afghanistan and made some sort of impacts on the investments as
well. Muharakah can be one of the key elements in the field of Islamic
Banking in Afghanistan as Musharakah encourages partnerships, also
created jobs for many people in society, promotes enterprise and
partnership ventures, creating jobs in the country, and promotes
business enterprise culture in society and growth of skilled people.
3.13 TOTAL MUDAREBAH AMOUNT IN ISLAMIC BANKS OF
AFGHANISTAN
The Table 3.9.2-1 and Table 3.9.2-2 shows the extent of overall
Mudarabah products of Islamic windows in Afghanistan for the year
(2012 -2014), which is
further described in Figure 3.4 and Figure 3.5 and has been interpreted
below. Table 3.4 represents (Savings) and Table 3.5 represents (Time
Deposits).
Table 3. 4 Mudarabah products of Islamic windows in
Afghanistan for the year (2012 -2014) represent savings
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Interpretation: As described
in the graph there is an
small fall in the year 2014
it is easy to see that people
of Afghanistan are
increasingly getting
attracted in interest free
banking since they are
getting aware of the
service, but still they need
to be educated about the
products of Islamic
banking for making this
service more as Murabaha
encourages business
management by skilled
people and promotes
commercial activity
which helps to reduce
poverty. Mudarabah also
helps control inflation by
promoting interest free
business activities.
Interest and credit creation of banks through lending are the major
source of inflation in society. Mudarabah involves bank or other
capitalists bearing in both profit and loss, and not just making
earnings through a predetermined interest rate exploiting the needs of
individuals or firms.
Figure 3. 4 Mudarabah products of Islamic windows in
Afghanistan for the year (2012 -2014) represent savings
Table 3. 5 Mudarabah products of Islamic windows in
Afghanistan for the year (2012 -2014) represent Deposit.
Figure 3. 5 Mudarabah products of Islamic windows in
Afghanistan for the year (2012 -2014) represent Deposit.
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3.14 TOTAL ALWADEAA AMOUNT IN ISLAMIC BANKS OF
AFGHANISTAN
The table shows the extent of overall Alwabeaa products of Islamic
windows in Afghanistan for the year 2012 up to Sep-2014, which is
further, described in Graph 3.6 has been interpreted below.
Interpretation: The above
graph describes that Islamic
windows in Afghanistan
were successful in
attracting businesses as
well, specially in the year
2013 however there is no
major difference in the
current account services of
Conventional and Islamic
Banks except that none
Islamic accounts are
directly or indirectly
involved in (Ribha or Interest) which is prohibited in Islam. This
service helps the business and as well as the bank being more liquid in
their daily operations.
Table 3. 6 Alwabeaa products of Islamic windows in
Afghanistan for the year (2012-2014)
Figure 3. 6 Alwabeaa products of Islamic windows in
Afghanistan for the year (2012-2014)
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3.15 TOTAL AMOUNT OF FINANCE + INVESTMENT IN ISLAMIC
BANKS OF AFG
The table shows the extent of overall Finance and an Investments of
Islamic window in Afghanistan for the year 2012 up to Sep-2014,
which is further, described in Figure 3.9.2-1and has been interpreted
below.
Interpretation: As shown in
the graph at the beginning
stage Islamic Banks in
Afghanistan were in a very
good phase in terms of
financing and investments,
but after a year passed due
to doubt in security
situations and departure
probability of U.S. Forces
from Afghanistan the
banks were afaired of
investing and financing, that is why the amount of investments got
decreased in 2013 and 2014 but the variance is not so much huge.
Table 3. 7 Finance and an Investments of Islamic window in
Afghanistan for the year (2012-2014)
Figure 3. 7 Finance and an Investments of Islamic window in
Afghanistan for the year (2012-2014)
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3.16 TOTAL PROFIT AMOUNT OF ISLAMIC BANKS IN
AFGHANISTAN
(AFS) The table shows the extent of overall Profit of Islamic
windows in Afghanistan for the year 2012 up to Sep-2014, which is
further, described in Figure 3.9.2-1 and has been interpreted below.
Interpretation: As shown in
the graph this is clear that
Islamic windows have a
positive run since they are
established, as they have
never experienced losses in
the past three years of their
operation. Although there
has been some ups and
downs in the amount of the
profit on yearly bases.
ASSET OF ISLAMIC BANKS IN AFGHANISTAN (AFS)
The table shows the extent of overall Asset of Islamic windows in
Afghanistan for the year 2012 up to Sep-2014, which is further
described in Figure 3.9.2-2and has been interpreted below.
Table 3. 8 Profit of Islamic windows in Afghanistan
for the year (2012 -2014)
Figure 3. 8 Profit of Islamic windows in Afghanistan for the
year (2012 -2014)
Table 3. 9 Asset of Islamic windows in Afghanistan for
the year (2012-2014)
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Interpretation: As it is
shown in the graph Islamic
windows in Afghanistan
has increased their maturity
and trust by increasing
their assets in the year
2013, and the small
decrease in the year 2014
describes that most of the assets are fixed and long term. And we are
hopeful of their long run to make a better society which is interest free
and less treat of inflation is there, as the businesses will be involved in
both profit and loss, and not just making earnings through a
predetermined interest rate abusing the needs of individuals or firms.
3.17 GHAZANFAR BANK
Ghazanfar Bank, a full fledged licensed commercial Bank, start its
operations in March 2009. This bank In the eight years since it opened
has established itself as one of Afghanistan’s most innovative and
successful financial institutions. The bank has strong product lines in
both conventional and Islamic banking, and offers extensive online
and mobile banking service. Recently, Ghazanfar launched a pension
plan program and partnered with MasterCard to offer 3D secure
internet transactions. As a result of these and other services, fee and
commission-income income is rising rapidly, up to 33% last year and
accounting for more than a quarter of total net income. The bank
Branches covers various key locations such as Mazar Sharif,
Hairatan, Kunduz, Takhar, Pule- Khumri, Jalalabad, Herat besides
Figure 3. 9 Asset of Islamic windows in Afghanistan for the
year (2012-2014)
70. 59 | P a g e
opening another two branches at Kabul in Sarai Shahzada and Shar-e-
Naw. The bank is particularly keen to help fledging Afghan
businesses to succeed and offers entrepreneurs a number of
programmes aimed at skills development and financial literacy. The
Management Team of the Bank is comprised of highly experienced
and qualified Bankers, Financial Experts, Accountants and Risk
Managers with considerable expertise in all aspects of Banking. With
the help of such a dynamic team the Bank is in a position to offer
specialized skills in a traditional way in all related spheres such as
counseling and advising on any financial matter, handling of foreign
exchange transactions, handling of investments in a Depository
Account, Islamic Banking transactions, Lending/Corporate Banking
transactions, SME Lending transactions, Money Transfer transactions,
Retail Banking transactions and International Trade related
transactions. Recently a pension scheme was launched by the Bank
under the nomenclature of Rahat-e-Zindagi. It is for the first time that
such a scheme has been introduced in Afghanistan.
Ghazanfar Bank has been awarded as best of the best in financing
bank of 2016 By Acquisition International "UK Magazine".
Also due to offering best Islamic service Ghazanfar bank achieves
Best Sharia-Compliant Commercial Bank Afghanistan Award in 2017
by “International Finance Magazine”.
3.18 GHAZANFAR BANK ISLAMIC ACCOUNTS AND ITS RULES AND
REGULATIONS
Basically Ghazanfar Bank has following types of Accounts and
Products:
