The Securities Law Firm of Tramont Guerra & Nunez, P.A. (TGN) provides notice to all investors concerning the Omnivision Technologies class action lawsuit (Case No. 11-CV-05235) filed October 26, 2011 in the United States District Court of the Northern District of California for the class period from August 27, 2010 to October 13, 2011. According to the class action lawsuit, During the class period, Defendants issued materially false and misleading statements regarding the Companys business and financial results. The class action lawsuit points to the alleged wrongdoing, Specifically, Defendants failed to disclose that the Company had lost its exclusive contract to supply imaging sensors for Apples celebrated iPhone representing a serious blow to the Companys bottom line. The lawsuit asserts, As a result of Defendants false statements, OmniVisions stock traded at artificially inflated prices during the Class period, reaching a closing high of $ 36.42 per share on May 26, 2011. TGN urges investors who acquired Omnivision Technologies stock through employment, inheritance or as a personal investment, which resulted in a concentrated stock position held with full-service brokerage firms, to consider what recourse is available to recover their investment losses. The Financial Industry Regulatory Authority, (FINRA) is a self regulating organization with sales practice rules and regulations that govern the securities industrys conduct and safeguard the investing public. Furthermore, an individual securities arbitration claim may allow investors to claim larger losses in Omnivision Technologies stock based on higher market values that prevailed prior to the class period.

According to TGN, many investors in Omnivision Technologies who held company stock with full-service brokerage firms were not educated about the risks associated with maintaining a concentrated stock position. Full-service brokerage firms are obligated to give, and investors are entitled to rely upon, brokerage firms for competent, suitable investment advice for securities held in customer accounts. Brokerage firms are required to supervise the activities in brokerage accounts, losses may be attributed to the failure to adequately supervise the stockbroker and the brokerage account. Recommendations which result in unsuitable investment advice and/or failure to recommend appropriate risk management strategies for unprotected concentrated stock positions are both causes of action that may be available to investors against their full-service brokerage firm in an individual securities arbitration claim filed with FINRA.

The Securities Law Firm of Tramont Guerra & Nunez, PA, is a nationally recognized, Martindale Hubbell AV rated securities law firm. To request a confidential consultation from a TGN attorney to determine whether you have a viable individual securities arbitration claim for investment losses that exceed $ 250,000 from a full service brokerage account, contact us on our website. To speak directly with an attorney, call (800) 578-0137 and ask for David Chacin, Esquire.

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According to Robert Kiyosaki, leverage, in its simplest terms, is basically “doing more with less”.  It could be in the form of leveraging other people’s money like acquiring a loan for your house. It could be leveraging other people’s time by hiring employees for your business.  Or it could be leveraging technology like putting up an online store to reach out to more people, 24 hours a day, 7 days a week.

Things to note when applying leverage:

There are many types of leverage: leverage of debt, leverage of financial intelligence, leverage of technology and more Most investors have little control over their investments such as savings, stocks, bonds, mutual funds, index funds.  Without control, the investment becomes risky. Higher returns does not mean higher risk.  The key to minimizing risk is applying financial intelligence. Most financial advisors are sales people – NOT investors. To gain control of your investments, you need to take control of your own financial education. Leverage can work in two ways – it can work for you, or work against you Warren Buffet, the second richest man in the world, says “diversification is a protection against ignorance.”

Investing for capital gains vs investing for cashflow

Some people invest only for capital gains.  Their motto is “buy low, sell high”.  When you purchase a house for PHP 1 Million in the hope that you can sell it for PHP 5 Million after a few years, you are investing for capital gains.

Others invest only for cash flow.  They want to receive a steady fixed amount of income every month.  When you invest in Retail Treasury Bonds and receive a regular interest earnings, or invest in stocks that give dividends, you are investing for cashflow.

To invest for both capital gains and cashflow, you need to increase your financial intelligence so you can control the investment and increase its value at the same time provide a steady stream of income for you.

More tips on taking the first step to apply leverage

Don’t let your problem of not having enough money stop you from becoming rich.  Take that first step, make mistakes.  Continue learning even if you fail. The experience will increase your financial intelligence. Start small and take baby steps.  Take the time to read books, attend seminars and learn from great financial mentors before you invest. Dream BIG.  Instead of living below your means, let your BIG dreams inspire you to learn and invest carefully to allow you to magnify your income and go beyond your means.

Income Statements:

This section of the POME Chapter expands our understanding of the key financial statements, from which analysts and Project Managers identify the areas of success within the company and those that need improvement, and develop the understanding necessary to reach conclusions and make decisions that will guide the business going forward. The essence of financial management is gathering information, taking actions based on that information, and then reviewing and reassessing before progressing again.

Exhibits below lay out the first two of the basic financial statements. These two statements are the building blocks for all of the financial information Project Managers need to fulfill their responsibilities.

These basic financial statements have already been introduced. Now we consider how the information gets into these statements. To do so we must understand terms such as debits and credits, revenues and expenses, assets and liabilities. Back in the fifteenth century a Franciscan monk named Luca Pacioli, who first described the essentials of double-entry bookkeeping, identified the most basic elements of today’s bookkeeping process.

He recognized that establishing a process of checks and balances enhanced information control. We follow that premise today, reflected in the Balance Sheet, where Assets = Liabilities + Equity. Using a basic principle of algebra, once established, the integrity of an equality must be preserved. Therefore, whenever we make an entry to affect one side of the equation, we must identify a companion transaction that either offsets that effect on the same side of the equal sign or reflects a complementary effect on the other side.

From this we have developed the essence of debits and credits. In double-entry bookkeeping, for every debit amount there must be an equal credit amount. Debits are used to increase the assets or decrease the liabilities and equity, and credits are used to decrease the assets or increase the liabilities and equity. In some cases the debits and credits reach the balance sheet accounts through the Income Statement. In such cases the debits decrease revenues or increase expenses and the credits increase revenues or decrease expenses. We examine the Income Statement in detail in the next few pages.

The second accounting equation relates to ongoing activity.

REVENUES – EXPENSES = PROFIT

Income – Outgo = Outcome

We measure our progress by comparing what we generate (revenues) with what it costs us (expenses) and keep track of the difference (profit). We compare that result against targets or objectives and get both absolute and relative measures of our success and achievement.

And we develop plans, programs, and actions that we expect will improve on our performance, our results. Over the remainder of this course we examine some of these tools and techniques and consider how to strengthen our basic financial management skills.

This second accounting equation reflects the second major financial statement, When the income statement, which is also known as the Profit and Loss Statement, is presented, it is expressed as covering a period of time, with the beginning and ending dates shown. Most frequently, this period is the accounting year, beginning on the first day (e.g., January 1, XXXX) and ending on the last day (e.g., December 31, XXXX). It summarizes all of the financial activity that took place during the period captioned. On the following pages we present and describe the basic elements of the Income Statement. we describe the activities that are incorporated into the Income Statement.

To understand the financial performance of a business, it is necessary to measure the revenues and expenses and to compute the profit. To be successful, all businesses, even those identified as “nonprofit” or “not-for-profit” need to make a profit. That is, their revenues must exceed their expenses. Beginning with the Income Statement, we assess the performance of the business. Thepresents more detail, permitting you to follow the Income Statement transactions, and see how they affect the Balance Sheet, enabling you to evaluate the financial condition of the enterprise. In Exhibit below the normal format for an Income Statement includes a line-by-line explanation of the key terms of this important financial statement.

Exhibit: The Income Statement—Annotated

Many times, people talk about “the bottom line” when referring to the financial results of a business. The bottom line refers to the Earnings after Taxes and is the primary focus of people measuring a company’s performance. The Income Statement shown here includes Dividends to demonstrate how the linkage is made to the Balance Sheet if a company issues dividends. If it does not, then the Earnings after Taxes are equal to the Change in Retained Earnings.

In an annual report of a public company these last segments (Dividends and Change in Retained Earnings) may be presented as a separate reconciliation, called Statement of Stockholders’ Equity or Statement of Retained Earnings. Conventions and regulations determine how information is presented to external users. This often differs from the way information is presented to internal Project Managers for internal decision-making.

Exhibit The Balance Sheet

Exhibit: The Income Statement

Preparing Financial Statements

The final step in what is really the bookkeeping process (the accurate and timely recording of transactions) is the preparation of financial statements. This is the summarization of the recorded transactions into standard format for review and analysis. Tfocuses on the analysis and interpretation of these financial statements, which we referred to as accounting

The Key Financial Statements

pome introduced the financial statements and this POME Chapter has described their creation. The following exercises provide an opportunity to try your hand at preparing some financial statements and then to apply the journal entries described earlier to these statements to see their effect.

Examining Your Company’s Income Statement

INSTRUCTIONS: Compare this Income Statement format with the one from your company or another company whose financial statements you have access to. Identify the similarities and differences between this generalized Income Statement and that of a specific company. As with the Balance Sheet, ask someone in the accounting or finance department to clarify anything that causes confusion.

For example, your company may show revenue from different sources separately or break down expenses in more detail. Individual industries, such as banking and insurance, may have some unique reporting practices that cause their statements to differ somewhat from this format.

The Statement of Retained earnings, also known as the Statement of Stockholders’ Equity, is sometimes included in the financial statements of a public company when there have been a number of transactions affecting the equity section of the Balance Sheet and when it might be difficult for a reader to reconcile the equity section from one reporting period to the next. This statement links the profit after tax on the income statement with the retained earnings reported on the Balance Sheet. Among the transactions that could create confusion would be the issuance or repurchase of common stock, distribution of dividends, acquisition or disposition of a portion of the company, adjustments due to currency translation or stock option activity. This statement is not really a financial statement, but rather an effort to make part of the Balance Sheet more understandable.

Now coming to Koppala and george’s discussions

Income Statement

Koppala points out that an income statement will show how profitable GG Org has been during the time interval shown in the statement’s heading. This period of time might be a week, a month, three months, five weeks, or a year—George can choose whatever time period he deems most useful.

The reporting of profitability involves two things: the amount that was earned (revenues) and the expenses necessary to earn the revenues. As you will see next, the term revenues is not the same as receipts, and the term expenses involves more than just writing a check to pay a bill.

A. Revenues

The main revenues for GG Org are the fees it earns for executing sub Projects. Under the accrual basis of accounting (as opposed to the less-preferred cash method of accounting), revenues are recorded when they are earned, not when the Project  receives the money. Recording revenues when they are earned is the result of one of the basic accounting principles known as the revenue recognition principle.

For example, if George delivers 1,00 work packages in December for per delivery, he has technically earned fees totaling ,000 for that month in that Project. He sends invoices to his clients for these fees and his terms require that his clients must pay by January 10. Even though his clients won’t be paying GG Org until January 10, the accrual basis of accounting requires that the ,000 be recorded as December revenues, since that is when the delivery work actually took place. After expenses are matched with these revenues, the income statement for December will show just how profitable the company was in delivering parcels in December.

When George receives the ,000 worth of payment checks from his customers on January 10, he will make an accounting entry to show the money was received. This ,000 of receipts will not be considered to be January revenues, since the revenues were already reported as revenues in December when they were earned. This ,000 of receipts will be recorded in January as a reduction in Accounts Receivable. (In December George had made an entry to Accounts Receivable and to Sales.)

B. Expenses

Now Koppala turns to the second part of the income statement—expenses. The December income statement should show expenses incurred during December regardless of when the company actually paid for the expenses. For example, if George hires someone to help him with December deliveries and George agrees to pay him 0 on January 3, that 0 expense needs to be shown on the December income statement. The actual date that the 0 is paid out doesn’t matter—what matters is when the work was done—when the expense was incurred—and in this case, the work was done in December. The 0 expense is counted as a December expense even though the money will not be paid out until January 3. The recording of expenses with the related revenues is associated with another basic accounting principle known as the matching principle.

Koppala explains to George that showing the 0 of wages expense on the December income statement will result in a matching of the cost of the labor used to deliver the December work packages with the revenues from delivering the December parcels. This matching principle is very important in measuring just how profitable a company was during a given time period.

Koppala is delighted to see that George already has an intuitive grasp of this basic accounting principle. In order to earn revenues in December, the company had to incur some business expenses in December, even if the expenses won’t be paid until January. Other expenses to be matched with December’s revenues would be such things as expenses for the engineers and Project Vehicle..

George asks Koppala to provide another example of a cost that wouldn’t be paid in December, but would have to be shown/matched as an expense on December’s income statement.

Koppala uses the Interest Expense on borrowed money as an example. He asks George to assume that on December 1 GG Org borrows ,000 from George’s aunt and the company agrees to pay his aunt 6% per year in interest, or ,200 per year. This interest is to be paid in a lump sum each on December 1 of each year.

Now even though the interest is being paid out to his aunt only once per year as a lump sum, George can see that in reality, a little bit of that interest expense is incurred each and every day he’s in business. If George is preparing monthly income statements, George should report one month of Interest Expense on each month’s income statement. The amount that GG Org will incur as Interest Expense will be 0 per month all year long (,000 x 6% ÷ 12). In other words, George needs to match 0 of interest expense with each month’s revenues. The interest expense is considered a cost that is necessary to earn the revenues shown on the income statements.

Koppala explains to George that the income statement is a bit more complicated than what she just explained, but for now she just wants George to learn some basic accounting concepts and some of the accounting terminology. Koppala does make sure, however, that George understands one simple yet important point: an income statement, does not report the cash coming in—rather, its purpose it to

(1) Report the revenues earned by the company’s efforts during the period, and

(2) Report the expenses incurred by the company during the same period.

The purpose of the income statement is to show a company’s profitability during a specific period of time. The difference (or “net”) between the revenues and expenses for GG Org is often referred to as the bottom line and it is labeled as either Net Income or Net Loss.

Gautam Koppala,

POME Author

The prized quality in shared activity that draws families closer lies is in the way the older generation makes the mysterious world appear clearer to the younger one. A shared adventure among uncharted financial waters could be just the trick. You don’t have to go through a broker or worry about commissions for the small levels of activity you have in mind buying stocks for kids.

Children usually have nothing more than a couple of hundred dollars set aside; buying a few shares of stock here and there, perhaps in a company that interests them, like Krispy Kreme’s or something, could be especially thrilling  – sort of a Monopoly for the real world. As a first step, you could go out to a website like ING’s ShareBuilder, that lets you buy their stocks for kids in very small quantities, at practically no commission for each trade.

If you are helping a child invest 0, and this doesn’t divide evenly with a stock that is, say, apiece, sites such as this let you buy fractions of a share for the remaining. And if you go to a website like MyStockDirect, you can even directly buy from the company, and cut out the middleman. If your child happens to love McDonald’s for example, he could buy their shares directly from them.

So once they make that first purchase, you can show them all the benefits of being a stockholder. You can show your grandchild how to enroll for the dividend reinvestment plan: each time the company announces a dividend, they will just apply it to buy even more shares for the kid. If the one or two shares that your kid has, are not quite enough to meet the company’s standard for enrolling in a dividend reinvestment plan, the company could help him make the cut.

Investing today for a child’s college education is a well recommended option. Some of the best long-term choices you can make in picking stocks for kids to make their college plans easier, can be unearthed with only little research. For instance, did you notice that no matter what you try to buy online these days, you always end up on Amazon? Amazon’s earnings are growing at a faster pace each year; and the stocks are quite affordable now, what is more.

A great tech stock to invest in would be Apple Computer. One wonders why they haven’t come up with something like the Wii to take the gaming world by storm but there is hope yet. Or how about the perennial favorite, an oil company? Stocks for kids, to teach them now and to secure their future later on, is a rich field of possible research. For the caring grandparent, a little wise guidance can reap rich returns in a better relationship.

Introduction

The topic of my present research work is “Islamic Banking and global financial market” and how they are interrelated to lead to the sustainable growth of economic development. Islamic finance is closely related to Islam’s vision of economic development, which gives primary importance to the realization of socioeconomic justice and the well-being.
The subject of Islam and economic development raises a number of 
questions, one of which is about the relevance of the subject to a 
discussion forum on Islamic finance. This question is not difficult to 
answer because finance and development are very closely interrelated. 
Finance is not an end in itself; it is one of the essential means to 
development, which in turn leads to a rise in financial resources for 
accelerating development. The juxtaposition of Islam and economic 
development in the title also raises some other questions. One of these 
is whether Islam is an asset or a liability for development and whether 
Islam and development can coexist without hurting each other. If Islam 
is capable of promoting development then the second and third questions 
are about the kind of development that Islam visualizes, and the 
reasons for the failure of Muslim countries to realize development of 
this kind.

As the economic crisis deepens throughout the world, global financial institutions have set about to re evaluate the various systems and business models in place. It is no exaggeration to say that practically every mainstream and conventional banking institution has been affected by the global financial crisis. In contrast, the Islamic banking system has largely escaped the fallout from the financial crisis, thanks to rules that forbid the sort of risky business ventures that infected mainstream institutions.

There is no doubt that the current global financial crisis has presented the Islamic finance industry with an excellent opportunity to expand its appeal beyond Muslim investors as a safe haven from the speculative excesses. The message may have particular resonance in the West after the crumbling of the US mortgage market left banks holding hundreds of billions of dollars of nearly worthless credit instruments tied to home loans by a web of complex structures. Investors traumatized by the credit crisis are seeking assurances and security. The stricter rules imposed on lending by Islamic laws provide these assurances and security. Many of the speculative and highly risky structures and financing methods that have proven to be the nemesis of the western financial industry are forbidden under Islamic laws. Islamic finance practices are undoubtedly fiscally more conservative, requiring direct participation by investors in plans that do not involve esoteric strategies such as parking assets in off-balance-sheet vehicles.

While Islamic banking is no longer a novelty in the international financial world, the United States is yet to embrace this model. While some US financial institutions are venturing into this market, they are few and far between. According to some experts and financial gurus, the United States is almost a decade behind the European and Asian financial counterparts as far as the adoption and implementation of Islamic banking is concerned.

What Is Islamic Finance?

In order for one to understand how Islamic banks have virtually escaped unscathed from this financial crisis, it is essential to have a grasp of the basic fundamentals of Islamic finance. Islamic finance is based on shariah, or Islamic law, which in essence requires that gains be derived from ethical and socially responsible investments and discourages interest-based banking and investments. Islamic finance is fundamentally different from the conventional banking models as it is based on a profit and loss structure (PLS) and the prohibition of riba’ (interest). This structure requires that the financial institution invest with the client in order to finance the client’s transaction rather than lend money to the client. Due to the inherent risk involved in any investment, the financial institution is entitled to profit from the financial transaction. This is a stark contrast to modern finance in which interest is one of the key methods by which banks make money through their products, such as mortgages and personal loans.

Another fundamental distinction of an Islamic bank is the absence of insurance protecting client deposits found in conventional banks. While the PLS structure permits receipt of money by depositors when deposits invested have earned a profit, they must incur losses when deposit investments incur losses to comply with shariah mandates. Deposit insurance, such as the protection provided by the Federal Deposit Insurance Corporation, defeats the very purpose of the PLS model, as the depositor does not incur any risk. The deposit insurance is an integral part of the western banking regulations but is in direct conflict to the basic concepts of Islamic banking. The issue of deposit insurance has proven to be a major hurdle for western, primarily European, banks that wanted and have chosen to provide shariah-compliant products. European banks overcame this hurdle of deposit insurance by informing clients that the insurance was not shariah-compliant.[1]

Islamic banks have been marketing their services aggressively in the West. The conventional commercial banks have in direct competition with the purely Islamic banks begun offering Islamically structured products to their clients through “Islamic banking windows’. However, confusion exists about Islamic banking. In many minds, the prohibition of interest is the defining characteristic of Islamic banking, but it can be distinguished from conventional banking by its concern with spiritual values and social justice.

The fact that interest is prohibited does not mean capital is costless. Islam is not opposed to a return on capital. What it prohibits is the predetermined pricing of capital. The owners of capital have no right to ask for additional payment without sharing risk. Thus in lieu of fixed interest which is prohibited, the lender will be a participant in the enterprise. [2]

Islam and Banking

A. The Prohibition of Riba (interest): legal connotations

The Qur’an, or holy book of Islam, is the primary Islamic authority and it prohibits riba. The prohibition appears in several passages in the Qur’an. One passage states that God does not view interest as true wealth because it represents unearned income. Another passage condemns Jews for not obeying the Torah’s prohibition of interest.  A third passage condemns the compounding of interest upon default by stating “O believers, take not doubled and redoubled interest, and fear God so that you may prosper. Fear the fire which has been prepared for those who reject the faith . . . .” A final condemnation warns that those who receive riba are waging war with God and shall be “inhabitants of the fire and abide there forever.” Scholars have noted that the taking of riba is on par with repeated adultery and deemed more sinful than maternal incest–two crimes in Islamic criminal law that are punishable by death.

The riba prohibition reflects the Islamic view that accumulating wealth through collecting riba is not a legitimate mode of “work”. Islam values capital when it is the product of labour and risk-taking. When a lender charges interest for capital, he receives a reward without adding his labour and without regard to the success or failure of the borrower’s venture. The benefit of the loan to the lender is certain while the benefit of the capital to the borrower is uncertain. Islam views these transactions as necessarily including unfair allocations of risk and justifying reward for a passively acquired return on capital. Riba is thus exploitive vies-a-vies the borrower and its prohibition limits the extent to which one party may be disadvantaged by the other party in financial transactions.

Prohibiting economic exploitation is important in Islam because Allah wills his followers to accumulate wealth in a manner that achieves social justice. Social justice, however, should not be mistaken to mean that Allah wanted people to be equal in wealth. Muslims believe that God “deliberately created disparities in the distribution of goods in this world.” Rather, social justice supported by legitimate work means that “no one may claim more than he has earned” and may not use wealth to disparage others. This thought, when applied to conventional banking, means that investments cannot be viewed solely through the lens of achieving the highest profit margin. Instead, Islam places accession to wealth in relation to spiritual costs to the individual and social costs to the community.

Outside of social justice, Islamic scholars have also offered economic critiques of interest that support its prohibition. Scholars have argued that the unjust allocation of risk between borrower and lender creates a “penalty upon entrepreneurial initiative.” In a truly competitive market, Islamic scholars believe it to be unlikely that an investment could result in gross profits that also cover the interest. Since capital would be unproductive without entrepreneurial input, the disincentive to create wealth hinders economic growth.[3]

Ideological issues involved in Islamic Banking mechanism

Twenty years ago, Islamic banks were unknown; today, they number in the hundreds worldwide and hold more than U.S. 0 billion in assets. In the world of global finance, this is not a large amount, but its growth rate is substantial. Furthermore, the concept is discussed heatedly in every Muslim country.

In light of Islam’s rapid development, especially in countries like the United Kingdom, France and the United States, Islamic banks will likely play a role in the development and globalization of world financial markets. But more importantly, Islamic banking offers a means of reintroducing ethics into the global financial system.[4]

At a time when global economic forces are causing great hardship for people around the world, and the harsh demands of the market seem to supersede concern for the well-being of fellow humans, Islamic banking may serve as a means of re-imbuing modern banking with ethical norms. Within the broader financial system, Islamic finance can play a role in re establishing a sense of ethics that has been lost and to try to make its concept and products acceptable to ethically minded Muslims, Christians, Jews and others who are engaged in financial transactions.
As a religion based upon justice, Islam can serve as an ethical framework for regulating monetary transactions between people and, in this way, influence the global market place.

The words “Islamic banking” has a strong emotional effect. In the Islamic world, some individuals and institution representatives talk as if patronizing Islamic banks makes them more pious than those who patronize traditional banks. For many more, there is a certain pride in knowing that their institutions, organized under their religious laws, have successfully adapted modern financial instruments yet remained true to the tenets of their religion. Others, however, both Muslim and non-Muslim, feel certain uneasiness. To use an American expression, there is a certain sense of “in-your-face” about the term “Islamic banking,” a certain defiance of the secular Western edifice. This ideological bent to Islamic banking greatly obfuscates the true value of Islam to the financial world. As mentioned above, Islamic banking should not be applied from a rigorously legalistic viewpoint, especially regarding interest. Rather, it should emphasize the application of social justice in the financial realm, a notion that has been forgotten by Western banking institutions.
Much writing on Islamic banking has a strong ideological bent. There seems to be an assumption that Islamic banking is a newly developed thought, a new form of Islamic ijtihad, or exegesis of the religious texts.[5] S.H. Homood has pointed out that interest and usury are discussed in the Bible (Ezekiel, 18:8, Deuteronomy 23:19). These paragraphs, which apply to Jews and Christians alike, clearly forbid the use of usury in dealing with people. For centuries, Christians had a very strong prejudice against interest, which they used, however reluctantly.

Despite the above-mentioned pride in Islamic banking, there also is certain ambivalence. While conservatives argue that it is impious for Muslims to participate in Western and Western-style financial institutions, others argue that there have been various forms of interest-style lending in the Islamic world for centuries. Given that previous generations of Muslims did not appear to have wrestled with their consciences over it, many Muslims today resent being described as sinners for similar activities

Trends in Islamic banking system
Financial markets as a whole, including Islamic ones, are going through constant change. The globalization of markets has placed a premium on profits at all costs. Islamic banks also are going through changes. Of course, the concept of creating Islamic instruments is quite new, and this new industry, like any other, has to find its own way.
Today, the trend in Islamic banking appears to be toward the development of boutique Islamic investment banks. In fact, a number of relatively new institutions are not banks in the traditional sense. They are closer to what the U.S. comptroller of the currency calls “non-bank banks.” These institutions focus on a precise instrument. For example, the Islamic Leasing Company of Bahrain borrows money from other banks, including, but not exclusively, its parent, Al-Faisal Investment Bank. There is a privately held company in Jeddah that provides consumer loans on an Islamic basis. As mentioned above, Al-Baraka invests the funds of sophisticated buyers, somewhat like a privately held merchant bank in Europe. Islamic mutual funds are growing strongly. There also are a large number of Islamic funds in the United States investing in a variety of instruments, from shares to mortgages.[6]
Islamic institutions have been springing up almost everywhere Muslims live. There appear to be many of these institutions emerging in former Soviet Central Asia. It will be particularly interesting to follow the contribution of Islamic banks to development in the Commonwealth of Independent States, particularly in countries such as Kazakhstan and Uzbekistan.
In the world of global international capital, Islamic banking is not a large force, but its role in the Muslim world and its influence worldwide are potentially large. Beyond the rhetoric of piety surrounding Islamic banking and the legalistic discussion of the use of interest, is a more important issue, the idea of justice. Practitioners and theorists in the field must move beyond these discussions and work to increase the visibility of Islamic banking to facilitate its most important contribution: the reintroduction of ethics into financial transactions.

Conceptual Analysis of Islamic Banking System

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Shariah) and its practical application through the development of Islamic economics. Shariah prohibits the payment of interest fees for the lending of money (Riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden). While these principles were used as the basis for an economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.

Islamic banking has gained momentum; controversy has arisen over role and methods of operation in financial intermediation. Acting as an Islamic bank means following the principles of shariah in financial transactions, but definition is difficult because of the many ways that Islamic law is interpreted and applied.

Most critics note that it is theoretically possible to act as an Islamic bank only in a totally Islamic financial system. Yet, in all countries where they are operating, Islamic banks are still in minority and follow a system and practice that does not parallel that of other banks operating in same community. To interact successfully with other financial institutions, Islamic banks can follow shariah laws only to the extent that they remain competitive with interest based financial institutions. Even in Pakistan, where uniform Islamic financial system has been proposed, the eventual success of Islamic banks depends upon thier success in international finance.

Defining Islamic banks has become increasingly difficult in recent years because many have expanded their banking services and methods of financing to include international market and non banking ventures. For example there is one successful organisation called “Dar-al-Maal al Islami” which defines itself as an Islamic financial institution rather than Islamic bank.

While some bankers felt, Islamic banks do act as intermediaries because they buy and sell commodities and are identical to conventional banks in many respects. The difference is mainly cosmetic. Even though Islamic banks may perform an intermediary functions, they do not necessarily do so Islamically.[7]

History of Islamic Banking

Ø Classical Islamic banking

During the Islamic Golden Age, early forms of proto-capitalism and free markets were present in the Caliphate, where an early market economy and an early form of mercantilism were developed between the 8th-12th centuries, which some refer to as “Islamic capitalism”. A vigorous monetary economy was created on the basis of the expanding levels of circulation ofa stable high-value currency (the dinar)and the integration of monetary areas that were previously independent.

A number of innovative concepts and techniques were introduced in early Islamic banking, including bills of exchange, the first forms of partnership(mufawada) such as limited partnerships (mudaraba), and the earliest forms of capital (al-mal), capital accumulation (nama al-mal), cheques, promissory notes, trusts, start up companies transactional accounts, loaning, ledgers and assignments.

Organizational enterprises similar to corporation’s independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced during that time. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.[8]

Ø Modern Islamic banking

The first modern experiment with Islamic banking was undertaken in Egypt under cover without projecting an Islamic image—for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. The pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 1981), by which time there were nine such banks in the country.[9]

In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank which, till date, is still in business in Egypt. In 1975, the Islamic Development Bank was set-up with the mission to provide funding to projects in the member countries. The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services.

Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent future growth. Islamic banks have more than 300 institutions spread over 51 countries, including the United States through companies such as the Michigan-based University Bank, as well as an additional 250 mutual funds that comply with Islamic principles. Conservative estimates suggest that over US0 billion of assets are managed according to Islamic investment principles.

The World Islamic Banking Conference, held annually in Bahrain since 1994, is internationally recognized as the largest and most significant gathering of Islamic banking and finance leaders in the world.

The Vatican has put forward the idea that “the principles of Islamic finance may represent a possible cure for ailing markets.”[10]

Interest free banking: Its Legal aspects involved

In order to better understand the logic and legal principles of the working of Islamic banks and how they are related to today’s economy, it is better to concentrate first on certain aspects of Islamic law as provided under Islamic law i.e. Sharia.

What is the Sharia?

Shariah is the sacred law of Islam and is the whole body of ethical and legal rules elucidated through the discipline of Fiqh (jurisprudence). The two primary sources of Islamic Sharia law are the Koran (the holy scriptures) and the Sunnah (rules deduced from the sayings and conduct of the Holy Prophet, peace be upon him). The primary sources are supplemented by the two dependent sources namely, Ijma (consensus) and Qiyas (reasoning by analogy), which is similar to the process of English law in so far as it seeks to extract the general principles underlying a decision from the particular facts of the case and applying it to analogous cases that arise later. The works of the four great jurists of the Classical period, Abu Hanifa, Anas Ibn Malik, Muhammad Al Shafi and Ahmad Ibn Hambal, must be considered. The corpus of literature developed by these schools refers to methods that were developed to work out a path around the Shariah doctrines that were considered inconvenient or unsuited to contemporary practice. The key principles enshrined in the Shariah which shape the way Islamic finance has evolved are riba (interest), gharar (uncertainty), maisir (speculation or gambling) and haram (prohibited commodities).

Nature of riba

The Koran categorically prohibits the giving or receiving of interest, regardless of the purpose for which the loan is made and regardless of the rate of interest charged. Although there is consensus among the Muslim scholars that riba is banned, controversy exists over what the concept actually is, and consequently what financial transactions are prohibited.[11]

Islamic scholars differ on the scope of prohibition of riba. Dr Siddiqui in his book on Islamic banking* attempts to resolve the issue when after examining and debating on the true nature of riba he reaches the conclusion that bank interest in all its forms and intent is riba.[12]

Sharia’s role in the structuring of transactions

All current concepts of Islamic banking are drawn from Islamic financial practice, found unobjectionable and subsequently institutionalised in Islamic law. The law itself is clear but its translation into modern rapidly evolving financial products and practice is inevitably open to different interpretations. Although there is a substantial literature on the methods of financing, there exists no practical guide to Islamic financial instruments and no universally acknowledged manual for the Islamic banker to follow. Indeed there is considerable divergence in the financial practice between institutions.

The answer to the problem of structuring Islamic financial products is to understand in particular that part of the Sharia law known as “Muamallat, fiqh’, which pertains to commercial transactions. Modern Islamic banking draws its legitimacy from reasoning going back to the medieval Islamic jurists. It borrows heavily from the specific financial instruments that had legal sanction in the conduct of medieval commerce.

Legal Principles involved in Islamic Banking

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Common terms used in Islamic banking include profit sharing (Mudharabah),safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in instalments. However, the fact that it is profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha.

Another approach is EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).

An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank’s share of the property at agreed instalments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party’s current equity. This method allows for floating rates according to the current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia.

There are several other approaches used in business transactions. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company’s individual rate of return. Thus the bank’s profit on the loan is equal to a certain percentage of the company’s profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labour while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labour reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy.

And finally, Islamic banking is restricted to Islamically acceptable transactions, which exclude those involving alcohol, pork, gambling, etc. Thus ethical investing is the only acceptable form of investment, and moral purchasing is encouraged. In theory, Islamic banking is an example of full-reserve banking, with banks achieving a 100% reserve ratio. However, in practice, this is not the case, and no examples of 100 per cent reserve banking are observed.[13] Islamic banks have grown recently in the Muslim world but are a very small share of the global banking system. Micro-lending institutions founded by Muslims, notably Grameen Bank, use conventional lending practices and are popular in some Muslim nations, especially Bangladesh, but some do not consider them true Islamic banking. However, Muhammad Yunus, the founder of Grameen Bank and microfinance banking, and other supporters of microfinance, argue that the lack of collateral and lack of excessive interest in micro-lending is consistent with the Islamic prohibition of usury (riba).

Shariah Advisory Council/Consultant

Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish a Shariah Supervisory Board (SSB) to advise them and to ensure that the operations and activities of the bank comply with Shariah principles. On the other hand, there are also those who believe that no form of banking can ever comply with the Shariah. In Malaysia, the National Shariah Advisory Council, which additionally set up at Bank Negara Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these institutions and on their products and services. In Indonesia the Ulama Council serves a similar purpose.

A number of Shariah advisory firms (either standalone or subsidiaries of larger financial groups) have now emerged to offer Shariah advisory services to the institutions offering Islamic financial services. Issue of independence, impartiality and conflicts of interest have also been recently voiced.

Islamic financial transaction terminology

Bai’ al-inah (sale and buy-back agreement)

The financier sells an asset to the customer on a deferred-payment basis, and then the asset is immediately repurchased by the financier for cash at ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency. Some scholars believe that this is not compliant with Shariah principles.

Bai’ bithaman ajil (deferred payment sale)

This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. This is similar to Murabaha, except that the debtor makes only a single instalment on the maturity date of the loan. By the application of a discount rate, an Islamic bank can collect the market rate of interest

Bai muajjal (credit sale)

Literally bai muajjal means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of murabaha muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in instalments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price.

Mudarabah (profit sharing)

Mudarabah is an arrangement or agreement between the bank, or a capital provider, and an entrepreneur, whereby the entrepreneur can mobilize the funds of the former for its business activity. The entrepreneur provides expertise, labour and management. Profits made are shared between the bank and the entrepreneur according to predetermined ratio. In case of loss, the bank loses the capital, while the entrepreneur loses his provision of labour. It is this financial risk, according to the Shariah, that justifies the bank’s claim to part of the profit. The profit-sharing continues until the loan is repaid. The bank is compensated for the time value of its money in the form of a floating rate that is pegged to the debtor’s profits

Murabahah (cost plus)

“Mudarabah” is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called “rabb-ul-mal”, while the management and work is an exclusive responsibility of the other, who is called “mudarib”. This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the Murabaha is paid in full.

This type of transaction is similar to rent-to-own arrangements for furniture or appliances that are very common in North American stores.

Musawamah

Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. This difference in obligation by the seller is the key distinction between Murabaha and Musawamah with all other rules as described in Murabaha remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce.

Bai salam

Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.

Hibah (gift)

This is a token given voluntarily by a debtor to a creditor in return for a loan. Hibah usually arises in practice when Islamic banks voluntarily pay their customers a ‘gift’ on savings account balances, representing a portion of the profit made by using those savings account balances in other activities.

It is important to note that while it appears similar to interest, and may, in effect, have the same outcome, Hibah is a voluntary payment made (or not made) at the bank’s discretion, and cannot be ‘guaranteed.’ However, the opportunity of receiving high Hibah will draw in customers’ savings, providing the bank with capital necessary to create its profits; if the ventures are profitable, then some of those profits may be gifted back to its customers as Hibah.

Ijarah

Ijarah means lease, rent or wage. Generally, Ijarah concept means selling benefit or use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price.

Musharakah (joint venture)

Musharakah is a relationship between two parties or more, of whom contribute capital to a business, and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property. In the case of real estate or property, the bank assesses an imputed rent and will share it as agreed in advance. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixed-income investing (i.e. issuance of loans).

Qard hassan/ Qardul hassan (good loan/benevolent loan)

This is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan. Some Muslims consider this to be the only type of loan that does not violate the prohibition on riba, since it is the one type of loan that truly does not compensate the creditor for the time value of money.

Sukuk (Islamic bonds)

Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law (Shariah) and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.

Takaful (Islamic insurance)

Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers.

Wadiah (safekeeping)

In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank’s discretion, may be rewarded with Hibah as a form of appreciation for the use of funds by the bank.

Wakalah (power of attorney)

This occurs when a person appoints a representative to undertake transactions on his/her behalf, similar to a power of attorney.

Islamic equity funds

Islamic investment equity funds market is one of the fastest-growing sectors within the Islamic financial system. Currently, there are approximately 100 Islamic equity funds worldwide. The total assets managed through these funds currently exceed US billion and is growing by 12–15% per annum. With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched. Some Western majors have just joined the fray or are thinking of launching similar Islamic equity products.

Despite these successes, this market has seen a record of poor marketing as emphasis is on products and not on addressing the needs of investors. Over the last few years, quite a number of funds have closed down. Most of the funds tend to target high net worth individuals and corporate institutions, with minimum investments ranging from US,000 to as high as US million. Target markets for Islamic funds vary; some cater for their local markets, e.g., Malaysia and Gulf-based investment funds. Others clearly target the Middle East and Gulf regions, neglecting local markets and have been accused of failing to serve Muslim communities.

Since the launch of Islamic equity funds in the early 1990s, there has been the establishment of credible equity benchmarks by Dow Jones Islamic market index (Dow Jones Indexes pioneered Islamic investment indexing in 1999) and the FTSE Global Islamic Index Series. The Web site failaka.com monitors the performance of Islamic equity funds and provides a comprehensive list of the Islamic funds worldwide.[14]

Understanding the Islamic prohibition of interest

Why there is a need of Islamic Banking System

Both the sources of law regarding the prohibition of riba and interpretations of the prohibition that call for its universal application show that riba is in direct conflict with Islamic ideals and precepts. Much of the confusion that arises in the non-Islamic world regarding Islam’s interest prohibition is based on an isolated view of the prohibition. In other words, unless the totality of Islam as a religion is taken into account, an analysis of riba from a peripheral perspective will remain inadequate. The above examination of the goals of Islam, the specific textual prohibitions of riba, and interpretations regarding its application to all forms of interest should provide the foundation for a sufficient understanding of Islamic banking and finance.

With a deeper understanding, it is possible to move into a specific analysis of the need for Islamic banking, its principles, and the alternative methods of banking that arise out of these principles. Such an analysis will illustrate that Islamic and non-Islamic systems of banking can not only co-exist, but also can benefit from one another.

The Need for and Principles of Islamic Banking and Finance

The Islamic banking and finance movement is the result of a recent resurgence felt throughout the Muslim world, one that emphasizes a stricter adherence to the Shari’ah in all areas of governance. According to some, this resurgence in religious conservatism is largely the result “of a long prevailing identity crisis being experienced by Muslims. The self-pride of Muslims that came from having been conquerors and rulers for over a millennium was battered by the shocking reality of Western military and technological superiority.” This sociological phenomenon can be explained in the context of Islamic history. Once the prohibition of riba came into conflict with the current modes of banking and finance (which were based on Western models), devout Muslims were, and continue to be, extremely embarrassed.  The ban on interest had a limited effect as evidenced by the variety of legal loopholes (hiyal) that were created to get around the ban.  More importantly, “most non-Muslims writing on Islamic law saw only this negative aspect of the matter and were prompt to tax Muslims with shallowness and religious hypocrisy.” Furthermore, the success of socio-economic ideologies such as capitalism has contributed to this weakened self-pride. Perhaps in an attempt to develop a strong Muslim identity, Muslim communities have reacted through the current Islamic banking and finance movement and its attempt strictly comply.
Though the goal of strict compliance is clear, there are significant problems regarding its implementation. As previously mentioned, the Islamic system of banking and finance was based on capitalistic models of interest-based banking. Though there was a strong resurgence in the revival of Islamic values, Muslims were hard-pressed to find a “quick fix” to the problems associated with following practices that did not comport with the Shari’ah. In a sense, Muslims were put in an inherently unfair position because of the unrealistic expectation that they refrain from involvement in riba transactions because the ruling economic order of the time was interest-based. The Islamic world, consequently, needed an entirely new system that was wholly based on the value and goal of Islam and shariah law, which is fountainhead.

This need led to the problem of ascertaining a method of banking and finance that would provide similar incentives to those of interest-based banking alternatives (i.e., incentives for both the lender and borrower to enter into banking transactions) while also strictly adhering to the Shari’ah. As previously mentioned, Islam encourages the accumulation of wealth so long as it is used for the benefit of society as a whole in conformance with Islam’s objectives. [15] Outsiders unfamiliar with the Islamic paradigm may think it impossible to effectively administer an interest-free system of banking and finance because of the broad application of the term interest. After all, anything above the amount of the principal could be considered interest, and as such, it might be prohibited under the Shari’ah. This view, however, is overly narrow since it does not take into account the fact that the Islamic system values capital when it is the product of work.  It should also be noted that the term ‘work’ carries a broad connotation and includes the idea of risk, which is fundamental to the effective operation of Islamic banking and finance methods. “To put it differently, investors in the Islamic order have no right to demand a fixed rate of return. No one is entitled to any addition to the principal sum if he does not share in the risks involved.” Thus, the basis for Islamic banking and finance transactions is the principal of shared risk allocation.
As a general matter, for both parties in a financial transaction to receive any benefit in addition to the principal amount invested, they must share the risks involved in the transaction. In other words,

“…an Islamic bank should share in the risk with the entrepreneur which is in sharp contrast with the interest-based bank. Islamic banking implies zero rate of interest but not zero rate of return as Islamic banks do not deal in money but deal with money.” This general idea of shared risk allocation buttresses the viability of the Islamic economic model, and it gives rise to a number of banking methods that have been employed in an attempt to provide Shari’ah-compliant alternatives to traditional banking. One can better understand such alternative methods by tracing the evolution of Islamic banking from its inception to its present.[16]

Comparative analysis of Islamic and commercial banks

Now, a question arises, that what is the effect of “interest” on capitalism and Islamic banks.

The current financing methods used by Islamic banks are helpful in clarifying many issues that obfuscate the necessary understanding that non-Islamic countries need in order to achieve economic cooperation with the Islamic world. It should be apparent by now that not only are interest-free financial solutions available they are very much successful. However, a comprehensive understanding of Islamic banking and finance would not be complete without a comparative analysis of the two systems. The following comparison between capitalist systems and the Islamic financial system, as they apply to interest, should contribute to this comprehensive understanding of Islamic banking system.

Differences in the sources of law
The most appropriate starting point for a comparison between the two systems and one that yields a great deal of differences, is an examination of the origin of the law. The sources of law in Islam are fundamentally different from those of most countries that operate under a capitalist paradigm.  The legal tradition of the West is wholly dependent upon the individual reasoning of judges, jurists, legal scholars, and the like. For instance, in countries that adopt a common law approach, a particular class of individuals makes the law, and the law evolves based on the opinions of those individuals as applied to particular circumstances. The Shari’ah, however, puts little faith in man’s ability to reason, which is evidenced by the fact that governance through individual reasoning is an option only in the last resort.
Another marked difference between the Islamic system and its Western counterpart was evidenced in the relationship between the practice of Islam and economics. Unlike many societies based on a capitalistic paradigm, where economics and religion are distinct entities, Islam cannot and does not separate religion from economics or from any other aspect of society. Islam is not only a religion, but also a system of governance. In fact, concepts in the West, such as separation of church and state in the United States, are in direct opposition to the objectives of Islam. Islam is a religion that permeates every aspect of the life of a Muslim, and countries ruled by the Shari’ah must adhere to this permeation. The Shari’ah is not only a mandate from God on how to live one’s life individually, but also is a command on how individuals are to live collectively in a society. It is vital to understand this philosophical divide between the West and the Islamic world. After all, without this basic appreciation of the Islamic worldview, it is impossible to have an actual insight into the system.

Conceptual Differences of Interest

The next point of comparative analysis is the differences in the conception of interest between the two systems. As previously mentioned, to the capitalist West, a mode of banking and finance absent the concept of interest is a virtual impossibility. In a capitalistic society, the ability for one to reap profit from investment is the most valued concept of economics. This profit is usually in some form of interest. [17] The incentive to invest in a mutual fund, for instance, is that the principal amount of money invested will over time yield a value equal to a certain percentage rate of the initial investment, i.e., interest. Likewise, when a bank loans money to an individual, it does so on the basis that it will receive profit by adding a certain percentage of money to the amount of the initial loan to be repaid which is also an interest.
Indeed, the very entrepreneurial spirit of a capitalist society is wholly dependent on the concept of interest. It would be very difficult to imagine how the United States,  a country that epitomizes capitalism, could survive if lending institutions were not given an incentive to make funds available to those who dream of owning their own businesses. In fact, interest is so pivotal a concept to the capitalist system that a mere statement one way or the other regarding the raising or lowering of interest rates by Federal Reserve Chairman Alan Greenspan has the potential of crippling the entire economy.[18] Many Americans have such a significant amount of capital invested in interest-bearing accounts such as stocks, bonds, mutual funds, and savings accounts, that any minor fluctuation in the rates of interest could have an extremely damaging impact. These views of interest are in direct opposition to Islamic fundamentals of banking and finance that strictly prohibit interest.  In his book, it illustrates this point by noting that the vast amounts of capital attained by banks from millions of depositors (the small players in the system) are being given to only a small percentage of the population (the big players in the system). [19]

Comparison from a characteristics Prospective:

The significance of these conceptual differences lies in the fact that it is the very differences, which establish the divergence between the two systems and make economic cooperation difficult. A comparison between the two systems that goes beyond conceptualism will show that the differences can be overcome and that economic cooperation between the Islamic system and capitalism is attainable. A useful study that is applicable to the present comparative analysis involves a comparison of characteristics that can be generally found in all economic systems. [20] The eight factors used in the study are (1) the level of economic development of the system, (2) the resource base, (3) the ownership-control of the means of production, (4) the locus of economic power, (5) the motivational system, (6) the organization of economic power, (7) the social process for economic coordination, and (8) the distribution of income and wealth.  When the comparison is viewed from this perspective, there are surprisingly few differences. The major differences are in the motivational system, the organization of economic power, and the distribution of income.
This suggests that both systems are oriented towards the attaining of profit, though for different purposes. The capitalist system seeks profit not as a means, but as an end that will satisfy the individual, while the Islamic system uses profit as a means to achieve its spiritual ends. Viewed from this perspective, it seems that this difference is not insurmountable. Indeed, both systems can cooperate very well to achieve a profit. Once they attain profit, they can then use it for their respective different purposes and ends which are contemplated.

Next, the organization of economic power refers to “centralization versus decentralization with regard to government administration.” In the capitalist system, this factor is characterized by a vast discretion of individual choice and a highly decentralized government administration. The Islamic system is similar, but it adds restricted areas for the choice of businesses that harm society’s interests. After all, “the general objective of Islamic banks is to develop the economy within and according to Islamic principles. In no eventuality, therefore, can such banks engage in the alcoholic beverage trade …” Again, this difference can be overcome by keeping in mind that cooperation between the two systems in regard to the formation and financing of business must be done by respecting the Islamic societal interests imposed by the Shari’ah. A clear example of a breach of respect would be the case of a business venture between the two systems that either directly or indirectly financed the alcohol trade. This would be a clear violation of the interests of the Islamic society and, as such, the transaction should not happen and therefore it should be avoided.

The third major difference between the two systems is the criterion of distribution of income, which “distinguishes systems according to how people obtain their income (labour, capital) and to the degree of inequality in income, property and/or opportunity.” Distribution of income in the capitalist system is described as “distribution according to market-determined contributions to production, with the possibility of considerable inequality in income and property.” The Islamic system is quite different and is characterized by “equitable distribution of income and decentralisation of wealth in the society with recognition of differences in individuals’ wealth.” Though this presents a significant difference between the two systems, it is evident that the differences only affect intra-system societal administration. In other words, cooperation is possible between the two systems to yield profit (which is desirable in both systems), and then each system can administer or not administer the fate of such profits wholly independent of one another. Hence, this difference should not be a limiting factor regarding the ability of the two systems to transact business.
This form of comparative analysis is useful in diluting the details that arise when examining the issue of cooperation and understanding between entities that are based on opposing systems. The distilled essence of this analysis is that though there are significant differences between the two systems in areas such as the sources of the law, the meaning of interest, the societal objectives involved, and the characteristics of the systems, the divergence is not so significant as to preclude co-existence and cooperation of the two systems in a global economy.[21]

Major Islamic banking institutions

Islamic institutions utilize various mechanisms for mobilizing funds from public, depending on the institution organisation, geographic location, market strategy, capital resources and charter. These include Islamic banks, investment companies and solidarities companies.

Islamic banks: such banks (al-massarif al islamiya) may accept Islamic current and investment accounts. Current accounts are not remunerated; clients benefit by receiving certain banking services free of charge. Investment account permits client to place funds for selected times and at designated level of risks; clients receive a range of financial services on a charge basis. Islamic investment companies: these companies offer the public the opportunity to participate in investment trusts (mudaraba) in the form of participation certificates (sukuks). The net profit is divided into the proportion of 9:1 for the certificate bearers and the company respectively. Ten public mudarbas have been launched over the last three years and have generated substantial profits. Islamic solidarity companies: these solidarity trusts (mudarabat al-takatul) offer to the public the Islamic alternative to insurance. The funds mobilized through these instruments are managed in a fashion similar to that of investment companies.

Given two basic conditions- interest free finance and equitable risk sharing – Islamic foundations may engage in number of activities, like musharaka, mudaraba, murabaha, ijarah, ijarah wa iqtina’ which we had already discussed.

The market scope governs (whether local, regional or international) governs the range of activities and types of banking practices that the Islamic institutions actually undertake. An important working rule is that the more sophisticated and internationally oriented the Islamic institutions activity, the more likely is to have to adopt or reinterpret its adherence to traditional Shariah’ principles. If on the other hand, the Islamic banks confine its activities within the local context of Islamic nature, it is more likely to adhere to the rigorous interpretation and implementation of banking activities according to Shariah’.

Even in the local context noted above, there are likely to be market conditions and practices that limit adherence. For example, profit and loss sharing is the guiding principle of Islamic banking, and project financing is the primary medium through which PLS is implemented.

There are 40 Islamic finance institutions currently in operation. Each bank has attempted to satisfy shariah requirements by dividing its operation into the various economic financing arrangements such as murabaha and mudaraba. In addition, the banks are linked to each other by a complex array of partial mutual ownership, project co- financing and Board of director membership. For example, DMI participate in joint ventures with the Faisal Islamic banks of Egypt and Sudan. The Kuwait Finance House enjoys a reciprocal depository arrangements with other financial institutions and has relationship with over 150 correspondents Banks, notably the Dubai Islamic Bank, the Bahrain Islamic bank, the Bahrain Islamic investment company and the Islamic development bank.

In addition to the presence of Islamic banks and finance institutions throughout the Middle East, part of Africa, South and South East Asia and to a very limited extent to Europe, Islamization of entire banking system has taken place in Pakistan and Iran. In such instances, all Banks, irrespective of prior pattern of operation, must correspond to the new regulations governing activities in accordance with Shariah’. The majority of the Islamic institutions were established as cooperative efforts between private businessman and governments. For example, Dubai Islamic bank is 10 percent by its private founders, 20 percent by the government of Dubai, and 10 percent by the government of Kuwait. The rest of the Equity is controlled by general shareholders.

In general, there is no great variation in the composition of Islamic banks portfolios. The main investment for most is in real estate; trade promotion and industrial product import financing forms in the next largest portfolio component.[22]

Islamic banking and its spread on world economy

The Spread of Islamic Banking

The first modern Islamic banking institutions were farmer credit unions in Pakistan in the 1950s, and the Mit Ghamr Savings Bank, a small rural institution founded in Egypt in 1963. The latter was modelled on the German local savings banks, which had impressed Ahmad al Najjar, the bank’s founder. Influential elements in Nasser’s political party, the Arab Social Union, and some of the senior managers in the country’s nationalised banks disliked al Najjar’s initiative, and the Islamic nature of the institution. In 1971, it was incorporated into a new government-controlled institution, the Nasser Social Bank, which had responsibility for the collection of zakat, the Islamic wealth tax. Many saw this new institution as a state agency rather than a bank.

The major expansion in Islamic banking came in the 1970s with the establishment of the Dubai Islamic Bank in 1975, the Faisal Islamic Banks in Egypt and the Sudan in 1977, the Kuwait Finance House the same year, the Jordan Islamic Bank in 1978 and the Bahrain Islamic Bank in 1979.[23] The impetus was partly the oil revenue boom in the Gulf and the growing economic muscle of the more conservative Muslim states of the Gulf at the expense of the more secular Arab nationalist movement. There was in any case a growing dissatisfaction with Arab socialism, especially among the young, and a feeling that there should be a greater emphasis on Islamic values in all spheres, including the economic and financial.

Current role of Islamic banking and its internalisation :

Gulf business interests strongly supported the new Islamic banking movement. Prince Mohammed bin Faisal of Saudi Arabia was the instigator of the Faisal Islamic Banks. Sheikh Saleh Kamel’s Dallah group based in Jeddah aided the Jordan Islamic Bank and funded the Albaraka Islamic Banks which spread from Turkey to Tunisia, and even to London. The al Rajhi money-changing group applied for an Islamic banking licence in Saudi Arabia, and offered Islamic financial services internationally through their London-based investment company. Prince Mohammed founded Dar al Mal al Islami, the house of Islamic funds, as an international financing institution based in Geneva.[24]

The new Islamic banks had to compete with the conventional riba-based banks in most Mu

Today’s economic conditions make financial planning more important than ever. Unfortunately, many people are struggling to make ends meet, let alone set aside money for their future. However, with perseverance and determination, most people can find a way to set aside money if they set their mind to it. It is simply a matter of reviewing current finances and making budget cuts or finding a way to increase income.

Individuals who have more month than money should consider obtaining credit counseling. Consumers with low income should seek out non-profit credit counseling agencies that use a sliding scale to determine fees. Depending on the level of income earned, some people can receive credit counseling at no cost. A list of nationwide credit counselors is available through the National Foundation for Credit Counseling website at NFCC.org.

The Internet is a great resource for helping people learn about various financial planning strategies. Most of the information is available at no cost. Before spending money on financial planning courses or workshops, it is important to conduct research to determine the credibility of the source. Always check with the Better Business Bureau and conduct online research to see if complaints have been filed.

The first step of financial planning involves reviewing current income and expenses. Many people fail to realize how much money they spend purchasing unnecessary items. A simple, no-cost way to determine where money is spent is to track all expenses for one month. Write down every penny spent, review, and determine where expenses can be shaved.

If you are spending a week on fast food lunches or coffee drinks, consider stashing that money in a high interest savings account instead. Over the course of 10 years, this miniscule amount could turn into over ,000, plus accrued interest.

Financial expert, Suze Orman, recommends contributing a minimum of 10-percent of income toward savings or investment funds. She suggests consumers get in the habit of paying their self first, than paying living expenses. Ms. Orman is not saying to pay bills late or not at all. She merely recommends including savings installments within the household budget.

Dave Ramsey is another trustworthy source for obtaining accurate financial planning tools and information. Ramsey has a reputation for his no-nonsense approach to debt management. Visitors to his website can locate an arsenal of financial planning information, debt reduction tools, and advice for obtaining financial freedom regardless of earned income amount.

Certified financial planners can provide consumers with solid financial plans. These professionals are trained to help consumers achieve short- and long-term investment goals by reviewing income and expenses and implementation of get out of debt strategies.

The Financial Planning Association website provides a list of certified financial planners, tools and resources, and financial planning webinars which can be viewed in the comfort of home. Visitors can locate information about buying a home, saving for college, estate planning, retirement planning and more at FPAforFinancialPlanning.org.

The sooner you enter into financial planning strategies, the sooner you begin to build wealth. Before diving in take time to conduct research to determine which plan is best suited for your personal needs. Then, create a savings and investment plan and make a commitment to stick with it!

The pros

These credits are available for those who have home but not willing to keep it as collateral. This facility is completely secure for the borrower as lender does not reposes his property in order to get his back on time.
The word homeowner here depicts the financial stability and status of the borrower.
This facility is available from a wide range of lenders, including online lenders and high street banks. So, it offers complete freedom to the borrower to select his deal according to his requirements.
Depending on your monthly salary and financial condition you can easily borrow funds up to £25,000.
Repayment terms are normally varies from 1 to 10 years according to the financial condition of the applicant.

The cons

The amount in this deal is much lower than with secured loans and amount directly depend upon on the financial stability of the applicant.
Not only amount, the repayment period is also much shorter, so borrower need to make high monthly repayments. Sometimes due to some extra expenses, you might fail to make large payments and again bad credit comes your way.
For good creditors, it is really simple to find this help but with bad credits many of the lenders hesitates in offering approval.
Timely payments play a major role in this deal because only single late payment can ruin your financial life.

Traditional commercial Bank vs Investment Bank

The simplest definition among them is: A commercial bank takes deposits for checking and savings accounts from consumers while an investment bank does not. A commercial bank may legally take deposits for checking and savings accounts from consumers. The federal government provides insurance guarantees on these deposits through the Federal Deposit Insurance Corporation (the FDIC). We have mentioned the definition and how a traditional commercial bank makes profit in before. So, how about investment bank(I-bank)?

An investment bank operates differently. An investment bank does not have an inventory of cash deposits to lend as a commercial bank does. In essence, an investment bank acts as an intermediary, and matches sellers of stocks and bonds with buyers of stocks and bonds. For example, if company needs capital, it may get a loan from a bank, or it may ask an investment bank to sell equity or debt (stocks or bonds).

Because commercial banks already have funds available from their depositors and an investment bank typically does not, an I-bank must spend considerable time finding investors in order to obtain capital for its client. Besides, the investment banks also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.

Mortgage

Most home buyers have to borrow money in order to purchase their home. Few have enough money sitting in the bank, or in other easily saleable assets, to pay the entire cost of the home at once. The home loan they receive is called a mortgage. Generally, A mortgage is loan you use to purchase a home, or some other piece of property. The amount you borrow is called the principal and each mortgage payment is a combination of principal and interest. The property remains in the possession of the borrower, but it may be reclaimed by the lender if the loan and interest are not paid as agreed. Mortgage or home loan is one of the major sources where commercial banks can generate profit.

Subprime mortgage

What is a subprime mortgage? Besides the conventional mortgage which we have just talked about, there is another kind of mortgage known as subprime mortgage. A subprime mortgage is a type of loan granted to individuals with poor credit histories, who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages. Because subprime borrowers present a higher risk for lenders, subprime mortgages charge interest rates above the prime lending rate.

Subprime mortgage crisis

As mentioned before, subprime mortgage present a higher risk because those borrowers are more likely to default on their loans since they already had financial problems before taking on the loan. Therefore, after a subprime loan is issued to homeowners, those issuing banks would sell these subprime loans to other investors, to compensate for the high risk. These investors include other banks, I-banks, funds and financial institutions. As subprime loans typically pay higher yields, so it had attracted a number of mutual funds and hedge funds to invest in them.

This kind of selling and re-selling of subprime loans or the subprime loans packaged products among the financial parties have created a very complex network of relationships. It can be imagined that, it is not easy to estimate the risks and the responsibilities of these products. Also, it is not easy to estimate how serious will the consequence be once there is problem in any party inside the network.

The story kept going. However, the bubble started bursting in 2006. In late of that year, many subprime mortgages have become delinquent as homeowners run into financial difficulty. A number of hedge fund companies and investment banks that invested in subprime loans incurred millions of losses

The loans are made available to you within the same day of application, thus by justifying its name. While availing these loans, there is no need to pledge any collateral or for that matter undergoing any credit check. This also means that applicants with severe credit disputes too can get hold of the loans.

In the case of same day payday loans, only those who are employed with a fixed income and are having access to a valid bank account can qualify for these loans. In addition to these, your age should be more than 18 years and must be a resident of UK.  All these details have to be filled up in a simple application form available online, which invariably saves you a great deal of time. Besides, there is no documentation or paperwork involved, which is of great relief indeed.

Through this option of the loans, you are entitled to avail loan amount in the range of £100-£1500, which is to be repaid over a period of 14-31 days. You can make use of the loans to deal with expenses related to paying credit card dues, loan installments, tour expenses, paying school fees, shopping and so forth. But prior to the availing of the loans, you must make a proper research of the loan market, so as to get optimal offers.

With same day cash loans, it is quite certain that you will never face short term monetary crisis.

Are you a businessman or woman, a student, a politician, an investor, or do you hope to be a successful businessman in the future? Very well then, this article is precisely appropriate to fit your quest.

Finance is a term used to describe money and the management of money. It is the lifeblood of any business in the sense that it is needed for establishment, continuity and expansion of a business. Without adequate sourcing and proper management of finance, a business may undergo colossal liquidation.

Financial risk comes into play during decision making and management of opportunity costs attached to every decision we make.

Risk simply means relative uncertainty or the state at which the outcome of an event may deviate from what is expected. Risk is different from uncertainty because it has some level of predictability as opposed to uncertainty. Too many a time, businessmen neglect opportunities and chances for expansion just because of fear of risk. The fact that some things have risk does not mean they are unachievable. It only means that we need extra courage and hard work to achieve them. Beside every decision we take lies a risk itself.

The truth is that risk can be measured and managed. Hence, there is no need to be stagnant in business without consideration of innovation and movement with trend. Of course, technology and services of today can be less useful with time if no values are added. We could start by taking a risk on 10% of our earnings on expansion and improvement of services and see the effects on the next year’s total earning. The risk is more manageable than a risk taken on miscellaneous funds for investment in some of the promising companies in the country. People would say that it’s quite risky to invest because we could lose such money. That is okay for a pessimist. It’s good we consider all possibilities within the parameter rather than being one-sided. Losing the money is not the only thing that can happen; the money could also double up with time, while on the other hand, if that money is spent materially or kept at home there would be no chance of doubling its value.

Basically, a corporate organization is faced with four decisions on which their risk lies.

Finance decision: It is the decision on the capital structure of the firm. It deals with the decision on what amount of debt and equity would be combined to run the organization. The finance manager carries out the finance decision. He carefully considers the interest on various debts he is sourcing and the control of the firm in the case of the sales of equity.  

Investment decision: This is capital budgeting decision. It must be carefully handled to prevent the firm from ending up with nothing on its investment. It is one of the riskiest decisions.  

Dividend decision: This is the decision on the proportion of profit to be distributed as dividend. It should be handled well to encourage prospective investors to patronize the organization.

Liquidity decision: This decision needs proper handling to save the firm from the risk of illiquidity. This is the decision on the proportion of cash for financing current assets. This is quite risky because it goes a long way to affect the profitability and continuity of the firm.

Generally, it is often believed that individuals vary with their levels of risk perceptions. Some are risk lovers, risk averter and risk neutral or avoider. Please my wonderful readers don’t be deceived into believing that you are strictly in one of these classes. You can exhibit all of them based on circumstances before you; you can be automatic because I and many other financial experts have been so.

The fact that you read “Financial |Risk and you” does not mean that you should indulge in a business opportunity with high risk without considering their returns. Off course, the risk lovers can be so intoxicated to fall a victim of this. It is paramount that the first thing you think about before taking a risk is the return. The magnitude of the return expected should be the drive for your taking a risk.

When you come across an opportunity that would never earn up to your expected return ever in your widest imagination, you automatically become a risk neutral. Don’t take a risk on such opportunity.Risk averter on the other hand has to do with efficient management of risk.

We may ask the question below:

How can we manage risk?

A straightforward answer is that, we can manage risk through risk diversification or spreading them on different investments. These kinds of investments are generally called portfolio investments. It is quite obvious today that too many of us put the whole of fund in one company hoping that such company would remain the best among others forever. This is like “putting all your eggs in one basket” and all eggs go down with the fall of such basket.

A little illustration would be paramount to clarify our understanding. Take for instance: A boy wants to invest 50% of his entire savings. Rather than putting all in sunglass Ltd, he puts half in kanko umbrella Ltd and the other half on sunglass Ltd. In the raining season he gets more dividend from kanko umbrella Ltd because they sell more while in the dry season that is sunny, he gets more dividend from sunglass Ltd. He manages his risks on investment because his investment in sunglass Ltd would compensate for the losses in kanko umbrella ltd during the dry seasons.

Note! As a business tycoon, politician, trader or even as a student, you could spread your funds in more than three investments so as to have efficient management of risk.

In conclusion, I believe that money, finance and risk are “three” things that we cannot escape in our journey to becoming a financial giant and that we aspire. A proper knowledge of the fusion and management of the above three have been analyzed in the body of this article. Hence, it is the candid opinion of this article that you carefully and systematically go through the article and hook up to many detailed secretes that could tremendously trigger your financial breakthrough even in the presence of a very risky business environment

For more on what you need to be financial risk successfully in any business visit my blog: http://firstclassmanager.blogspot.com