The Islamic bank is a financial institution which mediates between savers and investors within the framework of Islamic law. This definition highlights the bank’s role as a financial institution which aims to attract funds and investment banking services and to act as a financial intermediary within the framework of Islamic law. Islamic financial institutions are subject to the regulations and laws which cover the banking sector, as well as the rules specified in Shari’a law.
Therefore, we find that internal resources (capital, reserves and undistributed profits) and external resources (deposits) have their controls legitimised according to legal regulations. An example of the differences is funding, which has formulas which are different to loans. The most important formulas in funding are Murabaha and Istislna, which control and legitimise credit checks and credit control to ensure the money is paid back to the bank. Islamic banks must perform assessments to ensure all their banking services do not contravene the provisions for money in Islam. The functions of Islamic banks Despite the many views of researchers and scholars on this subject, the Islamic bank is a speculator in a speculation absolute. The bank has the right to appoint others to manage the investment funds of savers, and in this case the bank works for those who supplied them with the money (debtors) and the head of money and debtors are speculators (or the agent). The work of an Islamic bank can be described as a ‘racquet play’, legitimate speculation wins control over profit, labour and capital.
Unique features of Islamic banking The obligation to apply Shari’a rules Islamic banking is one of the most important parts of the Islamic economic system. The Islamic economic system by is a practical application of the religion of Islam, along with worship and morals.
Islamic banks, as financial institutions, act between savers and investors to offer financial services according to Shari’a rules on speculation. The main role for Islamic banks is to be a mediator. Islamic banks contribute to the economic and social development. In situations where the bank is a partner which contributes to the development, it is considered as a joint venture. However conventional banks have a limited relationship as borrowers or lenders.
Participating in profits and the losses. The basis of Islamic banking which renders it successful is its application of the legitimate profit and loss-sharing scheme. (Alghonm balghorm). The most important differences between Islamic and conventional banks Both Islamic and conventional banks can carry out financial brokering, however they have different aims and goals in doing so which distinguish them. Conventional banks only need to apply the regulations they are obligated to carry out, disregarding Shari’a perspectives. However Islamic banks have to apply Shari’a perspectives in order to qualify as an ‘Islamic Bank’ as well as implementing their legal obligations.
Profit The difference between the debit and the credit interest The profit from actual investment on the depositor’s money Main Activity Accepts deposits and grants loans Contributes directly to the financing and acts as specialized banks Direct trading Cannot be carried out Directly trades in cargo according to the formal rules of Islamic trade Deposits Accepts deposits and undertakes their response in the specific benefits in the specific quarter Accepts investment deposits on the basis of profit and loss sharing; thus there is no guarantee that the deposit will be returned and the distribution of profit will result from the project invested in. ‘Blue Chips’ Issues only a specific amount of interest. Issues Sukuk – the joint venture principle General reserves Deducted from net profit. Net profit is deducted only from private shareholders.
Shari’a Boards No Shari’a boards Essential to have a Shari’a board to allow new products and to monitor Shari’a compliancy. Investment Accounts All deposits gain interest. There are two accounts, (1) general investment (Modaraba Motliq) (2) private investment (Modaraba Moqaieda) Formulas for money investment Loans are mostly commercial They are invested within the framework of Islamic partnership contracts Zakaat Fund No Zakaat fund One of the ways of forming partnerships with the community. Credit Studies It’s about the business, the capital, the expected profit or securing credit. More involved with the borrower and the main interest is the repayment of the amount.
Prohibitions and allowance (Halal and Harram) Main interest is profit, subject to regulation. Banks do not become partners with projects involving prohibited activities within Islam, e.g. alcohol or drugs-related projects.
The establishment of Islamic banking and its progressions over the years It is claimed that local banks in Metghamer, Egypt, in 1963 established Islamic banking in a practical manner; therefore, it is said that Islamic banking was practiced first, then it was encoded. In 1969, the Islamic Governance was established consisting of foreign ministers who formed two committees, one Pakistani and one Egyptian. They studied the establishment of Islamic Banks and concluded the adoption of Islamic Banking in following sessions. In 1971, the Nasser Social Bank was launched as the first bank that specified in its company principles that it would not be involved in any kind of Riba activities. In 1974, an agreement was signed establishing the Islamic Development Bank in Jeddah, Saudi Arabia, it was a government bank formed in light of the study presented to the Islamic Governance conference and has been trading since 1975. 1975 saw the establishment of Dubai Islamic Bank in the UAE. The successful establishment of the first Islamic Banks, characterized by Dar el Maal El Islami, was followed by the Faisal Islamic Bank and Dalla el Barrka foundation, which is now one of the largest Islamic Banks. Some countries, such as Pakistan, Iran and Sudan, now require all the Islamic banks to work with some of their observations. Islamic banking in the Kingdom of Saudi Arabia All the banks in Saudi Arabia now offer Islamic financial products The Al Rajhi Bank has offered Islamic banking since it was established in 1988 The Al Jazeara Bank transferred fully to Islamic Banking services in 2003 The central banks of Saudi Arabia encourage Islamic banking.
Main problems which Islamic banks face Lack of trained staff in all sectors of the bank, such as head office and branches, in the area of Islamic banking rules and regulations. Difficulties in reconciling legal and Shari’a rules, in both Mudaraba and Mosharaka, making the banks turn to Murabaha. A lack of supervision and a lack of belief in modernization. Central banks do not develop tools and methods to compete within the market. A lack of cooperation and coordination between Islamic banks. The application of Islamic banking in the National Commercial Bank A recent concept has been established traditional banks offer traditional Islamic banking. The banks’ organizational units take multiple forms; either branches specialized in providing Islamic products, or Islamic windows in branches also offering traditional products.
The Central Bank sets a number of criteria and controls the work of Islamic banks and branches, of these, the most important are: 1 – Forming a Shari’a Supervisory Board formed of scholars of Islam and scholars of comparative law 2 – Preparing a budget for the branches of each financial year, taking into account the nature of the Islamic sect. This must not be incompatible with the accounting rules followed in the preparation of the budget and accounts. Profit and loss statements and periodic reports must also be sent to the Central Bank 3 – We must be faithful workers of his thought Islamic Bank Forms taken by traditional banks to offer Islamic banking According to Taatokz, banks provide Islamic banking in several forms, which can be categorized as: 1 – Specialist Islamic branches. In this form the traditional bank sets up new branches or converts existing branches to offer Islamic banking products. These branches are usually branches of a Department of the traditional bank, or may be established as a special department, which was the method used by the Egyptian National Bank, which set up a second Bank of Egypt in 1979 which in turn established branches for Islamic transactions in 1979, and by the Saudi National Commercial Bank which was established in 1990. The establishment of independent branches of conventional banks is the most common method of offering Islamic services.
The most credible is the form that allows checks on the validity of the banks. As can be seen with the Central Bank in Egypt, the main advantage of this format is that it can be separated and the results of operations have a separate results section on the bank’s statement alongside the profit and loss of the traditional business. In addition, this method is more convincing for customers than having a window in a traditional branch. The disadvantages of this method are based on the nature of the relationship between the branch and Head Office, and also that it raises questions about the separation of the private funds section which provides Islamic banking and the conventional branches. These questions will be reviewed in the next section by looking at the experiences of the Saudi National Commercial Bank. 2 – Windows offering Islamic products in the branches of traditional banks. In this form the bank allocates windows in traditional branches to provide Islamic banking products in addition to those traditionally provided by the branches of banking products. This form meets the needs of customers who wish to. This form of Islamic banking has been used widely in Malaysia, but it gives rise to differences of opinion. While some believe it is the beginning of a transformation in Islamic banking, others believe that this form leads to a loss of credibility, and also raises practical problems in the recruitment of funds, and due to the separate regulations, accounting policies and other policies concerning both financial and other matters. 3 – Islamic finance products issued through the Department of Islamic Finance This method is used to attract a segment of customers who want to deal with the traditional banks. The traditional Islamic design, Abannom, provides some instruments compatible with Islamic finance and provides all conventional banks in the Kingdom of Saudi Arabia 4 – Islamic investment funds An Islamic investment fund is an investment pool which usually takes the form of a company and aims to make a profit for investors in accordance with Islamic law.
The management of a fund may be delegated to another company or may be managed by the bank directly.
The application of Islamic banking in the Saudi National Commercial Bank This section summarizes the Saudi National Commercial Bank’s experiences in providing Islamic banking 1 – The birth of the idea The idea of providing Islamic banking services began in the application of the work of Islamic banking. In the early 1980s there was an approach made to examine the ways the Bank could provide banking services compatible with the Islamic Baattabaraha way to attract deposits, but the proposal was limited by its lack of clarity and the lack of completion of studies into the legal aspects of this work at that time. The Bank’s management decided to follow other applications of Islamic banking and participated in seminars and conferences on the subject. This led to the introduction and development of banking.
Following this introduction, expert practitioners designed a series of contracts and versions of the documents that could be applied practically and provided a clear intellectual vision for the application and the discipline of operations. The Bank then floated the idea of starting with one branch offering Islamic banking with each of the banks operating in the Kingdom of Saudi Arabia participating in its capital, like its predecessors, but the idea died because it was not adopted by any of the banks. In 1987, the Bank created the first investment fund with disciplined restrictions to ensure any deals it made were legitimate. The fund traded in global commodities and invested in trade goods in accordance with the Murabaha formula for international transactions to ensure short-term quality, with the exception of trade in gold and silver coins. In 1990, the first branch specializing in products and services of Islamic banking was opened under the guidance of the General Manager of the Bank. He himself pursued the activity and showed there was a conviction. This leadership was important. It is becoming imperative to start planning for the application of Islamic banking and so it is important to study the process in terms of development and the creation of appropriate internal and external environment for this process. The Saudi Bank’s approach to Islamic banking was to proceed in a phased manner to ensure the success of the application process.
The use of a specialized consulting firm in the Islamic banking area was effective to achieving this goal. 2 – Establishing a separate department of Islamic Banking In 1992, a separate department was set up within the bank to develop Islamic banking. Its functions were defined as follows:
• Business development in the areas of deposits, financing and investment.
• Marketing the Islamic Banking and attracting customers.
• Oversight of the management of branches that were established as Islamic branches or were converted into Islamic branches.
• Preparation and development of staff who understand the nature and characteristics of Islamic banking and control the legitimacy.
• Development of awareness among customers of the nature, philosophy and characteristics of Islamic banking through a variety of means, such as seminars attended by members of the DFI and Islamic scholars to answer questions from the audience.
• Communications and personal correspondence with customers and businesses, and the distribution of brochures concerning the activities of branches and the nature of the products. 3 – The application of the principles of Islamic banking in the National Commercial Bank Alosaip principles were approved to verifying that all the processes that were submitted and implemented in accordance with the provisions of Islamic law. To achieve this in practice, training programmes were created for all employees and branches on the basics of banking business, contracts and evidence of work in order.
The final step was the selection and appointment of R. Kabh in 1996 from among credible experts in Almehm with experience in the field of Islamic banking business. The Board examines the ways in which the administration operates Islamic banking services and develops appropriate controls and reviews all contracts. In order to legitimize the work of the Department, from time to time some operations and control steps are inserted into the implementation and administration sections, for example a monitor was created to ensure the legitimate legal rights of the application in 1999. 4 – Application within the Bank It became evident that the methodology would be one of the main requirements of the change, because the Department was seeking to make comprehensive changes in the Bank, and these changes would be difficult to achieve to the required level in the short time available. For example, policies, products and staff would need to be ready, and the policy of conversion which was adopted highlighted some of the sensitivities among administrative employees, customers, departments and branches which have become so important. Regional differences were also studied in order to avoid inappropriate reactions. 5 – Compliance with prevailing local and international laws This means the necessity of complying with all regulations in force in the Kingdom and internationally.
Activities within the bank which are not inconsistent with Islamic law are conducted in cooperation with the Foundation. The Saudi establishment has established a unit for the training of Islamic Banking Institute. 6 – Alignment with the various departments and branches of the Bank This principle aims to reduce the differences that might do harm to the relationships between the administration and its subsidiaries, other units of the bank and legislators. It is consistent with the philosophy of the senior management to create an atmosphere of harmony between the various units of the bank. These principles have been included in development plans in which the criteria for selection of workers sit at the center; and the number of branches is evidence of the design working. For example, some studies, such as Murabaha, have examined the evidence for the use of funding formulas in speculation, leasing and sale. This evidence has been reviewed more than once, and has adopted the forms of contracts in the Fatwa.
The Shari’ah should also be allowed to manage its independence and its financial and administrative subsidiaries. 7 – Market research to identify customer needs The National Commercial Bank conducted studies to determine the degree of customer awareness and interest in Islamic banking. This study found that 93% of all respondents intended to perform some transactions with an Islamic, with different degrees of commitment. A second study aimed to identify the market and was used to attract funding. It found the following results: a – a high proportion of medium-sized enterprises had a desire to use Islamic products b – large companies believe that the Islamic financial products do not provide sufficient flexibility c – 16% have a desire to use Islamic financial products immediately, with the results varying according to the region d – 35% believe it is feasible they would use Islamic financial products in the next two to five years 8 – Expanding the application of Islamic banking The successful achievement of the first phase of its goal to implement Islamic banking services within the National Commercial Bank has drawn attention both internally and externally, and its experience has become a model for other countries wishing to achieve economic goals that do not conflict with Islamic law, especially in Malaysia. However, the initial results since the opening of the first branch in 1990 up until 1998 did not achieve the aspirations of senior management in the bank in terms of the number of Islamic funds and the number of branches transformed. Having conducted a study into the possibility of using a strategy aimed at mobilizing the resources and expertise available in the bank to offer Islamic banking, Alkhmat found that the innovative and imaginative vision and the experiences of the National Commercial Bank were unprecedented globally and so created a model to help measure it. To support the administration of a scheme such as this he found the following to be the most important actions:
• Formation of a Committee of Islamic Banking A Committee of Islamic Banking was formed, headed by the Director-General of the Bank, and its membership includes a number of members of senior management of the Bank and the Director of Islamic banking services. It is responsible for planning and overseeing the process of expansion and providing the necessary support.
• Scientific Forum for the expansion of Islamic banking At the end of 1998 The Department of Islamic Banking’s forum included the Directors of most departments in the National Commercial Bank, as well as the Deputy Director-General, and was moderated by one of the experts.
One of the objectives of this forum was the search for better methods to achieve the expansion that would meet the Bank’s senior management’s commitment to the application of the law of God in all transactions. This forum proposed that the Department of Islamic banking should be led by a transformational leader who would contribute to helping other departments on the application of the change and ensure that sufficient knowledge and skills were available within each department because a certain percentage of staff must be converted to work Islamic banking during the agreed period of time. This approach was introduced to the Fatwa and Shari’a Supervisory Board in May 1999 and it was decided that its advisory opinion to provide Islamic banking in all the departments and branches of the bank was permissible. According to Dhaobt, legitimacy was established by the DFI in this regard and provides for the following: 1 – to approve National Bank branches currently providing traditional services to provide Islamic Banking Murabaha to customers in a manner specified in procedures established by instructions to the branches by the Department of Islamic Banking; that the contracts are issued by the competent authority within the bank, such as a unit for Islamic Credit Monitoring; and that these Algjraiat and practices are subject to legal supervision and follow-up observations to allow more competent employees to take over these actions. 2 – Approval by the departments and the various branches of the bank identify annual targets as a ratio of the financial activities of Islamic banking, so that these branches and departments Ptivha through Islamic modes of finance such as Murabaha, leasing and sale of term And peace and Istisna and as a stage in a gradual conversion. 3 – A Shari’ah Supervisory Board to monitor and follow-up all work and formulas used in Islamic finance in the National Bank, which do not fall within the competence of the Islamic banking management services, such as investment funds and the various formulas in the departments of finance. There will be differences between the National Bank and Murabaha contracts, between companies and individuals, and so on. 4 – The Supervisory Board confirms the legitimacy the bank officials need to redouble their efforts to accelerate the transition and to prepare for it by training staff. It provides assurance that the business transformation in the bank is moving in a safe direction, so they can act in accordance with the provisions, rules and principles of Islam. 5 – The terms of reference the Shari’ah Supervisory Board are presently limited to monitoring the management of Islamic banking, but there is a desire of officials to take over the oversight functions for all of the Bank of the Islamic Murabaha and other modes of finance, and the the Shari’ah Supervisory Board has requested the right to issue decisions, guidance, follow-up and opinion for all departments of the bank.
• Full conversion of all branches to provide Islamic banking In the Bank’s celebration of 50 years since its foundation the members of the Board of Directors passed a resolution to convert the remaining 135 branches to work only in accordance with Islamic banking principles and mechanisms.
The determination by the Bank to make this transformation can been seen in its integration of personnel management and administrative services for Islamic banking into one department. This integration has been accompanied by administrative and structural changes contributing to the objectives of the Bank.
This change was also announced a new slogan for the new bank which reflected the commitment to Islamic traditions, values and roots and the national aspirations for the future. On 29th May 2004, the Director-General of the NCB made a speech outlining the features and steps of this change and its impact on departments. The Bank accompanied this speech with questions and answers about the size of the shift, its motives and implications, and its impact on jobs and the time frame for the application of this transformation, which was completed by the end of 2005
• Methodology of converting branches to Islamic banking As Ja noted, the model for the development of Islamic banking includes a clear vision for a specific and scientific approach to lead the shift towards Islamic banking. In light of this vision, goals must be identified and, as Alastrajiat determined, the necessary resources and organizational structure must be provided. Alemrahalouaktoat claimed that the adoption of a gradual method was logical, and this was evident in the style that was followed in the conversion of branches. The most important aspects of this are: 1 – Choose the sections to be converted The branches to be converted must be chosen in accordance with the plan thought out in accordance with the principles established by the Bank.
The foremost aim was to ensure coverage in all areas in the Kingdom, and to provide literature on the definition of Islamic banking to these areas. For customers, it was important to make the conversion easy, whether this is linked to deposits, investments or funding, easing the process of conversion 2 – Conversion team The team must contain members from different banking disciplines to ease the conversion process, this means covering aspects of banking, finance and accounting, and aspects associated with the system, processes, models, documents and contracts. 3 – Preparing human resources Once the decision to convert a branch has been made, time must be set aside for training of the branch staff on the basics of Islamic banking and Ahidvp and the nature of the specialized legal controls that govern all operations. They must be provided with approaches for the self-development areas of Islamic banking. 4 – Provide branches with forms, contracts, documents, and evidence of work 5 – Contact with clients After a section is converted internally to the application of Islamic banking, it is time to communicate with existing customers, including sending personal letters, and making telephone calls and field visits to customers to explain the Islamic alternatives. 6 – Seminars for clients, and provide them with Palmtaiwiat It was clear from the outset that, in practice, customers were in dire need to be informed about the methods and means of Islamic banking. The successful deployment of Islamic banking is not the responsibility of the Islamic bank alone, but must be done with the participation of customers. It was therefore among the objectives of the administration to raise awareness of clients, particularly businesses and dignitaries, which was achieved by holding meetings and seminars with members of the Shari’ah in various cities of the Kingdom 7 – Preparation and development of human resources Human resources play an important role in improving the level of performance and paying attention to the selection of individuals, and developing and motivating them and evaluating their performance will help them to achieve a high degree of satisfaction which will be reflected in their performance, and this has been demonstrated through the administration’s interest in Islamic banking. Human resources should:
• Develop controls for the selection of personnel and administration leaders
• Investigate the ongoing training needs of employees
• Define the vision, mission preparation and development of human resources
• Design programmes, forums and development laboratories. In order to overcome the lack of knowledge and skills among individuals both short-term and long-term plans must be created.
Participation in the area of Islamic banking will be improved by 1 – Participation in internal and external programmes in Islamic banking 2 – Creation of reward and punishment schemes according to performance criteria for concrete results 3 – Fostering a culture of continuous improvement through self-development 4 – Innovation and offering new ideas for financial and Islamic investment products.
• Set priorities for the development process In order to achieve effective achievement in the development of human resources, initial requirements were identified as being leadership and management skills for branch managers and customer service for cashiers
• Curriculum development and self-development Abstract 1 – The experience of National Commercial Bank provides a case study for the transition phase for the development of Islamic banking. 2 – As well as looking at the experiences of the National Commercial Bank, the essay examines the philosophy of separate Islamic branches and Islamic windows in some branches of other conventional banks, because it seeks to examine the beginning of the expansion and development on an ongoing basis without limits. 3 – The National Commercial Bank manages the practice of Islamic banking and has achieved good financial results which have attracted the attention of bankers and specialists both locally and internationally, who want to follow up their achievements and to study it as a case of a banking system implementing Islamic finance rules. 4 – Since the National Commercial Bank implemented Islamic banking, all the banks in the Kingdom of Saudi Arabia have followed its lead.
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