Islamic Finance

Musharakah & Mudarabah By Maulana Taqi Usmani

The Principle Of Limited Liability
Introduction
The concept of 'limited liability' has now become an inseparable ingredient of the large scale enterprises of trade and industry throughout the modern world, including the Muslim countries. The present chapter aims to explain this concept and evaluate it from the Shari‘ah point of view in order to know whether or not this principle is acceptable in a pure Islamic economy. The limited liability' in the modern economic and legal terminology is a condition under which a partner or a shareholder of a business secures himself from bearing a loss greater than the amount he has invested in a company or partner-ship with limited liability. If the business incurs a loss, the maximum a shareholder can suffer, is that he may lose his entire original investment. But the loss cannot extend to his personal assets, and if the assets of the company are not sufficient to discharge all its liabilities, the creditors cannot claim the remaining part of their receivables from the personal assets of the shareholders.

Although the concept of 'limited liability' was, in some countries applied to the partnership also, yet, it was most commonly applied to the companies and corporate bodies. Rather, it will be more true, perhaps, to say that the concept of 'limited liability' originally emerged with the emergence of the corporate bodies and joint stock companies. The basic purpose of the introduction of this principle was to attract the maximum number of investors to the large-scale joint ventures and to assure them that their personal fortunes will not be at stake if they wish to invest their savings in such a joint enterprise. In the practice of modern trade, the concept proved itself to be a vital force to mobilize large amounts of capital from a wide range of investors.

No doubt, the concept of 'limited liability' is beneficial to the shareholders of a company. But, at the same time, it may be injurious to its creditors. If the liabilities of a limited company exceed its assets, the company becomes insolvent and is consequently liquidated, the creditors may lose a considerable amount of their claims, because they can only receive the liquidated value of the assets of the company, and have no recourse to its shareholders for the rest of their claims. Even the directors of the company who may be responsible for such an unfortunate situation cannot be held responsible for satisfying the claims of the creditors. It is this aspect of the concept of 'limited liability' which requires consideration and research from the Shari‘ah viewpoint.

Although the concept of 'limited liability' in the context of the modern commercial practice is a new concept and finds no express mention as such in the original sources of Islamic Fiqh, yet the Shari‘ah viewpoint about it can be sought in the principles laid down by the Holy Qur’an, the Sunnah of the Holy Prophet ? and the Islamic jurisprudence. This exercise requires some sort of ijtihad carried out by the persons qualified for it. This ijtihad should preferably be undertaken by the Shari‘ah scholars at a collective level, yet, as a pre-requisite, there should be some individual efforts which may serve as a basis for the collective exercise.

As a humble student of Shari‘ah, this author have been considering the issue since long, and what is going to be presented in this article should not be treated as a final verdict on this subject, nor an absolute opinion on the point. It is the outcome of initial thinking on the subject, and the purpose of this article is to provide a foundation for further research.
The question of 'limited liability' it can be said, is closely related to the concept of juridical personality of the modern corporate bodies. According to this concept, a joint-stock company in itself enjoys the status of a separate entity as distinguished from the individual entities of its shareholders. The separate entity as a fictive person has legal personality and may thus sue and be sued, may make contracts, may hold property in its name, and has the legal status of a natural person in all its transactions entered into in the capacity of a juridical person.

The basic question, it is believed, is whether the concept of a 'juridical person' is acceptable in Shari‘ah or not. Once the concept of 'juridical person' is accepted and it is admitted that, despite its fictive nature, a juridical person can be treated as a natural person in respect of the legal consequences of the transactions made in its name, we will have to accept the concept of 'limited liability' which will follow as a logical result of the former concept. The reason is obvious. If a real person i.e. a human being dies insolvent, his creditors have no claim except to the extent of the assets he has left behind. If his liabilities exceed his assets, the creditors will certainly suffer, no remedy being left for them after the death of the indebted person.

Now, if we accept that a company, in its capacity of a juridical person, has the rights and obligations similar to those of a natural person, the same principle will apply to an insolvent company. A company, after becoming insolvent, is bound to be liquidated: and the liquidation of a company corresponds to the death of a person, because a company after its liquidation, cannot exist any more. If the creditors of a real person can suffer, when he dies insolvent, the creditors of a juridical person may suffer too, when its legal life comes to an end by its liquidation.

Therefore, the basic question is whether or not the concept of 'juridical person' is acceptable to Shari‘ah. Although the idea of a juridical person, as envisaged by the modern economic and legal systems has not been dealt with in the Islamic Fiqh, yet there are certain prcedents wherefrom the basic concept of a juridical person may be derived by inference.

Waqf
The first precedent is that of a Waqf. The Waqf is a legal and religious institution wherein a person dedicates some of his properties for a religious or a charitable purpose. The properties, after being declared as Waqf, no longer remain in the ownership of the donor. The beneficiaries of a Waqf can benefit from the corpus or the proceeds of the dedicated property, but they are not its owners. Its ownership vests in Allah Almighty alone.
It seems that the Muslim jurists have treated the Waqf as a separate legal entity and have ascribed to it some characteristics similar to those of a natural person. This will be clear from two rulings given by the fuqaha’ (Muslim jurists) in respect of Waqf.

Firstly, if a property is purchased with the income of a Waqf, the purchased property cannot become a part of the Waqf automatically. Rather, the jurists say, the property so purchased shall be treated as a property owned by the Waqf. It clearly means that a Waqf, like a natural person, can own a property .

Secondly, the jurists have clearly mentioned that the money given to a mosque as donation does not form part of the Waqf, but it passes to the ownership of the mosque.
Here again the mosque is accepted to be an owner of money. This principle has been expressly mentioned by some jurists of the Maliki school also. They have stated that a mosque is capable of being the owner of something. This capability of the mosque, according to them, is constructive, while the capability enjoyed by a human being is physical.

Another renowned Maliki jurist, namely, Ahmad Al-Dardir, validates a bequest made in favour of a mosque, and gives the reason that a mosque can own properties. Not only this, he extends the principle to an inn and a bridge also, provided that they are Waqf.
It is clear from these examples that the Muslim jurists have accepted that a Waqf can own properties. Obviously, a Waqf is not a human being, yet they have treated it as a human being in the matter of ownership. Once its ownership it established, it will logically follow that it can sell and purchase, may become a debtor and a creditor and can sue and be sued, and thus all the characteristics of a 'juridical person' can be attributed to it.

Baitul-Mal
Another example of 'juridical person' found in our classic literature of Fiqh is that of the Baitul-mal (the exchequer of an Islamic state). Being public property, all the citizens of an Islamic state have some beneficial right over the Baitul-mal, yet, nobody can claim to be its owner. Still, the Baitul-mal has some rights and obligations. Imam Al-Sarakhsi, the well-known Hanafi jurist, says in his work "Al-Mabsut":
"The Baitul-mal has some rights and obligations which may possibly be undetermined."

At another place the same author says: "If the head of an Islamic state needs money to give salaries to his army, but he finds no money in the Kharaj department of the Baitul-mal (wherefrom the salaries are generally given) he can give salaries from the sadaqah (Zakah) department, but the amount so taken from the sadaqah department shall be deemed to be a debt on the Kharaj department".

It follows from this that not only the Baitul-mal, but also the different departments therein can borrow and advance loans to each other. The liability of these loans does not lie on the head of state, but on the concerned department of Baitul-mal. It means that each department of Baitul-mal is a separate entity and in that capacity it can advance and borrow money, may be treated a debtor or a creditor, and thus can sue and be sued in the same manner as a juridical person does. It means that the Fuqaha of Islam have accepted the concept of juridical person in respect of Baitul-mal.

Joint Stock
Another example very much close to the concept of 'juridical person' in a joint stock company is found in the Fiqh of Imam Shafi‘i. According to a settled principle of Shafi‘i School, if more than one person run their business in partner-ship, where their assets are mixed with each other, the Zakah will be levied on each of them individually, but it will be payable on their joint-stock as a whole, so much so that even if one of them does not own the amount of the nisab, but the combined value of the total assets exceeds the prescribed limit of the nisab, zakah will be payable on the whole joint-stock including the share of the former, and thus the person whose share is less than the nisab shall also contribute to the levy in proportion to his ownership in the total assets, whereas he was not subject to the levy of zakah, had it been levied on each person in his individual capacity.
The same principle, which is called the principle of 'Khultah-al-Shuyu‘' is more forcefully applied to the levy of Zakah on the livestock. Consequently, a person sometimes has to pay more Zakah than he was liable to in his individual capacity, and sometimes he has to pay less than that.
That is why the Holy Prophet has said:

'The separate assets should not be joined together nor the joint assets should be separated in order to reduce the amount of Zakah levied on them.

This principle of 'Khultah-al-Shuyu‘' which is also accepted to some extent by the Maliki and Hanbali schools with some variance in details, has a basic concept of a juridical person underlying it. It is not the individual, according to this principle, who is liable to Zakah. It is the 'joint-stock' which has been made subject to the levy. It means that the 'joint-stock' has been treated a separate entity, and the obligation of 'zakah has been diverted towards this entity which is very close to the concept of a 'juridical person', though it is not exactly the same.

Inheritance under debt
The fourth example is the property left by a deceased person whose liabilities exceed the value of all the property left by him. For the purpose of brevity we can refer to it as 'inheritance under debt'.

According to the jurists, this property is neither owned by the deceased, because he is no more alive, nor is it owned by his heirs, for the debts on the deceased have a preferential right over the property as compared to the rights of the heirs. It is not even owned by the creditors, because the settlement has not yet taken place. They have their claims over it, but it is not their property unless it is actually divided between them. Being property of nobody, it has its own existence and it can be termed a legal entity. The heirs of the deceased or his nominated executor will look after the property as managers, but they are not the owners. If the process of the settlement of debt requires some expenses, the same will be met by the property itself.

Looked at from this angle, this 'inheritance under debt' has its own entity which may sell and purchase, becomes debtor and creditor, and has the characteristics very much similar to those of a 'juridical person.' Not only this, the liability of this 'juridical person' is certainly limited to its existing assets. If the assets do not suffice to settle all the debts, there is no remedy left with its creditors to sue anybody, including the heirs of the deceased, for the rest of their claims.

These are some instances where the Muslim jurists have affirmed a legal entity, similar to that of a juridical person. These examples would show that the concept of 'juridical person' is not totally foreign to the Islamic jurisprudence, and if the juridical entity of a joint-stock company is accepted on the basis of these precedents, no serious objection is likely to be raised against it.

As mentioned earlier, the question of limited liability of a company is closely related to the concept of a 'juridical person'. If a 'juridical person' can be treated a natural person in its rights and obligations, then, every person is liable only to the limit of the assets he owns, and in case he dies insolvent no other person can bear the burden of his remaining liabilities, however closely related to him he may be. On this analogy the limited liability of a joint-stock company may be justified.

The Limited Liability of the master of a slave Here I would like to cite another example with advantage, which is the closest example to the limited liability of a joint-stock company. The example relates to a period of our past history when slavery was in vogue, and the slaves were treated as the property of their masters and were freely traded in. Although the institution of slavery with reference to our age is something past and closed, yet the legal principles laid down by our jurists while dealing with various questions pertaining to the trade of slaves are still beneficial to a student of Islamic jurisprudence, and we can avail of those principles while seeking solutions to our modern problems and in this respect, it is believed that this example is the most relevant to the question at issue. The slaves in those days were of two kinds. The first kind was of those who were not permitted by their masters to enter into any commercial transaction. A slave of this kind was called 'Qinn'. But there was another kind of slaves who were allowed by their masters to trade. A slave of this kind was called The initial capital for the purpose of trade was given to such a slave by his master, but he was free to enter into all the commercial transactions. The capital invested by him totally belonged to his master. The income would also vest in him, and whatever the slave earned would go to the master as his exclusive property. If in the course of trade, the slave incurred debts, the same would be set off by the cash and the stock present in the hands of the slave. But if the amount of such cash and stock would not be sufficient to set off the debts, the creditors had a right to sell the slave and settle their claims out of his price. However, if their claims would not be satisfied even after selling the slave, and the slave would die in that state of indebtedness, the creditors could not approach his master for the rest of their claims.

Here, the master was actually the owner of the whole business, the slave being merely an intermediary tool to carry out the business transactions. The slave owned nothing from the business. Still, the liability of the master was limited to the capital he invested including the value of the slave. After the death of the slave, the creditors could not have a claim over the personal assets of the master.

This is the nearest example found in the Islamic Fiqh which is very much similar to the limited liability of the share holders of a company, which can be justified on the same analogy. On the basis of these five precedents, it seems that the concepts of a juridical person and that of limited liability do not contravene any injunction of Islam. But at the same time, it should be emphasized, that the concept of 'limited liability' should not be allowed to work for cheating people and escaping the natural liabilities consequent to a profitable trade. So, the concept could be restricted, to the public companies only who issue their shares to the general public and the number of whose shareholders is so large that each one of them cannot be held responsible for the day-to-day affairs of the business and for the debts exceeding the assets.

As for the private companies or the partnerships, the concept of limited liability should not be applied to them, because, practically, each one of their shareholders and partners can easily acquire a knowledge of the day-to-day affairs of the business and should be held responsible for all its liabilities. There may be an exception for the sleeping partners or the shareholders of a private company who do not take part in the business practically and their liability may be limited as per agreement between the partners. If the sleeping partners have a limited liability under this agreement, it means, in terms of Islamic jurisprudence, that they have not allowed the working partners to incur debts exceeding the value of the assets of the business. In this case, if the debts of the business increase from the specified limit, it will be the sole responsibility of the working partners who have exceeded the limit.

The upshot of the foregoing discussion is that the concept of limited liability can be justified, from the Shari‘ah viewpoint, in the public joint-stock companies and those corporate bodies only who issue their shares to general public. The concept may also be applied to the sleeping partners of a firm and to the shareholders of a private company who take no active part in the business management. But the liability of the active partners in a partnership and active shareholders of a private company should always be unlimited.
At the end, we should again recall what has been pointed out at the outset. The issue of limited liability, being a modern issue which requires a collective effort to find out its solution in the light of Shari‘ah, the above discussion should not be deemed to be a final verdict on the subject. This is only the outcome of an initial thinking which always remains subject to further study and research.

The Performance of the Islamic Banks - A realistic evaluation
Islamic banking has become today an undeniable reality. The number of Islamic banks and the financial institutions is ever increasing. New Islamic Banks with huge amount of capital are being established. Conventional banks are opening Islamic windows or Islamic subsidiaries for the operations of Islamic banking. Even the non-Muslim financial institutions are entering the field and trying to compete each other to attract as many Muslim customers as they can. It seems that the size of Islamic banking will be at least multiplied during the next decade and the operation of Islamic banks are expected to cover a large area of financial transactions of the world. But before the Islamic financial institutions expand their business they should evaluate their performance during the last two decades because every new system has to learn from the experience of the past, to revise its activities and to analyze its deficiencies in a realistic manner. Unless we analyze our merits and demerits we cannot expect to advance towards our total success. It is in this perspective that we should seek to analyze the operation of Islamic banks and financial institutions in the light of Shariah and to highlight what they have achieved and what they have missed.

Once during a press conference in Malaysia, this author was asked the question about the contribution of the Islamic Banks in promoting the Islamic economy. My reply to the question was apparently contradictory, I said it he has contributed a lot and they have contributed nothing. In the present chapter an attempt has been made to elaborate upon this reply. When it was said that they have contributed a lot, what was meant is that it was a remarkable achievement of the Islamic banks that they have made a great break-through in the present banking system by establishing Islamic financial institutions meant to follow Shariah. It was a cherished dream of the Muslim Ummah to have an interest-free economy, but the concept of Islamic banking was merely a theory discussed in research papers, having no practical example. It was the Islamic banks and financial institutions which translated the theory into practice and presented a living and practical example for the theoretical concept in an environment where it was claimed that no financial institution can work without interest. It was indeed a courageous step on the part of the Islamic banks to come forward with a firm resolution that all their transactions will conform to Shariah and all their activities will be free from all transactions involving interest.

Another major contribution of the Islamic banks is that, being under supervision of their respective Shariah Boards they presented a wide spectrum of questions relating to modern business, to the Shariah scholars, thus providing them with an opportunity not only to understand the contemporary practice of business and trade but also to evaluate it in the light of Shariah and to find out other alternatives which may be acceptable according to the Islamic principles.

It must be understood that when we claim that Islam has a satisfactory solution for every problem emerging in any situation in all times to come, we do not mean that the Holy Quran or the Sunnah of the Holy Prophet (SW) or the rulings of the Islamic scholars provide a specific answer to each and every minute detail of our socio-economic life. What we mean is that the Holy Quran and the Holy Sunnah of the Prophet have laid down broad principles in the light of which the scholars of every time have deduced specific answers to the new situation arising in their age. Therefore, in order to reach a definite answer about a new situation the scholars of Shariah have to play a very important role. They have to analyze every new question in the light of the principles laid down by the Holy Quran and Sunnah as well as in the light of the standards set by the earlier jurists, enumerated in the books of Islamic jurisprudence. This exercise is called Istinbat or Ijtihad. It is this exercise which has enriched the Islamic jurisprudence with a wealth of knowledge and wisdom for which no parallel is found in any other religion. In a society where the Shariah is implemented in its full sway the ongoing process of Istinbat keeps injecting new ideas, concepts and rulings into the heritage of Islamic jurisprudence which makes it easier to find out specific answer to almost every situation in the books of Islamic jurisprudence. But during the past few centuries the political decline of the Muslims stopped this process to a considerable extent. Most of the Islamic countries were captured by non-muslim rulers who by enforcing with power the secular system of government, deprived the socio-economic life from the guidance provided by the Shariah, and the Islamic teachings were restricted to a limited sphere of worship, religious education and in some countries to the matter of marriage, divorce and inheritance only. So far as the political and economic activities are concerned the governance of Shariah was totally rejected.

Since the evolution of any legal system depends on its practical application, the evolution of Islamic law with regard to business and trade was hindered by this situation. Almost all the transactions in the market being based on secular concepts were seldom brought to the Shariah scholars for their scrutiny in the light of Shariah. It is true that even in these days some practicing Muslims brought some practical questions before the Shariah scholars for which the scholars have been giving their rulings in the forms of Fatawas of which a substantial collection is still available. However, all these Fatawas related mostly to the individual problems of the relevant persons and addressed their individual needs.
It is a major contribution of the Islamic banks that, because of their entry into the field of large scale business, the wheel of evolution of Islamic legal system has re-started. Most of the Islamic banks are working under the supervision of their Shariah Boards. They bring their day to day problems before the Shariah scholars who examine them in the light of Islamic rules and principles and give specific rulings about them. This procedure not only makes Shariah scholars more familiar with the new market situation but also through their exercise of Istinbat contributes to the evolution of Islamic jurisprudence. Thus, if a practice is held to be un-islamic by the Shariah scholars a suitable alternative is also sought by the joint efforts of the Shariah scholars and the management of the Islamic banks. The resolutions of the Shariah Boards have by now produced dozens of volumes - a contribution which can never be under-rated.

Another major contribution of the Islamic banks is that they have now asserted themselves in the international market, and Islamic banking as distinguished from conventional banking is being gradually recognized throughout the world. This is how I explain my comment that they have contributed a lot. On the other hand there are a number of deficiencies in the working of the present Islamic banks which should be analyzed with all seriousness.
First of all, the concept of Islamic banking was based on an economic philosophy underlying the rules and principles of Shariah. In the context of interest-free banking this philosophy aimed at establishing distributive justice free from all sorts of exploitation. As I have explained in a number of articles, the instrument of interest has a constant tendency in favor of the rich and against the interests of the common people. The rich industrialists by borrowing huge amounts from the bank utilize the money of the depositors in their huge profitable projects. After they earn profits, they do not let the depositors share these profits except to the extent of a meager rate of interest and this is also taken by them by adding it to the cost of their products. Therefore, looked at from macro level, they pay nothing to the depositors. While in the extreme cases of losses which lead to their bankruptcy and the consequent bankruptcy of the bank itself, the whole loss is suffered by the depositors. This is how interest creates inequity and imbalance in the distribution of wealth.

Contrary to this is the case of Islamic financing. The ideal instrument of financing according to Shariah is Musharakah where the profits and losses both are shared by both the parties according to equitable proportion. Musharakah provides better opportunities for the depositors to share actual profits earned by the business which in normal cases may be much higher than the rate of interest. Since the profits cannot be determined unless the relevant commodities are completely sold, the profits paid to the depositors cannot be added to the cost of production, therefore, unlike the interest-based system the amount paid to the depositors cannot be claimed back through increase in the prices.
This philosophy cannot be translated into reality unless the use of the Musharakah is expanded by the Islamic banks. It is true that there are practical problems in using the Musharakah as a mode of financing especially in the present atmosphere where the Islamic banks are working in isolation and, mostly without the support of their respective governments. The fact, however, remains that the Islamic banks should have gressed towards Musharakah in gradual phases and should have increased the size of Musharakah financing. Unfortunately, the Islamic banks have overlooked this basic requirement of Islamic banking and there are no visible efforts to progress towards this transaction even in a gradual manner even on a selective basis. This situation has resulted in a number of adverse factors :

Firstly, the basic philosophy of Islamic banking seems to be totally neglected.

Secondly, by ignoring the instrument of Musharakah the Islamic banks are forced to use the instrument of Murabahah and Ijarah and these too, within the framework of the conventional benchmarks like Libber etc. where the net result is not materially different from the interest based transactions. I do not subscribe to the view of those people who do not find any difference between the transactions of conventional banks and Murabahah and Ijarah and who blame the instruments of Murabahah and Ijarah for prepetuating the same business with a different name, because if Murabahah and Ijarah are implemented with their necessary conditions, they have many points of difference which distinguish them from interest-based transactions. However, one cannot deny that these two transactions are not originally modes of financing in Shariah. The Shariah scholars have allowed their use for financing purposes only in those spheres where Musharakah cannot work and that too with certain conditions. This allowance should not be taken as a permanent rule for all sorts of transactions and the entire operations of Islamic Banks should not revolve around it.

Thirdly, when people realize that income from in the transactions undertaken by Islamic banks is dubious akin to the transactions of conventional banks, they become skeptical towards the functioning of Islamic banks.

Fourthly, if all the transactions of Islamic banks are based on the above devices it becomes very difficult to argue for the case of Islamic banking before the masses especially, before the non-muslims who feel that it is nothing but a matter of twisting of documents only.
It is observed in a number of Islamic banks that even Murabahah and Ijarah are not effected according to the procedure required by the Shariah. The basic concept of Murabahah was that the bank should purchase the commodity and then sell it to the customer on deferred payment basis at a margin of profit. From the Shariah point of view it is necessary that the commodity should come into the ownership and at least in the constructive possession of the bank before it is sold to the customer. The bank should bear the risk of the commodity during the period it is owned and possessed by the bank. It is observed that many Islamic banks and financial institutions commit a number of mistakes with regard to this transaction:

Some financial institutions have presumed that Murabahah is the substitute for interest, for all practical purposes. Therefore, they contract a Murabahah even when the client wants funds for his overhead expenses like paying salaries or bills for the goods and services already consumed. Obviously Murabahah cannot be effected in this case because no commodity is being purchased by the bank.

In some cases the client purchases the commodity on his own prior to any agreement with the Islamic Bank and a Murabahah is effected on a buy-back basis. This is again contrary to the Islamic principles because the buy-back arrangement is unanimously held as prohibited in Shariah.

In some cases the client himself is made an agent for the bank to purchase a commodity and to sell it to himself immediately after acquiring the commodity. This is not in accordance with the basic conditions of the permissibility of Murabahah. If the client himself is made an agent to purchase the commodity, his capacity as an agent must be distinguished from his capacity as a buyer which means that after purchasing commodity on behalf of the bank he must inform the bank that he has effected the purchase on its behalf and then the commodity should be sold to him by the bank through a proper offer and acceptance which may be effected through the exchange of telexes or faxes.

As explained earlier Murabahah is a kind of sale and it is an established principle of Shariah that the price must be determined at the time of sale. This price can neither be increased nor reduced unilaterally once it is fixed by the parties. It is observed that some financial institutions increase the price of Murabahah in the case of late payment which is not allowed in Shariah. Some financial institutions roll-over the Murabahah in the case of default by the client. Obviously, this practice is not warranted by Shariah because once the commodity is sold to the customer it cannot be the subject matter of another sale to the same customer.

In transactions of Ijarah also some requirements of Shariah are often overlooked. It is a prerequisite for a valid Ijarah that the lessor bears the risks related to the ownership of the leased asset and that the usufruct of the leased asset must be made available to the lessee for which he pays rent. It is observed in a number of Ijarah agreements that these rules are violated. Even in the case of destruction of the asset due to force majeure, the lessee is required to keep paying the rent which means that the lessor neither assumes the liability for his ownership nor offers any usufruct to the lessee. This type of Ijarah is against the basic principles of Shariah.

The Islamic banking is based on principles different from those followed in conventional banking system. It is therefore logical that the results of their operations are not necessarily the same in terms of profitability. An Islamic bank may earn more in some cases and may earn less in some others. If our target is always to match the conventional banks in terms of profits, we can hardly develop our own products based on pure Islamic principles. Unless the sponsors of the bank as well as its management and its clientele realize this fact and are ready to accept different - but not necessarily adverse - results, the Islamic banks will keep using artificial devices and a true Islamic system will not come into being.

According to the Islamic principles, business transactions can never be separated from the moral objectives of the society. Therefore, Islamic banks were supposed to adopt new financing policies and to explore new channels of investments which may encourage development and support the small scale traders to lift up their economic level. A very few Islamic banks and financial institutions have paid attention to this aspect. Unlike the conventional financial institutions who strive for nothing but making enormous profits, the Islamic banks should have taken the fulfillment of the needs of the society as one of their major objectives and should have given preference to the products which may help the common people to raise their standard of living. They should have invented new schemes for house-financing, vehicle-financing and rehabilitation-financing for the small traders. This area still awaits attention of the Islamic banks.

The case of Islamic banking cannot be advanced unless a strong system of inter-bank transactions based on Islamic principles is developed. The lack of such a system forces the Islamic banks to turn to the conventional banks for their short term needs of liquidity which the conventional banks do not provide without either an open or camouflaged interest. The creation of an inter-bank relationship based on Islamic principles should no longer be deemed difficult. The number of Islamic financial institutions today has reached around two hundred. They can create a fund with a mixture of Murabahah and Ijarah instruments the units of which can be used even for overnight transactions. If they develop such a fund it may solve a number of problems.

Lastly, the Islamic banks should develop their own culture. Obviously, Islam is not restricted to the banking transactions. It is a set of rules and principles governing the whole human life. Therefore, for being 'Islamic' it is not sufficient to design the transactions on Islamic principles. It is also necessary that the outlook of the institution and its staff reflects the Islamic identity quite distinguished from the conventional institution. This requires a major change in the general attitude of the institution and its management. Islamic obligations of worship as well as the ethical norms must be prominent in the whole atmosphere of an institution which claims to be Islamic. This is an area in which some Islamic institutions in the Middle East have made progress. However, it should be a distinguishing feature of all the Islamic banks and financial institutions throughout the world. The guidance of Shariah Boards should be sought in this area also.

The purpose of this discussion, as clarified at the outset, is by no means to discourage the Islamic Banks or to find faults with them. The only purpose is to persuade them to evaluate their own performance from the Shariah point of view and to adopt a realistic approach while designing their procedure and determining their policies.