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In The Name of Allah,
The most Beneficent, The most Merciful
“O Believers: devour not Riba, doubled and redoubled;
and fear Allah, in the hope that you may get prosperity.”
Sura Ale-Imran (verse No. 130)
-------------------------------------------------------------------
The articles published in this Journal contain references from the
sacred verses of Holy Qur’an and Traditions of the prophet (p.b.u.h)
printed for the understanding and the benefit of our readers. Please
maintain their due sanctity and ensure that the pages on which these
are printed should be disposed of in the proper Islamic manner
4
Journal of
Islamic Banking and Finance
Volume 40 Oct - Dec 2023 No. 4
Founding Chairman
Muazzam Ali (Late)
Former –Vice Chairman
Dar Al-Maal Al-Islami
Trust, Geneva,
Switzerland
Chairman
Basheer Ahmed Chowdry
Shariah Advisor
Uzair Ashraf Usmani
Editorial Board
Ahmed Ali Siddiqui
Mufti Bilal Qazi
S. A. Q. Haqqani
Altaf Noor Ali (ACA)
Chief Editor
Aftab Ahmad Siddiqi
Associate Editor
Dr. Salman Ahmed Shaikh
Seemin Shafi
Manager Publication
Mohammad Farhan
Published by:
International Association of
Islamic Banks
Karachi, Pakistan.
Ph: +92 (021)35837315
Fax: +92 (021)35837315
Email: ia _ ib @ yahoo.com
editor@islamicbanking.asia
Registration No. 0154
Printed at M/S Maaz Prints, Karachi
Website: www.islamicbanking.asia
Follow us on Facebook:
http://www.facebook.com/JIBFK
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cgisirsi/x/0/0/5/?searchdata1=37177{ckey}
Academic Advisory Board
Dr. Mohd. Ma’sum Billah
Professor IEI, KingAbdulAzizUniversity,
Kingdom of Saudi Arabia.
Dr. Zubair Hasan,
Professor Emeritus INCEIF
Global University of Islamic Finance, Malaysia.
Dr. Mehboob ul Hassan
Professor, Department of Economics, (CBA)
King Saud University, Saudi Arabia.
Dr. Manzoor Ahmed Al-Azhari,
Associate Professor (Islamic Law)
Ph. D, Legal Policy, Fac. Shariah & Law.
Alazhar University, Egypt.
Post Doc. Fac. of Law, Univ.of Oxford, UK.
Dr. Mohammad Kabir Hassan
Professor of Economics & Finance
University of New Orleans, USA.
Dr. M. Ishaq Bhatti
Associate Professor of Finance and Financial
Economics, LA TROBE University, Australia.
Dr. Riham Rizk,
Associate Professor in Accounting
Durham University Business School, UK
Dr. Rodney Wilson
Professor Emeritus, INCEIF, Lorong Universiti
A Malaysia/France.
Dr. S. Nazim Ali,
Professor and Director,
Center for Islamic Economics and Finance,
HamadBinKhalifaUniversity, Doha, Qatar.
Dr, R. Ibrahim Adebayo
Department of Religions, University of Ilorin,
Nigeria.
Dr. Huud Shittu
Professor of Islamicology Islamic Banking, 'Ilm-l-
Kalām, Culture and Conflict Resolution
Department of Religion and Philosophy, Faculty of
Art University of Jos – Plateau State, Nigeria.
Dr. Waheed Akhtar
Assistant Professor, Comsats Institute of
Information Technology (CIIT), Lahore, Pakistan.
Dr. Muhammad Zubair Usmani
Jamia Daraluloom Karachi.
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Journal of
Islamic Banking and Finance
Volume 40 Oct - Dec 2023 No. 4
C O N T E N T S
1. Editor Note: -------------------------------------------------------------------------------------------07
2. Corporate Understanding of Actuarial Methods (Pricing) ---------------------10
in Takaful Practices
By Mohd Ma’Sum Billah
3. Waqf in Malaysia and the Indian Connections ------------------------------------------------18
By Ahmad Rodzi Pawanteh, Sudin Haron & Finorita Fauzi
4. Behaviour of Companies during Covid Times -------------------------------------------------35
By Usama Toor and Ayşe Yüce
5. Usury and its’ Islamic and Interreligious Dimensions --------------------------------------50
By Camille Paldi
6. The ‘Participatory Finance’ Initiative in a Conventional Setting ------------------------63
By Professor Badr El Din A. Ibrahim
7. Islamic Microfinance in India: A Quantitative Approach ---------------------------------71
By Huma Mahmood, Rusni Hassan & Syed Ahmed Salman
8. Country Model ----------------------------------------------------------------------------------------88
Democratic Socialist Republic of Sri Lanka
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Editor’s Note
In 2023, Islamic finance remains concentrated in the GCC, Middle East, North Africa,
Malaysia, Indonesia with some activity in Brunei and Singapore. Goals, which the industry
should focus on, include but are not limited to expanding outside its traditional territories of
practice including the Western world and developing a unique dispute resolution system for
Islamic finance, sukuk, and takaful. In addition, the Islamic Development Bank should
consider continuing its free online educational courses so the world might access Islamic
finance learning tools at their own pace and convenience.
In terms of spreading Islamic finance to the Western world and beyond, it might be wise to
consider re-branding Islamic finance to something more inclusive such as Holy Book Finance,
which is a movement inclusive of Muslims, Jews, and Christians to revise the economy
through creating a new and alternative financial system. In this manner, all of the People of
the Book might collaborate in a peaceful yet fruitful effort to harmonize financial tools and
practices. I see no reason why Western countries should miss out on financing opportunities
such as Sukuk, where in which billions of dollars are raised each year for businesses and
governments across the globe.
In addition, the Islamic finance industry should consider developing a unique dispute
resolution system for Islamic finance, sukuk, and takaful as adjudicating Islamic finance
disputes in common law and civil conventional courts has many pitfalls for the industry. I
have previously suggested creating the Dubai World Islamic Finance Arbitration Center and
Jurisprudence Office equipped with a separate sukuk and takaful tribunal. In this way, the
industry can not only preserve the essence of the Islamic financial contract, however, it can
ensure that Islamic finance survives into the future.
Finally, the Islamic Development Bank and other institutions should continue the tradition of
offering free online Islamic finance, sukuk, and takaful training certificates to spread the
message of Islamic finance in the Islamic world and beyond.
The Islamic finance industry has potential to spread around the world and last long into the
future if these simple suggestions might be acknowledged and implemented. Camille Paldi is
the CEO of Center for Holy Book Finance at http://www.holybookfinance.com and can be
reached at camille@holybookfinance.com.
Camille Silla Paldi, Founder and CEO of Center for Holy Book Finance, E-mail:
https://holybookfinance.com +1 650 250 2839
This issue of Journal of Islamic Banking & Finance documents scholarly contributions
from authors around the globe. Contributions in this current issue discuss the
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theoretical underpinnings of an Islamic economy, contemporary issues in Islamic
finance and performance based empirical studies on Islamic banking and finance.
Below, we introduce the research contributions with their key findings that are selected
for inclusion in this issue.
“Corporate Understanding of Actuarial Methods (Pricing) in Takaful Practices”, is
contributed by Mohd Ma’Sum Billah senior professor of finance and insurance at Islamic
Economic Institute, King Abdul Aziz University, Saudi Araba and Md Amanat Ullah, PhD
Assistant Professor, School of Business, Anwar Khan Modern University Dhaka. In this
article the authors attempt to explain the role actuarial science plays in calculation of mobility
and mortality rates in a society and region and pricing based on these. However, in case of
Takaful companies, they say, that such calculations need to comply with Islamic Shariah.
They also speak of the structure of a Takaful company and stages from product development
to approval before marketing any Takaful product as well as the importance of an actuary in
the takaful company.
Ahmad Rodzi Pawanteh of the Asian Centre for Islamic Economics Research, Sudin Haron
from Saito University College and Finorita Fauzi at Kuala Lumpur Business School have
contributed their paper entitled “Waqf in Malaysia and the Indian Connections” trace the
history of the institution of waqf in Malaysia going back to pre Christan era when the first
Indians came to the region. However, they conclude that the waqf was introduced by Indian
Muslims who came to the region to trade much later in time. The authors talk about early
waqfs created by well to do merchants on properties and monies for public good and the
influence of British colonist in attempting to create a governance structure which after
Malaysia gained independence became the basis of the State Islamic Religious Councils
(SIRCs), the challenges faced by SIRCs and the relative success that SIRC of Penang has met
with administering these waqfs so far. It is an interesting read for others wanting to ensure
good governance in this field.
The article “Behaviour of Companies during Covid Times” contributed by Usama Toor
and Ayşe Yüce both from Ted Rogers School of Management, Ryerson University, Canada,
investigates whether the Covid pandemic affected the choice to issue conventional bonds or
sukuks amongst institutions and organizations globally. For this they analyzed data of 249
sukuk and 217 bonds issued by 12 countries during the covid period from 2019 to 2021 to see
what factors influence this decision. They used statistical analyses to study data of the issuers
and conclude that large companies with large capital needs are more likely to choose sukuk as
a vehicle to raise funds.
Founder and CEO of Center for Holy Book Finance, Camille Paldi, in his article titled
“Usury and its’ Islamic and Interreligious Dimensions”, compares the concept of usury, its
consequences and religious injunctions in the religions of Judasim, Christianity and Islam. He
quotes from the religious texts of the Jews, from the Bible and the Quran passages that refer to
usury and those indulging in it. It is very interesting to note, as pointed out in the article, that
essentially all three religions forbid usury. While jewish scripture allows such with non Jews,
Christian and Muslim scriptures forbid it outright. All three scriptures speak of social justice
and kindness. He also speaks of the importance the Quran lays on charity. This article lays a
common ground for scholars and economist of all three religions to pool their intellectual
resources to develop a financial system free from usury and one that supports equality and
social justice across the world.
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Corporate Understanding of Actuarial
Methods (Pricing) in Takaful Practices
By
Mohd Ma’Sum Billah
1
Abstract
In Takaful policy, actuary plays an important role in determining the pricing
for the Takaful plan as well as the rate of contribution and claim. The
actuary department in Takaful uses both mobility rate and mortality rate in
benchmarking the costing. It also focusses on rate of investment return or in
conventional insurance, it is familiar with the term of rate of investment. The
Actuary department in expecting the return or profit uses this method of
investment return. The mobility rate is used for measuring the critical illness
and medical expenses. The mortality rate is commonly used as ‘khayrat’.
Similarly, with conventional insurance, Takaful also recognizes time value
of money in order to measure the expected return for the company.
However, the benefit with rate in time value of money is considered as
service charge (Ujrah) in Takaful practices which is lawful in Islam. The
internal staff do the process of calculating the cost, and they are the staff of
the actuary and price department in Takaful. In the actuary department,
there are several people who directly contribute in preparing the cost for the
new Takaful plan. They are specializing in statistics, valuation and product
development. The characteristics to become a member for the team are
generally with minimum skill in actuaries and already taken extra
qualifications on the actuaries in the United Kingdom, United States,
Australia or alike.
Keywords: Actuary, takaful, Shari’ah, Maqsid al-Shari’ah, valuation, pricing, mortality rate
and mobility rate.
JEL Classification: Z12, G22, R49, D83, N30.
An Overview
In experiencing with the central bank of Malaysia, which only provides the guidelines to all
insurance companies in preparing the cost for new product. The product can be launched only
after the approval from the central bank. The central bank does only a part of filing the
documentation. The process begins with the marketing then continued with the actuary
1
Senior Professor of finance & insurance, Islamic Economics Institute, King Abdul Aziz University,
Kingdom of Saudi Arabia. profdrmasumbillah@yahoo.com. It is acknowledged here that; this
manuscript is the revised version of the original work of the author and, is published here due to
market demands and added benefits.
10
department, management department and finally, with the central bank. If the Takaful
company plans to create new Takaful plan, the marketing department will conduct a research
based on the company’s need, which emphasizes customer’s need and preference, requested
by the society and the competitors’ challenges. After gathering the data, the marketing will
transfer the information to the actuary department. The actuary department will prepare the
costing based on the marketing information, mortality rate and mobility rate. They need to
make a comparison regarding the amount with the statistics and existing rate. The proposal
will thereafter be submitted to the management for approval. After the approval, the proposal
will be submitted to the actuarial Consultant Company, which is hired by the Takaful
Company. Finally, after obtaining the approval from the central bank, the IT department will
prepare a system for new products.
Products
(an experience with Malaysia)
Family Takaful
Family Takaful Plan
Family Takaful Plan for Education
Health Takaful
Ma’asyi Takaful Plan
Siswa Takaful Plan
Ziarah Takaful Plan
Hawa Takaful Plan
PTKB Takaful Plan
Annuity Scheme of Takaful KWSP
General Takaful
‘Rumah Desa’ Takaful scheme
Basic Fire Takaful scheme
Motor Takaful
Accident Takaful
Engineering Takaful
Marine Takaful
Pilgrimage Takaful scheme
Every product has its own objectives, characteristics of participant, amount of contribution
(premium rate), maturity period, benefits, and type of payment as well as the allocation of the
fund and application form. The actuary and pricing department takes all information that is
provided by the marketing department to determine the pricing for each Takaful plan. For
example, in fixing the rates of claim that can be made by the participant, the department
needs to refer to mobility rates and mortality rates. The mobility rate is referring to a rate such
as average rate of accident in the state and the mortality rate is referring to the average death
of people in certain time. The statistical and data collection also may be useful in calculating
the cost of the Takaful plan. Therefore, primary sources are vital in order to get an accurate
and quality result.
In the family Takaful plan for example, the contribution made is related to the maturity period
that is chosen by the participant either 10 years or 40 years plan. The longer maturity period
the participant takes, the more percentage of contribution will be credited into ‘Tabbarru’
(donation) fund. The rational is the longer the participant takes the policy, the higher risks
will be faced and the better coverage as well.
Therefore, the type of coverage offered to the participant is depending on the type of policy.
For example, ‘Takaful Rawat’ is purposely to help the participant in paying cost of treatment
in the hospital; if any accident or illness occurs to the family member. However, ‘Takaful
Sihat’ is purposely to provide coverage in term of money if the participant has any critical
illness that is determined by the Takaful operator. Similarly, in term of claim that the longer
the participant contributes in the plan, the higher coverage they will receive from the Takaful
Company.
Corporate Understading of Actuarial Mehods (Pricing)…. 11
Information
Conducting research
Prepare
Costing
& Make
Comparison
Data collection data analysis
Approval
YES NO
Approval
Approval
Filing Document
Preparing
System
i)
ii)
Principles of Pricing in Takaful Schemes
Marketing
Department
In Takaful
Actuary & Pricing
Department
MANAGEMENT
DEPARTMENT
Actuarial Consultant
Company
ARTICLE I. C
E
N
T
R
A
L
B
A
PRODUCT
LAUNCHED
It Department
Journal of Islamic Banking and Finance Oct – Dec 2023 13
Actuary refers to an expert who calculates insurance risks and payments by studying the
mobility rates and mortality rates. However, pricing is referring to the value of the policy
and the number of premium rates that need to be contributed by the participant as a result
of calculating the insurance risks by the actuaries. Therefore, there is a department called
actuary and pricing department in a Takaful Company, which is specialized in this field.
The aim of this department is to provide quality products with good pricing rates.
Therefore, the products and the pricing need to meet some criteria before it can be
considered as quality product.
The product can serve the society and provide benefits aligning with
Shari’ah principles.
The product can provide protection and coverage to the participant with
a reasonable premium rate.
There is a mutual cooperation between participant and operator in
managing the fund.
The profit that is generated from the Mudharabah fund is lawful.
The Takaful Company must present the right pricing rates for each Takaful plan in line
with principles of Shari’ah. Allah (swt) said in the Qur’an
2
;
“and Allah has encouraged and permitted trade and commerce and prohibited usury in
practices”.
This verse is related to the concept of pricing in Takaful, which is the responsibility of
the actuary and pricing department in preparing the costing for the Takaful product that
does not involve any element contrary to Shari’ah like ‘riba’ or ‘gharar’. For example, in
terms and conditions that are stated in the policy or in the application form, which shall
be clear and understandable. This includes:
Allocation of the funds.
Types of payment.
Types of coverage and benefits received by participants
How to apply for the Takaful policy.
The allocation of the fund means how the fund is managed by the operator and at the
same time justify that the product is free from any element of ‘riba’ or other non-
Shari’ah subjects. Similarly, in term of the contribution that is made by the participant, it
2
Al-Qur’an, 2:278
Corporate Understading of Actuarial Mehods (Pricing)….
14 Journal of Islamic Banking and Finance Oct – Dec 2023
must not involve any surplus or extra charges such as commission. The concept of
cooperation and to help each other is determined in the Qur’an as Allah (swt) said
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:
“and cooperate each other in righteousness and piety”
The actuary and pricing department has responsibility to prepare costing for the new
product by looking into mobility rates and mortality rates as a consideration. The
mortality rates and mobility rates should come from the primary sources or a result from
the research, which is done by the marketing department in Takaful company itself.
However, the way that the price is fixed must also be influenced by the profit of company
as well as the benefit to the society.
Takaful also emphasizes on the cooperation in helping each other among participants and
the operator. The participant contributes certain amounts in the Takaful plan, as a result
the operator will provide the coverage accordingly. Similarly, in the Mudharabah fund
where the sharing of profit and loss will be divided in a portion that is agreed by the
participant and operator at the beginning of the contract. Therefore, there is no issue on
misallocation of fund or breach of trust.
Briefly, the roles of actuary and pricing department are:
Calculating cost for new product by referring to mobility rates, mortality rates,
project investment return based on information from marketing research as well as
needs of the society.
Providing a value product to the company.
Submitting the proposal of costing for the management approval.
Submitting to the actuary and central bank for their final approval.
Only after getting the approval from the central bank, the company can launch the
product in the market.
Finally, factors that influence the actuary department in determining the pricing are:
Rates of death in certain time.
Information from the existing products that may be quite similar (comparison).
Re-takaful rate.
Expectation of Profit.
3
Holy Quran Al-Maidah:3
Journal of Islamic Banking and Finance Oct – Dec 2023 15
Shari’ah Ruling
The law is permitted by religious and ethical consideration, where each institution,
transaction or obligation is measured by the standard of religious and moral rules. For
instance, the prohibition of interest and uncertainties, the concern for the equality of the
two parties and the concern for the just average (mithl). The basic rule of Shari’ah ruling
of Takaful is based on mutual co-operation between two parties as it is stated in the
Qur’anic ayah
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;
“And co-operate each other in righteousness and piety, and do not co-operate in
sin and rancor”
The Takaful relates to the mortality risk, which requires appropriate protection from re-
takaful. Therefore, it shows the implication of mutual co-operation between both parties.
For Islamic insurance, all activities in Takaful are free from riba’. In other words, it
prohibits riba’ in the contractual agreement, as well as in determining the pricing of
takaful. Allah (swt) said in surah Al-Baqarah
5
;
“ALLAH HAD PERMITTED TRADE, BUT NOT ALLOWED RIBA”
In Islamic law, which emphasizes the fairness in dealing with any transaction while
avoiding unjust enrichment at the expense of others. Therefore, Shari’ah obligation
provides the principle of justice (‘adl) for welfare to others as stated in the Qur’an, 3:77
6
;
“As for those who sell faith they owe to God and their own plighted word for a
small price, they shall have no portion in the Hereafter: Nor will God (deign to) speak to
them or look at them on the Day of Judgment, nor will He cleans them (of sin), they shall
have a grievous penalty”
Indeed, Allah (swt) stated that, every action of Muslim must follow the law of Shari’ah,
which is compliant to the Qur’an and the Sunnah. Thus, the implementation of takaful
that must be guided by Shari’ah laws.
4
Holy Quran, Al-Maidah:3
5
ibid 2:278
6
ibid 3:77
Corporate Understading of Actuarial Mehods (Pricing)….
16 Journal of Islamic Banking and Finance Oct – Dec 2023
Role of Actuaries
The role of actuary in Takaful is recognized under the Islamic Insurance (Takaful)
regulation, which contains three main areas;
1. Product Certification
A takaful operator is required to submit to the regulatory authority (central bank)
certification by an actuary who certifies that the premium determined for any
takaful product or the takaful contribution for any product of the general or
family Takaful plan is based on Shari’ah principles.
2. Actuarial Valuation
A Takaful operator is required to submit to the central bank yearly actuary report
on the actuarial investigation over the financial condition of the life insurance
fund, as well as the part of Family Takaful Business specifically allocated for the
payment of the takaful benefits.
3. Appointed Actuary
A takaful operator must have an appointed actuary who has the responsibility to
report to the central bank. The actuaries shall be accountable if in case the
actuaries fail to take the necessary steps to address the issues that may expose the
company to undue risk of being insolvent.
Actuarial Techniques
There are two techniques that have been applied in takaful operation, namely;
Theory of Compound Interest, and,
Time Consideration.
Theory of compound interest is applicable in the Family Takaful Business where
anticipating a certain conservative investment return that can be obtained from the
investment. The lump sum of takaful contribution that the takaful operator received
upfront can reduce the lump sum or single takaful contribution under the Mortgage
Takaful Plan. The second technique is time consideration in the business transaction.
In Family Takaful Plan, it is possible to have tabarru’ rate for monthly installment
to be higher than that for the yearly installment.
Journal of Islamic Banking and Finance Oct – Dec 2023 17
Conclusion
Actuaries in designing takaful products, need to be at least aware of the core principles,
which embody the principle of Maqasid al-Shari’ah. The spiritual basis of the Shari’ah is
grounded in the Shari’ah realizes benefits (Maslahah) to mankind as a manifestation of
that mercy. This principle of realizing benefit to the individual and the community is a
fundamental value, which runs throughout the entire Shari’ah principles. The benefits,
which the Shari’ah sets out to achieve are graded in three categories in a descending
order of importance namely; Daruriyyat masalih (essential), Hajiyyat masalih
(complementary), and Tahsiniyyat masalih (embellishment). The actuary’s role in
providing financial numbers reflecting market potential and risk exposures is valuable to
a management wishing to objectively screen and identify products exhibiting the best
return to both participants and shareholders alike.
Corporate Understading of Actuarial Mehods (Pricing)….
18 Journal of Islamic Banking and Finance Oct – Dec 2023
Waqf in Malaysia and the Indian
Connections
By
Ahmad Rodzi Pawanteh *
Sudin Haron
Finorita Fauzi
ABSTRACT
One of the legacies left by the British when granting independence to
Malaysia (then, Malaya) was the authority on certain matters between the
Federal and States. The responsibility in managing Islamic matters was
given to the States including waqf. Thus, laws and regulations on waqf
were promulgated by each State through the establishment of the State
Islamic Religious Council (SIRC). It is the duty of the Council to manage
and develop waqf assets within their territory. SIRC Penang is the most
outstanding Council in managing and developing waqf assets. They
managed to develop vacant lands into commercial centres and high-rise
residential complexes. These developments were made possible because of
the legacy waqf created by the early Muslim migrants from India. This
paper examines the migration and contribution of these groups from a
historical perspective and the clans that had come to Malaya. We also
highlight the intervention by the British on waqf administration during the
colonisation period. The development process undertaken by SIRC Penang
is also discussed in this paper.
* Auhors: Ahmad Rodzi Pawanteh, Senior Fellow, Asian Centre for Islamic Economics
Research.
Sudin Haron, Distinguish Adjunct Professor, Saito University College.
Finorita Fauzi, Research Fellow, Kuala Lumpur Business School.
Journal of Islamic Banking and Finance Oct – Dec 2023 19
Key words: Waqf, Penang, Indian Connection, Malaysia, endowment
1.0 INTRODUCTION
The Islamic resurgence which took place at the end of the 1960s and in the early 1970s
had awaken many Muslim thinkers and scholars. They started to believe that the capitalist
system does not conform to the Islamic foundations. This is because the backbone of this
system is ‘riba’; and ‘riba’ or interest is prohibited by Al-Quran and Hadith. Therefore,
the Islamization of the economy can only be initiated when interest is abolished. Thus, it
is natural that the discussions on the establishment of interest-free banks were given more
attention (Khan and Mirakhor, 1987). Mit Ghamr Local Savings Bank in Egypt which
was established in 1963 is considered as a pioneer in the Islamic banking system. In
2019, the number of commercial banks worldwide amounted to 428 banks with a total
asset of USD1.99 trillion (Mirza A.P, 2021).
We are really grateful and very much indebted to many great classical scholars such as
Sami Hassan Homoud (1985) for his ‘Islamic Banking: The Adaptation of Banking
Practice to Conform with Islamic Law.’ Muhammad Nejatullah Siddiqi (1983) who
wrote the eye-opening book entitled ‘Banking Without Interest’, and the first book in
accordance with the academic requirement of higher institutions that was written by
Sudin Haron and Bala Shanmugham (1997) titled ‘Islamic Banking System: Concepts &
Applications. Since then, there has been numerous publications published by young
researchers. Today, almost every frontier of Islamic banking knowledge has been
explored and the Islamic banking industry is considered to be at a maturity stage.
Of late, many scholars have started to discuss other instruments within the parameter of
Islamic economics which were considered more superior that instruments in the Islamic
banking system. This instrument is called ‘waqf’ (plural, ‘awqaf’ – in this article we use
‘waqf’ interchangeably for singular and plural) and regarded by many that this instrument
is more suitable not only in mobilising wealth of the Muslims but at the same time is a
powerful mechanism in poverty alleviation (Sadeq, 2002).
There are three notable contemporary scholars who have produced a new insight of
knowledge pertaining to waqf. Khaf (1992) produced a rudimentary work which
highlighted the impact of waqf on socio-politic. Murat Cizakca (2000) made a great
contribution to knowledge by publishing a comprehensive book on cash waqf. Murat’s
book also covers the practices of waqf in various Muslim countries. Kuran (2001) made a
rigorous effort in analysing the mechanism of waqf and its role toward providing public
goods and utilities. It is also worthy to mention that the book by Siti Masitoh Mahamood
Waqf in Malaysia and The Indian Connections
20 Journal of Islamic Banking and Finance Oct – Dec 2023
(2006) is very beneficial to those who wanted to know the regulatory aspects of waqf in
Malaysia.
The publications on waqf were mushrooming during the decade of 2000s and onward.
Atan, N.A and Faudah, Johari (2017) made a review of waqf literature from 2006 to
2016. There were 289 articles under review. They found that the most popular topics
were cash waqf, followed by property waqf, and the concept on waqf. Interestingly,
71.3% writers were from the South-East Asia countries including Malaysia, Indonesia,
Brunei, Singapore, and Thailand. Yusuf A.O. et al (2021) used a bibliometric technique
in reviewing 476 articles on waqf between 1914 and 2020. They found that 2017 and
2018 were the most productive years. Similar to Atan, they too found that most works
were done by Malaysian researchers.
We made an extensive review on waqf literature produced by Malaysian researchers and
found no in-depth discussions from a historical perspective. We are of the opinion that
Muslims community which migrated from India to Malaysia (i.e., those days known as
Malaya) made significant contribution to the waqf creation in Malaysia, especially in
Penang. Their contributions can be traced back during the early years of 1800s. To date,
some of these waqf properties can still be seen and used for the purpose intended for by
the original owner (‘waqif’). We do believe that the actions by these waqf pioneers
served as an impetus for others to follow.
This paper is divided into five sections. Section Two highlights the development and
regulatory aspects of waqf in Malaysia. Information provided in this section is sufficient
for those who want to know the background of waqf in Malaysia. Section Three discusses
the beginning of the history where Indian Muslims came to Malaya and started to create
waqf for the specific purpose in Malaya, especially in Penang. Section Four highlights
the current conditions and interventions made by the regulatory bodies in preserving and
managing the waqf asset. Finally, we summarise our hopes and expectations in the last
section. The origin, concept, and Sharia aspects on waqf will not be discussed in this
paper. There is an abundance of literature on these elsewhere (Cizaka, 2000; Siddiqi,
1971; Khaf, 1992, 2003; Othman, 1982; Kuran, 2001; Mahmood, 2006).
2.0 THE DEVELOPMENT OF WAQF IN MALAYSIA
Malaysia, previously known as ‘Malaya’ is one of the countries located within the area
called ‘Malay Archipelago’. Historically, Malaya either fully or partly, has been
colonized by the Portuguese, Dutch, British, and Japanese. Every invader has left their
own legacy. While colonization by the Portuguese, Dutch, and Japan had no significant
impact on many facets of life to the people of Malaya, politically and culturally, however,
it was the British who had successfully exerted their influence that changed the economic
patterns of the country as well as the thought process of the people in the country. It is
not our intention to discuss the damage done by British to Malaya during the colonization
Journal of Islamic Banking and Finance Oct – Dec 2023 21
period. However, there were policies of which outcomes had created the positive results
to our beloved nation.
The ‘Anglo-Dutch Treaty of 1824’ signed by the British and the Dutch was the beginning
of the structured colonization in Malaya and Indonesia. While Dutch was given the right
to the whole of Indonesia, Malaya was under full control of the British. This Treaty also
confirmed the rights of the British on four settlements i.e., Penang, Dinding, Malacca,
and Singapore. Since then, many activities had been undertaken by the British to ensure
that they will control the administration of every state within Malaya. Beside governing
the Straits Settlement Territories (Dinding was later transferred back to Perak in 1935),
they started to persuade five other states i.e., Perak, Selangor, Pahang, Negeri Sembilan
to accept a British advisor (called ‘Resident’). These states conceded to British demand
and in 1896, these four states were later known as the Federated Malay States.
Another milestone towards the establishment of Malaya was the ‘Bangkok Treaty of
1909’, in which Siam transferred its rights over for the Malay states (Perlis, Kedah,
Kelantan, and Terengganu) to the British. This states then become British Protected
States and also known as the Unfederated Malay States. As for Johor, The Sultan of
Johor had signed a ‘Friendship Agreement 1885’ with the British. Again in 1914 another
agreement was signed between the two parties. The Agreement stated that Johor will
accept British’s General Advisor, and the Johor sovereignty remains independent from
British interference. Since then, Johor was categorized as an unfederated Malay State.
In 1946, an attempt was made by the British to amalgamate the three components of
states within Malaya into a single nation called ‘Malayan Union’. However, this attempt
was perceived by Malays as a step toward diminishing the powers of the Sultans and
Rulers. Thus, the Malays all over Malaya started to demonstrate their rejection towards
the intention of the British to establish the Union. Finally, after two years of trying and
seeing the huge objections from Malay communities, the plan to establish ‘Malayan
Union’ was put to an end. On 1 February 1948, the ‘Federation of Malaya’ was
inaugurated and in this new agreement, Singapore was excluded and remained a separate
colony of the British. The victory against the establishment of a Union was an impetus
for the flight towards gaining independence from the British. Instead of using direct
bloody confrontation, the diplomacy and negotiation approach were used by leaders in
seeking independence from the British. On 31 August 1957, Malaya gained its
independence from the British and included as one of the countries within the
Commonwealth Nations. Another milestone of Malayan history was the birth of a new
nation called ‘Malaysia’ in September 1965. This new nation consists of states within the
Federation of Malaya, Sabah and Sarawak.
We purposely highlighted the time tunnel with regards to the history of Malaya for a very
important reason i.e., the British choose not to interfere with the Malay customs and
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22 Journal of Islamic Banking and Finance Oct – Dec 2023
matters pertaining to religion. The powers on matters related to customs and religions
remained in the hands of the Malay Rulers. Therefore, during the promulgation of the
Malaya constitution (later for Malaysia Constitution), there was a clause clearly stated on
this matter.
As stated in Part 1, Article 3(2) and Article 3(3) of the Federal Constitution of Malaysia,
for states that have Rulers, these Rulers will also become the head of religion of Islam in
their respective states, whereas the Yang di-Pertuan Agung becomes the head of religion
in a territory that has no Rulers. Also in Part 6, Chapter 1, Article 74 (1) and 74 (2)
mentioned the subject matters of Federal and State laws. A State may make laws on
matters enumerated in the State List i.e., the Second List set out in the Second List or the
Concurrent List set out in the 9th Schedule. As clearly stated in Article 1, List II (State
List) of the 9th Schedule, waqf falls within the jurisdiction of the State i.e., State matter.
Since then, all states including territories within the Federal jurisdiction had promulgated
laws related to waqf. Simultaneously, every state had established an institution called
‘State Islamic Religious Council’ or SIRC. This body is responsible to manage the
Islamic affairs within its respective states.
Although the step towards institutionalized waqf started after Malaya gained
independence from the British, it is worthy to note that the creation of waqf had started
when Islam gained its first footing in Malaya in the 1400s. Mahamood, S.M (2006, p.27)
believes that the Kg Hulu Mosque in Malacca, the Sultan Abu Bakar Mosque in Johore,
and the Kg Laut Mosque in Kelantan were amongst the early waqf in Malaya.
Other proofs to support the existence of waqf long before the institutionalization of waqf
is the promulgation of laws in various states in Malaya. Regulations pertaining to waqf
were included in Hukum Kanun Melaka (1523 C.E.), Pahang Laws (1596 C.E.), Kedah
Legal Digest (1605 C.E.), Laws of Perak (1765 C.E.), and Johore Legal Digest (1789
C.E.). Interestingly, the laws related to waqf were not only being promulgated in states
governed by Islamic Rules, but Penang of which was administered by the British and had
its own regulation called ‘Mohammedan and Hindu Endowment Board.’ This Board was
established in 1905 for the purpose of administering waqf matters in Penang.
Due to the unavailability of regulations on waqf, and lack of knowledge pertaining to the
proper ways in creating waqf, this has resulted in many issues on waqf assets. It was a
normal practice at that time, where the waqf assets were surrendered to Imams (religious
leaders) to manage the assets and in most cases the title of assets was transferred to the
Imam’s name. Interestingly, some of these issues are still unresolved and can be
considered as legacy issues. Sabran, O (1991 – cited from Mahamood SM (2006) p. 40)
believes that the reasons for problems pertaining to waqf are as stated below:
No parties were available to manage the awqaf concerned at the time they were created;
The imam had no idea as to what should be done;
The founders (wakif) died before the alienation was being made to the SIRC;
Journal of Islamic Banking and Finance Oct – Dec 2023 23
There were difficulties in arranging the ownership transfer processes as the District
Officers were far away; and
The founders migrated to other places, after the awqaf concerned had been completed.
The above issues were detected in 1991 and based on the findings by latest researchers,
the legacy issues are still in existence. Chowdhury and Chowdhury (2012) made a study
on the administration in Malaysia and found that the main problem is that the
administrators at the SIRCs are not qualified, and lack knowledge and professionalism.
They are also not well versed in Islamic and country laws. Budget constraint is also
another factor that was considered an issue for SIRCs.
Ismail, C.Z. et.al. (2015) found the dominant issues faced by SIRCs in managing waqf
land as listed below:
Ownership and registration of waqf land problems
Financial problems
Physical barriers: Size, type and geographical location of waqf land
Shortage of competent manpower
Incomplete databases
Illegal occupation and encroachment of waqf land
There are also many suggestions made by the scholars to improve the management of
waqf in Malaysia. Unfortunately, we will not give our comments because it is beyond the
scope of this paper.
3.0 THE MIGRATIONS AND THE BEGINNING OF THE WAQF HISTORY
It is uncertain as to when the Indian Hindu first arrived to the shores of Malaya.
However, there are scholars who believed that the Indian Hindu (will be referred as
Hindus after this) came to Malaya during the Pre-Christian period (Arassrathnam, S,
1980, p.1; Sandhu, K.S., 2008, p.151.). During the early years of relationship, the Hindus
were barter traders from South India supplying basic goods to locals for the exchange of
spices and precious metals. These traders were basically the followers of Buddhism and
Jainism. The archaeologists found the artifacts and ruins at Bujang Valley (one of the
oldest archaeological sites in Malaysia) that showed Buddhist polity in Sanskrit dated
more than 2,500 years old (https://en.wikipedia.org/wiki/Bujang_Valley: accessed 1
April 2022). This supports the views that Hindus had arrived in Malaya during the Pre-
Christian era.
The Hindu traders continued to have dominance in the trades and managed to take
advantage of the north-east monsoon that facilitates the maritime schedule between the
eastern cost of India and Malaya; and at that time, Kedah was the popular destination
amongst them. The dependence on seasonal monsoons produced another characteristic of
Indo-Malayan contact, settlement and colonization. As a logical sequel, the first sign of
Hindus settlement is to be seen in places which were used as entre-port of trades
Waqf in Malaysia and The Indian Connections
24 Journal of Islamic Banking and Finance Oct – Dec 2023
(Arasarathnam, S, p.3). Thus, it is inevitable and makes sense to say that Kedah Kingdom
(also known as Kedah Tua) which was established in the second century and located at
Sungai Muda, professed Hinduism and became the first Malay’s Hindu Kingdom in
Malaya (Ramli Z, 2020).
The Hindus influence in the Malay’s society and kingdom becoming more prevalent
during the Sri Vijaya era (7th – 14th century). This is because Sri Vijaya was also Malay’s
Hindu Kingdom. When Sri Vijaya became a mighty empire that rules the whole Malay
Archipelago, Hindus merchants started to change their trading methods and started to
man the ports and deal with well-established trading systems and traders in Southeast
Asia (Arasarathnam, S, p.5). During this time, These Hindus started to assimilate with the
local people and Indian culture started to influence the life of Malays especially in rituals
and the way ceremonies were performed.
The trade activities by Hindu merchants started to decline when almost the entire India
was ruled by Muslim rulers, especially during the beginning of the 10th century. During
this time, India started to become an industrial nation and the products from the new
industries were brought to various parts of the world especially to Southeast Asia by
more powerful and better equipped Muslim merchants (Arasaratnam, S. p.6). These
Indian Muslim traders were from Coromandel, Bengal, Golconda, and Gujerat and had
better vessels. They managed to take over the businesses that were once dominated by
Hindu merchants.
Based on earlier research works or writings of earlier scholars, there is no evidence to
support the opinions to say that the India Muslim traders are religious missionaries. Islam
was introduced to the Malay Hindus by traders from Arab (especially Yamen), Persia,
and Turkey during the 8th-11th centuries (Putra, B.A, 2016). Among the earliest kingdoms
that converted to Islam were Pasai and Aceh. Both kingdoms were located in Sumatera.
Though it was claimed that Islam has arrived to the Malay Peninsula during the 7th
century i.e., the early days of Islam, there was no concrete evidence to support this
opinion. On the other hand, Islam started to gain footing in the Malay Peninsula
beginning in the 9th century. It was started in Kedah (829 AD), Pahang (11th century),
Terengganu (14th century), Melaka (15th century) and followed by Johor and Perak during
the 16th century (Asni, F., 2019).
By the 17th century, almost the entire population of the Malay Peninsula became Malay
Muslims. Although the credit should be given to Arabs and Malay Muslims from
Sumatera that made Islam spreading faster and easier in this country, the contributions
made by Indian Muslim merchants were significant too. Not only did they play an
important role in spreading Islam, they also managed to become the trusted advisors to
the Rulers of Sultans of certain states. For example, Indian Muslims were appointed to
hold important positions during the era of Melaka’s sultanate. They even married the
daughters and sons of the Sultan and Bendahara in Melaka (Winstedt, 1935). The fall of
Melaka to the Portuguese in 1511 caused some difficulties to both Indian Muslim traders
Journal of Islamic Banking and Finance Oct – Dec 2023 25
and those who had assimilated with the locals via inter-marriage. Some traders continue
to trade in Melaka but some shifted to other ports. Many of those who had assimilated
and married the local people, moved to the different states, especially to Perak and Kedah
(Mujani, 2012).
While Indian Muslims were actively involved in trades, and married to the locals, but
nowhere can we find evidence that they propagated waqf activities. There were no
documents to show that waqf assets were created by them. Even the Kg Hulu Mosque, in
Melaka i.e., the third oldest mosque in the Malay Peninsula, was built in 1728 by the
local people headed by Datuk Samsudin Arom, a converted Muslim from China.
(https://ms.wikipedia.org/wiki/Masjid_Kampung_Hulu: accessed 15 April 2022). It is
worth mentioning here that the cost to finance this project is from the Dutch. Thus, it is
appropriate to conclude that waqf was not created during the first wave of Indian
Muslims that came to the Malay Peninsula before the 18th century. The history of waqf in
the Malay Peninsula based on documented evidences was that it had started in Penang.
These waqf were initiated by the second wave of Indian Muslims diaspora that made
Penang their homeland.
In the 1770s, the British East India Company instructed Francis Light to establish trade
relations in the Malay Peninsula. Light subsequently landed in Kedah, which at that point
was threatened by both Siam and Burma, as well as an internal Bugis rebellion. However,
nothing transpired until 1786, because the British was busy fighting at American
frontiers. However, seeing the growing threat from the Dutch and French, Light, again
was ordered by the British East India Company to acquire Penang from Kedah. This is
because Penang needed to be developed as a navy base as well as trading post between
India and China.
After both Light and the Sultan of Kedah had agreed on the terms regarding the
surrendering of Penang, Light and his entourage sailed to Penang Island and landed on 17
July 1786 at a place that was later known as Fort Cornwallis, and the township built by
Light was known as George Town.
Gradually, Light managed to develop George Town as a free port. Merchants conducted
trades without having to pay any form of taxes. This strategy was able to entice
merchants within the region to come to Penang. As a result, the number of incoming
vessels increased exponentially from 85 in 1786 to 3,569 in 1802; George Town's
population had also risen to 10,000 by 1792. Immigrants came from various parts of
Asia, and, most of the immigrants were from India. The British were given the power to
tighten their grip on Malay Peninsula with ‘The Anglo-Dutch Treaty of 1824, also known
as the ‘Treaty of London’, where the Netherlands ceded the city and fort of Malacca and
agreed not to open any office on the Malay Peninsula or to make any treaty with its
rulers. Therefore, the entire peninsula was under the control of the British via East India
Waqf in Malaysia and The Indian Connections
26 Journal of Islamic Banking and Finance Oct – Dec 2023
Company. This Agreement generated a positive impact on the Indian Muslim merchants.
They were now free to conduct business at the various ports in both Malaya and
Indonesia.
The initial arrival of Indian Muslim merchants in Penang was for the purpose of
conducting trades. However, seeing the opportunities and conditions of Penang that were
very conducive for them to stay, many of these merchants decided to make Penang their
homeland. The Indian Muslim merchants who came to trade in Southeast Asia were
mainly from Coromandel Coast (on the east coast of India). They were also known as
Chulians. These Chulians are divided into four main groups, i.e., Marakayars, Rawther,
Labbai, and Kayalar. Marakayars group was mainly maritime people such as sailors and
merchants and they were the majority who migrated to Malaya during the 17th and 18th
centuries (Eusoff, page 30).
By the 18th century the Chulians outnumbered their Hindu compatriots in trade. When the
British founded Fort Cornwallis, in Penang in 1786, they cooperated with the British in
commerce and became wealthy-class people. Amongst the wealthiest Chulians were
Cauder Mohuddeen or better known as ‘Kapitan Kling’, Mohamed Noordin, Shaik
Eusoff, Dalbadalsah Merican, and Yahya Merican. These people were the pioneers in
creating waqf in Penang. Most of the waqf created by them and other Chulias are in the
form of mosques, burial grounds and other public amenities.
As mentioned by Yusoff A.K., et al (1974), “there were 70 mosques from the 19th and
early 20th centuries, on the island of less than 300 square kilometres. Men of Tamil
Muslims origin played a founding or co-founding role in about 20 of the mosques
studied. In addition to mosques, Tamil Muslim benefactors also sponsored a number of
Sufi saint-shrines (dargah), these tended to be important places of resort for marginal and
non-main stream groups, and also served as integrative transcultural space
accommodating both Muslims and Hindus.”
It is hard to confirm whether these ‘philanthropist Chulians’ created their own waqf
because of religious belief, self-esteem, or trying to emulate the practices of their
forefathers in their homeland. However, the process of creating waqf in Penang became
more popular amongst Muslims especially when the British administrator themselves
granted a piece of land to the Kapitan Keling Mosque and the said land automatically
became a waqf asset of the mosque.
It is interesting to note here that, there is no authority to manage Muslim affairs in
Penang, more so to govern and manage the waqf properties. The intention to create waqf
were done by way of creating a will and this will was either written by the testators
themselves or appointed solicitors. Amongst those who had written a will of their
properties were Kapitan Kling dated 1834, Mohamed Noordin dated 1866, and Shaik
Eusoof dated 1890. One of the common terms which every testator had inserted in their
Journal of Islamic Banking and Finance Oct – Dec 2023 27
will is that the assets in question will be managed by the trustees and in most cases the
trustees are their legal heirs.
While the state of the dedicated waqf assets were properly managed and maintained in a
good condition by the testators’ lifetime, things started to deteriorate upon their death.
For example, Waqf of Kapitan Kling started to deviate from the original objective during
his grandsons’ era due to rivalries and self-interest. There were also disputes which were
brought to court for settlements by the trustees, unplanned development, poor conditions
of the houses built on the waqf land, and no proper records of the waqf properties. All
these weaknesses prompted the authority to intervene and take proper actions so that the
management of the land was in line with the development of the town. Another main
reason for the authority to intervene was the public perception that the houses on the
waqf land can be easily distinguished by the poor condition of the houses and disgrace to
the town (Nasution, K.S., 2002).
In 1890, the colonial government set up a commission to look into the management of
waqf properties that were subject to cases lodged in the Supreme Court. Unfortunately,
due to some reasons, this commission was unable to produce a concrete solution. Again,
because there were many other civil suits related to waqf, this had prompted the
government to appoint in 1903 another Commission of Enquiry to investigate the cases of
alleged mismanagement of endowment estates. This Commission found many
malpractices among the trustees and that waqf properties were not properly maintained.
In fact, the Commission also reported that half of the land within the compound of the
Kapitan Kling Mosque was ceased to be recognised as waqf property.
All these negative findings had prompted the Commission to recommend the
establishment of, ‘a standing committee of Mohammedan gentlemen’ as well as an
authority whose duties should be to keep a register of all awqaf and the names of their
trustees or managers, and to manage the accounts pertaining to the expenditure of the
awqaf (Nasution, K.S., 2002).
Since Hindu temples also received donations and endowments from their communities,
the authority believed that the operations of these activities needed to be investigated.
Therefore, the draft bill to the Legislative Council included recommendations to both
endowments for Mohammedan and Hindus. Finally, in 1905, after debating and
published many times in the Straits Settlements Government Gazette, the law was passed
and known as ‘Mohammedan and Hindu Endowments Ordinance 1905’. The
establishment of the Board had revolutionised the way waqf was being managed in
Penang. For the first time all waqf properties were centrally managed by an authority
appointed ‘Board’. Thus, trustees or agents appointed by way of will by respective
testators had become powerless.
Waqf in Malaysia and The Indian Connections
28 Journal of Islamic Banking and Finance Oct – Dec 2023
At the beginning of the ‘Board’ era, the properties of waqf can be categorised into
mosque buildings, shop premises, residential premises, and vacant lands. For the next 53
years (1906 to 1959) the Board was the sole authority in managing endowments in
Penang. There were instances that the Board was sued by the trustees of testators.
Similarly, there were actions taken by Board to protect the interest of the waqf properties.
When Malaya gained independence from the British in 1957, every state started to
establish a State Islamic Religious Authority (SIRC). In Penang the SIRC was established
in 1959 and known as the State Religious Authority of Penang (SIRCP). Thus, all matters
pertaining to waqf were taken over by SIRCP.
4.0 RESHAPING FUTURE
As stated in Section 2, the Constitution of Federation of Malaya clearly mentions that
matters pertaining to Islamic religion is within the states’ jurisdiction. Therefore, every
state started to promulgate rules and regulations on this matter. In Penang, the first law on
this subject was entitled ‘Administration of Muslim Law Enactment, 1959’. Since then,
many amendments were made to suit the new changing environments. Currently the
enforcing law is named as ‘Administration of the Religion of Islam (State of Penang)
Enactment 2004’ and the last amendment was in the year 2008.
Section 7 (1) of the Enactment 2004 states, ‘It shall be the duty of the Majlis to promote,
stimulate, facilitate and undertake the economic and social development of the Muslim
community in the State of Penang consistent with Hukum Syarak (Sharia Law).’
Therefore, SIRCP is duty bound to undertake social-economic activities including waqf
for Muslims in Penang.
With regard to waqf, the Section 89 of Part VI – Finance (Waqf, Nazr and Trusts), the
Enactment clearly mentioned that the SIRCP is the sole trustee for waqf, nazr and trusts.
Section 89 further states as below:
‘Notwithstanding any provision to the contrary contained in any instrument or declaration
creating, governing or affecting it, the Majlis shall be the sole Trustee of:
(a) all wakaf, whether wakaf am or wakaf khas;
(b) all nazr am; and
(c) all trusts of every description creating any charitable trust for the support and
promotion of the religion of Islam or for the benefit of Muslims in accordance
with Hukum Syarak,
to the extent of any property affected by the wakaf, nazr am or trust and situated in the
State of Penang.’
Journal of Islamic Banking and Finance Oct – Dec 2023 29
Although Malaya became an independent state on 31 August 1957 and the SIRCP was
established in 1959, the official handing over of responsibility in managing waqf in
Penang took place on 1 January 1967. The order was made by the King of Malaysia that
any previous law pertaining to waqf and the Mohammedan and Hindu Endowment Board
was no longer operative. Since then, SIRCP is the sole authority in managing waqf
affairs in Penang.
At a point of transferring the responsibility to SIRCP, the waqf assets that were
previously managed by MHEB can be classified as mosques, burial grounds, commercial
and residential units, agricultural lands, and vacant lands. In terms of quantity, 12
mosques, 9 burial grounds, 303 units of commercial and residential blocks, 5 agricultural
lands, 4 vacant lands, and 6 lots were acquired by the municipality for public purposes
(MHEB, 1932).
SIRCP not only inherited the assets but also problems that come with those assets. Some
of the notable issues related to these legacy waqf are listed below:
Poor conditions of the asset, not well maintained and the need to be refurbished.
Infrastructure surrounding the assets are not well planned and need to be redeveloped in
line with the current environment.
SIRCP did not have sufficient funds to solve the issues related to the poor condition of
the assets. Thus, many of the assets remain unattended to and took a longer period to do
the rectification agenda.
Some of these assets were managed by trustees. Therefore, they were very adamant not to
comply with the instructions and they even refused to cooperate with SIRCP.
Many discrepancies pertaining to terms spelled out in the tenancy agreements between
tenants and the trustees of the assets. Some of these terms were no longer justifiable in
the modern days and to the disadvantage of SIRCP.
Over the years, SIRCP, with limited and inexperienced staff, started to manage these
legacy issues and many of these issues were beyond their control and remain unresolved.
There are also other new emerging issues related to these assets that need to be addressed
and all these issues made SIRCP’s job more challenging.
The Introduction of The Control of Rent (Repeal) Act 1997 has brought much relief to
SIRCP. The recalcitrant tenants no longer had any reason to refuse paying the new rental
rates imposed by SIRCP. Therefore, more income generated from these legacy assets and
problems related to unpaid rental no longer exist.
While The Control of Rent (Repeal) Act 1997 has created positive results to SIRCP, the
recognition of George Town, Penang, along with Malacca, as a UNESCO World
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30 Journal of Islamic Banking and Finance Oct – Dec 2023
Heritage Site (WHS) on 7 July 2008 had created some issues for SIRCP. This is because
many of the legacy assets were located within this locality. Therefore, SIRCP needs to
comply with the National Heritage Act, 2005 (Act No. 645). This Act provides rules and
matters pertaining to the conservation and preservation of National Heritage, natural
heritage, tangible and intangible cultural heritage, underwater cultural heritage, treasure
trove and for related matters. In order to comply with all the requirements as stipulated by
the Heritage Act, substantial funds are required and it is beyond SIRCP’s capability.
Another issue pertaining to this legacy waqf is the legal action taken by the trustee of this
asset. SIRCP was sued by the trustee of Shaik Eusoff’s asset. They claimed that the 15
acres of land was not a waqf asset but Shaik Eusoff intended to give land on ‘trust’ basis
for a period 99 years. Since the will was written in 1892, now the trustee is asking
SIRCP to return back the said land to them. The case is still pending decision at the
Shariah High Court, Penang.
Despite all the issues, SIRCP is considered an exemplary religious institution amongst
other SIRCs in Malaysia. They managed to transform unproductive waqf assets to assets
that generate economic benefits for the society. The development of waqf land which was
given by Seetee Aisah for commercial and residential complex is a success story of waqf
in Malaysia. This project also served as a new business model between SIRC and a
private party. While SIRCP is the trustee for the land, UDA Holdings Berhad is the
funder and developer for the project. This project was divided into 2 phases; the 1st phase
consists of 9 units of 3-storey commercial shops and 76 residential units, whereas the 2nd
phase comprises of low-cost flats, a condominium and an office block.
As for the legacy waqf, SIRCP has prepared a plan that generates optimum returns
socially and economically. For example, there will be a mixed development on Shaik
Eusoff’s waqf land consisting of 391 units of low-cost flats, 1,350 units of medium-cost
apartments, 14 units of shops, 56 units of shop-office, and 66 units of hawker stalls.
There are also orphanage homes, and other public amenities. Similarly, SIRCP intends to
develop 350 affordable housing units on land belonging to the waqf of Kapitan Kling.
5.0 CONCLUDING REMARKS
It is an undisputable fact that Muslims in Malaysia, especially those in Penang had truly
benefited socially and economically from the noble acts rendered by the Muslims that
came from India during the 1800s and early 1900s. We are really unsure of why they had
created these waqf. There is a great possibility that they were being influenced by the
waqf practices in their motherland, or they were stimulated by the feeling that they need
to become good Muslims and will be placed in heaven or ‘jannah’ later. Whatever the
reason may be, these properties will be there in perpetuity and serve as landmark gifts by
pioneering generations of Indian Muslims to the current and future generations of
Muslims in Penang.
Journal of Islamic Banking and Finance Oct – Dec 2023 31
SIRCP being a custodian of these assets, needs to be more professional and dynamic in
handling these assets. The cardinal rule is that the usage of these assets must be to the
optimum level and generate maximum returns both socially and economically so that
society will benefit to the fullest. There are many negative findings from the previous
research papers which claimed that a majority of SIRCs need to improve the governance
pertaining to waqf administration and data should be kept using the AI mechanism
(Kamaruddin, M.I.H and Mustafa M.H., 2021; Rashid, Syed Khalid, 2012). More
importantly, the human capital that handles waqf matters must be knowledgeable
especially in the area of Islamic economic and finance.
There are other important dimensions that need to be carefully addressed by the SIRCP
and these dimensions also apply to other SIRCs. Firstly, we do believe that seeking
Allah’s Blessing is the main purpose of people establishing their own waqf. In the case of
building a mosque for example, the more people use that mosque for prayers, the more
unseen returns we receive from Allah. Therefore, SIRC should try to find ways and
means of how these unseen returns can be quantifiable. For example, a certain portion of
the monthly rental income from the waqf assets must be donated back to charity on
behalf of the person who has created that waqf.
Secondly, in the case of legacy waqf, it was created long time ago and the family tree of
the waqf originators are getting bigger and bigger. Therefore, we are of the opinion that
preference or privilege should be given to the descendants of those originators. For
example, if a high-rise building is built on the waqf land, preference must be given to the
offspring with a discounted price. By doing so, people tend to believe that waqf
mechanism not only brings benefit for the life hereafter but also to our progeny and they
also will appreciate their ancestors. Thus, this could lead to the new dimension and
perception on waqf among the younger generation and they will definitely create their
own waqf for their heirs.
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Journal of Islamic Banking and Finance Oct – Dec 2023 35
Behaviour Of Companies During Covid Times
By
Usama Toor *
Ayşe Yüce
Abstract
Our paper examines 249 Sukuk, and 217 Bond issuing companies across 12
countries globally to analyze which factors affect the choice between
issuing Sukuks versus Conventional Bonds and how COVID has impacted
these decisions. As previous research suggests that Islamic Banks were
affected by the financial crisis of 2008 less than the conventional banks
because their financial performance did not deteriorate like conventional
banks. Our research investigates how corporations have behaved during
the COVID-19 crisis financially and whether their choice to issue a Sukuk
versus a Conventional bond was impacted.
I. INTRODUCTION
The earlier history of Sukuks extends well before the first formal issuance by Shell MDS
in Malaysa in 1990, and Malaysia has remained the largest global Sukuk share market in
2019 by 50.5%. While Malaysia had been the largest global producer for Sukuks,
* Authors: Usama Toor, Ted Rogers School of Management, Management, Ryerson University,
E-Mail: ayuce@torontomu.ca
Ayşe Yüce, Ted Rogers School of Ryerson University, E-Mail: ayuce@torontomu.ca
36 Journal of Islamic Banking and Finance Oct – Dec 2023
companies globally had begun issuing Sukuks in Asia, Middle East, and the UK as it
grew in popularity. During the financial crisis of 2008, research has demonstrated that
while many western economies had been affected, Islamic Banks were affected less by
the financial crisis.
On March 11, 2020 the WHO declared the COVID-19 as a pandemic, and this virus is
described as very aggressive in nature as it spreads fast and can be fatal Vanelli &
Cucinotta (2020). This virus resulted in multiple lockdowns and shutdowns for business,
and restrictions of movement for travel and cargo. For companies this means a significant
decrease in productivity and profitability, and since March 2020 there is no clear sight as
to when this virus would end. It therefore begs the question of how companies performed
during COVID-19. In our paper, we will explore various factors that affect the
corporations’ choice to issue a Sukuk versus a Conventional Bond and how COVID has
affected that decision. The rest of the paper is categorized as II. Previous Studies, III.
Data, IV. Methodology, V. Results, VI. Conclusion.
II. PREVIOUS STUDIES
Defining a Sukuk
The question of what a Sukuk is, has intrigued many scholars since it is structured as a
conventional bond, yet it is not a bond. A Sukuk can simply be defined as a security
representing a portion of ownership in the underlying assets collateralized by third party
companies where the investor will earn a periodic return on their investment based on a
predetermined rate.
Literature Review
An earlier study by, Ozdincer and Yüce (2018) compared the performances of Islamic
banks with conventional banks to find that even though Islamic Banks are doing a lot of
client financing, using relatively cheaper funding they can generate high net margins
consistently. The drawback, however, is that they are not able to convert these relatively
high margins to higher profitability compared to their conventional counterparts. The
study also reveals that conventional banks lose their edge over Islamic banks during the
crisis period. This can be attributed to the fact that conventional banks are dependent on
the economic principles of interest, while the Islamic banks focus is on risk-sharing.
Rosman et al. (2014) and Asmild et al. (2018) conclude that western banks, and the
global economy were disarrayed from the financial crisis of 2008. Islamic financial
institutions had been proven to be unaffected by the subprime meltdown and remained
efficient while global economies fell. Alexakis et al. (2019) suggest that Islamic banks
have higher costs associated with the Shariah Supervisory board and with the
development of their complex shariah-compliant products. Smaoui & Ghouma (2020)
paper found that the performance of Islamic banks during the financial crisis was more
Journal of Islamic Banking and Finance Oct – Dec 2023 37
efficient compared to conventional banks; mainly because of the types of portfolios
undertaken by Islamic Banks were far less risky than traditional banks.
The primary difference between Islamic financing and Western financing is Shariah
which enforces a certain set of principles firms or banks must abide by both socially and
ethically. In Western context Corporate Social Responsibility is commonly associated
with institutions that promote social and ethical-well being. Environmental and social
well-being are common schools of thought for Western companies. The same applies to
Islamic Finance; however, religious boundaries already promote CSR in Islamic finance.
According to Aribi and Arun (2015) Bahrain’s Islamic Financial Institutions require
more development in the area of CSR, meanwhile globally this is becoming the focus of
many firms and institutions.
Special Purpose Vehicles, third party companies, agencies are typically involved in the
collateralization of the physical assets for sukuk issuers. Sukuks are backed with assets of
which investors have partial ownership in the underlying asset. Hahn (1995) concludes
that the SPV companies can securitize the assets by separating the assets from the
originator to minimize or eliminate the risk for the assets and cash flow generated from
the assets in the event of insolvency from the originator. Characteristics of these
“bankruptcy-remote companies” make them act as separate entities while operating in the
interests of the originator. In the case of sukuks, banks, and financial institutions, or even
third-party companies, serve as the party to collateralize the assets to buy them from the
supplier and supply them to the firm in the transaction. Depending on the type of
contract, the assets can be repurchased at the end of the term. This also means as Klein
and Weill (2016) suggested that some firms may act unethically to collateralize
depreciated or depleted assets to gain an exposure to the market to access capital which
otherwise was not accessible from the bond market from the benefits of information
asymmetries. However, this is not a “one size fits all” theory because there are very
reputable large issuers representing the Sukuk market.
Securing of assets has been a tradition to the debt market to secure collateral to access
capital when borrowing from the bank becomes difficult according to the pecking order
theory. Lei et al. (2018) suggested that the decline of tangible assets could reduce the
firm's debt ratios and result in increase in cash reserves. Their paper also indicated that an
example of an imperfect financial market could be linked to firms with more physical
assets and cash sensitivity, and firms in industries with less tangible assets experience
faster growth.
Behaviour of Companies During Covid Times
38 Journal of Islamic Banking and Finance Oct – Dec 2023
Securing of assets means there is a need from that asset to leverage profitability by
increasing efficiency to generate cashflow while accounting for depreciation. Halim et al.
(2017) study concluded that companies issuing sukuks benefit from the higher free
cashflows because they generate more on their operating financial metrics; however, with
high free cashflow increases the probability of agency costs of free cashflow. This means
that companies issuing sukuks are faced with higher transaction costs; rather, stronger
corporate governance or auditing may be required to offset personal benefits from
stakeholder interests. A more aggressive alternative Jensen (1986) paper suggested is to
invest into projects by increasing the debt ratio thereby promising future cashflow
payments into principle and interest payments without increasing the agency costs of debt
to reduce the unethical behaviours of personal versus stakeholder interests.
According to Hayat et al., (2013), Nagano (2017) and Klein and Weill (2016) different
views on information asymmetry exist which ultimately result in higher transaction costs
depending on the quality of information available to investors, creditors and the
stakeholders involved in the sukuk issue. Information asymmetries can influence choice
of debt and to issue the sukuk depending on whether the bank is able to secure the
demand for capital. Secondly, Hayat et al., (2013) paper mentioned that investors can
expect higher search costs and depending on the quality of information available about
the security, the higher information asymmetry may be mitigated by the Halal certificate,
but the time and cost to obtain the certificate does not necessarily reduce the transaction
cost. Third, Klein and Weill (2016) paper suggest that sukuks with a long term encourage
information asymmetries from the unexpected returns that a creditor would anticipate.
In an earlier study Nagano (2016), suggests the Timing theory that a firm would issue a
sukuk opposed to a conventional bond when the stock price is undervalued. According to
Godlewski et al. (2013), findings from their cumulative abnormal returns test suggest a
negative relationship in the stock market from the sukuk announcement. Their papers
along with Alam et al. (2013) and Modirzadehbami and Mansourfar, (2011) concluded
that the sukuks issued in Malaysia have a unique reaction to the stock market meanwhile
bonds issued does not suggest any negative signals.
Hypothesis Development
The previous papers suggest that companies are more likely to issue a Sukuk as an
alternative to the Conventional Bond when there is a greater need for capital such that the
banks may not fulfill. As an alternative to a conventional bond, it is more likely the firm
will issue the Sukuk without exhausting their debt capacity and financing at a premium
without sacrificing equity. Likewise, we also consider that previous research has
confirmed that companies had performed relatively well during the financial crisis of
2008 compared to the west. However, the COVID-19 crisis differs from the Financial
crisis of 2008, because many global markets had been impacted from lockdowns and
restrictions which still has significantly impacted not only the financial sector, but many
Journal of Islamic Banking and Finance Oct – Dec 2023 39
retail and other sectors that depend on the financial sector. We therefore hypothesize the
following;
H1: Companies have a higher probability to issue a Sukuk during the crisis.
III. DATA
We obtained the data from Bloomberg Professional Services for Sukuk issuances, and
Bond issuances while eliminating any data pieces for hybrids, agency issuances, dual
issuances, default, or any junk bonds to insure consistency. Our final data consists of 249
Corporate Sukuk issuances and 217 Corporate Bond issuances issued from 2019 – 2021.
Table I displays the distribution of issuances across by year and industry, while Table II
shows the spread of issuance across regions. Table III displays the descriptive statistics
for each of the factors to be tested, meanwhile Table IV displays the summary statistics.
hTable V shows the results for the CAARs for 1-Day, 3-Day, 5-Day, and 21-Day
calculated returns, and Table VI displays the regression results and VIF.
IV. METHODOLOGY
To understand why firms, prefer to issue sukuks over conventional bonds, we test a
logistic regression model that incorporates a series of firm characteristics and financial
performance variables. We employ a logistic regression method which will estimate the
variables that will be significant for the sample of 249 corporate sukuks and 217 bond
issuances from the period of 2019 – 2021. The logit model bases a binary composition of
1 if a sukuk were issued otherwise 0 for a conventional bond as the dependent variable.
We will test the effects of the independent variables in different sub-periods to examine
how the pandemic may has affected the company decision to issue sukuk with dummy
variables to control for industries.
The model can be written as;
i. 2019 – 2021:
Where, is the dependent variable denoted for sukuks. equals 1 if the company
issued a sukuk; otherwise, 0 for a bond. The explanatory variables are as follows; size is
measured as the logarithm of total assets. The next independent variable, Issue Size, is the
Behaviour of Companies During Covid Times
40 Journal of Islamic Banking and Finance Oct – Dec 2023
logarithm of the issue size. The Debt Ratio is total debt scaled by total assets. Free
Cashflow is the disposable cashflow at the discretion of management divided by total
revenue. Market-to-Book is as the market value of equity scaled by the book value of
equity. ROA, Return on Assets is the Earnings before Interest Taxes and Depreciation and
Amortization, EBITDA over Total Assets. Tangibility is the ratio of Tangible Fixed
Assets scaled by total assets. Finally, Industry Dummies are the dummy variables for the
ten industries sampled: Telecommunications, Cons. Discretionary, Cons. Staples, Energy,
Financial, Health, Industrial, Material, Technology, and Public Utilities.
Secondly, we use the market model below to analyze and reinforce our findings on which
factors are relevant to a company’s choice of issuing a Sukuk versus conventional debt.
We first calculate the expected, and abnormal returns below, and regress the results to
analyze the linear relationship.
Where, is the security return at time t, and is the market return on time t. We
estimated and using the (-250, -50) window, and then calculated the abnormal
returns for the event windows. The abnormal returns were calculated as;
The is the abnormal return for stock i, is the difference in the actual return
minus the expected market return . We have used the UKX, DUAE, SASEIDX,
KWSEIDX, DSM, MXBH, MSM30, FBMKLCI, JCI, STI, KSE100, XU100 and the
DJIM indexes specific to each country sampled as the market indexes to compute the
cumulative average abnormal returns for the aggregate set of events for the global sukuk
market. We compute the returns for the event windows for a 1-day, 3-day, 5-day and 21-
day periods while the announcement date for a Sukuk is time 0.
Secondly, proposed is the regression model below for a three-day event window;
Finally, we check for how financial performance has been impacted during the crisis for
20-21 through the t-test.
V. RESULTS
As displayed in Table VI the results for the regression model the variables presented with
their significance. As per model, we can confirm the log of firm size, issue size and
Journal of Islamic Banking and Finance Oct – Dec 2023 41
tangibility, debt ratio, free cashflow, market-to-book significantly, positively affect the
decision to issue sukuk. ROA also positively affect the sukuk issuance relation, however
the relation is statistically insignificant. It therefore signals that a larger size company is
more likely to issue a Sukuk when there is a demand for capital not otherwise available
from the Bond market. Secondly, we find that Tangibility variable has statistical
significance indicating that these companies are more likely to collateralize their assets
with Sukuks as an alternative to debt financing. Moreover, the results suggest that firms
with higher performance are more likely to issue a Sukuk, because as the result indicated
the debt ratio, free cashflow, market-to-book, and ROA showed a positive relationship.
Furthermore, the results display a positive relationship for the logarithm of issue size with
the dependent variable, in the CAR [3-day] statistically significantly, while tangibility,
debt ratio free cashflow, market-to-book and ROA’s significance are mute. The result
rather confirms a company is more likely to announce to issue a Sukuk as additional
capital is needed.
Finally, as table IV suggests that financial performance has significantly been impacted
by COVID-19. First, we find that the debt ratio (t=63.06) has been much higher for
companies issuing Sukuks than those issuing Bonds. Secondly, free cashflow (t=-7.37)
statistically is negatively significant for companies issuing Sukuks. Market-to-book
however indicates a positive statically significant result (t=2.65) for both Sukuk and
Bond Issuers. Meanwhile, ROA suggests a negative t result (t=-81.76) statistically
significant while both averages are positive. In addition, we can see a similar statistically
significant observation with Tangibility (-79.36).
VI. CONCLUSION
In conclusion, this paper explored the many factors that determine a company’s decision
to issue a Sukuk versus a Conventional Bond during the COVID-19 period. Our results
confirm a large firm with a high demand for capital would be more likely to issue a sukuk
compared to a bond because of a higher demand that may not be available in the bond
market. Secondly, we confirmed during the COVID crisis companies had been impacted
where they had taken on more debt, yet the financial performance was not as progressive.
We can therefore conclude that the COVID crisis had impacted both Sukuk and Bond
issuers’ decision on debt. The impact from COVID-19 results indicates the market for
Sukuks has been more accessible compared to Bonds. We can confirm this from the
results for firm size and issue size which confirmed market accessibility. On the other
hand, we did also confirm that servicing debt was another reason why companies would
issue Sukuks, because without exhausting their debt capacity and without sacrificing
Behaviour of Companies During Covid Times
42 Journal of Islamic Banking and Finance Oct – Dec 2023
equity made companies to issue Sukuks as a solution. Industry wise, we can confirm a
strong majority of issuers for Sukuks were from the financial sector. At the same time our
results confirmed that companies from the communications, retail, health, industrial, and
technology sector are more likely to issue a Sukuk.
Compared to the financial crisis of 2008, there have been global lockdowns since the start
of the pandemic and consistently progressing However, it definitely confirms that at a
global level this has affected firms significantly, and the results confirm that a company
is likely to issue a Sukuk during the crisis.
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https://www.salaamgateway.com/story/saudi-arabia-reduces-fees-for-sukuk-and-bonds-
to-spur-growth-of-local-debt-market
Sherif, M. Erkol. T. (2017). Sukuk and conventional bonds: shareholder wealth
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Smaoui, H. Ghouma, H. (2020). Sukuk market development and Islamic banks’ capital
ratios. Elsevier, 51, 1-17. DOI: https://doi.org/10.1016/j.ribaf.2019.101064
Vizcaino, B. (2014, March 24). Sukuk issuance costs still above conventional bonds in
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finance-adb/Sukuk-issuance-costs-still-above-conventional-bonds-in-asia-adb-
idUSL5N0ML00D20140324
Wang, Y. (2010). The Impacts of Free Cashflows and Agency Costs on Firm
Performance. J. Service Science & management, 3, 408-418. DOI:
10.4236/jssm.2010.34047
Zulkhibri, M. (2015). A synthesis of theoretical and empirical research on sukuk. Borsa
Istanbul Review, 15(4), 237-248.
Table I – Sample distribution of issuances
Table I
Sample distribution of issuances
The following table provides an overview of our
sample distribution by year, and industry for
conventional bond and sukuk issuances.
Bond
Sukuk
Years
2019
2020
2021
1,240
648
106
873
959
1,104
Industry
Communications
Consumer Discretionary
Consumer Staples
Energy
Financial
Health Care
Industrial
Material
Technology
Utilities
4
8
9
23
1,886
10
14
26
4
10
46
80
79
197
2,138
4
209
33
30
120
Behaviour of Companies During Covid Times
46 Journal of Islamic Banking and Finance Oct – Dec 2023
Table II – Sample distribution of issuances across geography
Table II
Sample distribution of issuances across countries
The following table provides an overview of our sample distribution of
corporate issuers by country from 2019 – 2021.
Number of Corporate Issuers
Conventional
Bonds
Sukuks
Sample Countries
Asian
Malaysia
Indonesia
Singapore
Pakistan
Turkey
Middle East (GCC)
UAE
Saudi Arabia
Kuwait
Qatar
Bahrain
Oman
European
United Kingdom
35
46
9
0
50
23
1
3
2
2
5
41
141
18
1
1
24
1
12
0
0
0
2
49
Total
217
249
Journal of Islamic Banking and Finance Oct – Dec 2023 47
Table III – descriptive statistics
Table IV – Summary Statistics
Table III
Descriptive statistics for each explanatory variable
Variables
N
Mean
Minimum
Maximum
Std. Dev
Sukuk Issuances
1. (Log) Size
249
3.15
0.00
9.20
2.30
2. (Log) Issue Size
249
7.73
4.98
9.50
0.87
3. Debt Ratio
249
24.97
0.00
99.99
25.63
4. Free Cashflow
249
-242.74
-33,133.96
71.21
2,723.03
5. Market-to-book
249
1.43
0.00
49.66
4.29
6. ROA
249
0.03
-0.161
1.052
0.08
7. Tangibility
249
0.05
-0.010
0.86
0.01
Bond Issuances
1. (Log) Size
217
4.97
2.24
8.45
1.56
2. (Log) Issue Size
217
7.91
4.79
9.54
0.87
3. Debt Ratio
217
33.02
0.46
99.99
18.99
4. Free Cashflow
217
10.84
-4.54
1,924.50
130.60
5. Market-to-book
217
1,950.00
0.00
150,271.70
13,701.31
6. ROA
217
0.06
-0.14
1.05
0.09
7. Tangibility
217
0.05
-0.028
0.49
0.09
This table displays the summary statistics for our explanatory variables for the sample of 249 corporate sukuk,
and 217 corporate bond issuances for the period of 2019 – 2021.
Table IV
Summary statistics for financial performance from 2019 - 2021
Sukuks
Conventional Bonds
N
Mean
SD
N
Mean
SD
t
Metrics
1. Debt Ratio
249
24.97
25.63
217
33.02
18.99
63.06 ***
2. Free Cashflow
249
-242.74
2,723.03
217
10.84
130.60
-7.37 ***
3. Market-to-book
249
1.43
4.29
217
1,950.00
13,701.
31
2.65 ***
4. ROA
249
0.03
0.08
217
0.06
0.09
-81.76 ***
5. Tangibility
249
0.05
0.01
217
0.05
0.09
-79.36 ***
This table displays the T-test results. Significance levels are reported as ‘***’ as 1%, ‘**’ as 5%, and ‘*’
10%.
Behaviour of Companies During Covid Times
48 Journal of Islamic Banking and Finance Oct – Dec 2023
Table V – CAAR descriptive statistics full sample
Table VI
Logit regression model results
Dependent Variable: Sukuk
Model:
Full Sample
CAR [3-day]
V.I.F
1. Firm Charicterestics
Log(Size)
228.23 ***
2.57
1.113
Log (Issue Size)
26.98 ***
3.30 *
1.063
Tangibility
52.18 ***
0.52
1.176
2. Firm Performance
Debt Ratio
154.27 ***
0.16
1.049
Free Cashflow
27.01 ***
2.48
1.105
Market-to-Book
9.52 ***
0.65
1.186
ROA
0.72
0.11
1.685
3. Industry Dummies
YES
YES
CONSTANT
-1.390
-12.845
0.5611
0.0506
0.000
0.000
7.357
7.356
N
461
5
The table displays the estimates reported in F-Values for the sample of 249 Sukuk and
217 Bond Issuers. The dependent variable is 1 if the sukuk was issued; otherwise, 0 for a
conventional bond. Significance levels are reported as ‘***’ as 1%, ‘**’ as 5%, and ‘*’
10%. The table also displays the estimates in F-Statistics for the regression model for (-1,
+1) CAAR for the global Sukuk market. The third column displays the test for
multicolinearity.
Table V
Descriptive statistics for cumulative average abnormal returns for the full sample
Global
UK
Asia
GCC
Event Window
Whole
T-Stat
Whole
T-Stat
Whole
T-Stat
Whole
T-Stat
1. [0, 0]
0.100
0.36
-0.300
3.72
***
0.100
0.86
0.500
0.66
2. [-1, +1]
0.300
0.73
-0.800
-6.80
***
-0.500
-2.97
***
1.800
1.68
**
3. [-2, +2]
0.200
0.44
-0.900
-6.80
***
-0.600
-3.10
***
1.800
1.39
*
4. [-10, +10]
-0.900
-0.89
-0.500
-1.81
**
-1.500
-3.85
***
-1.000
-0.39
This table illustrates the descriptive statistics for CAAR for the periods of 1day, 3day, 5day and 21day
returns for Sukuk announcements for the full sample from 2019 – 2021. Significance levels are reported
as ‘***’ as 1%, ‘**’ as 5%, and ‘*’ 10%.
Journal of Islamic Banking and Finance Oct – Dec 2023 49
Figure I – CAAR Plot [-3, +3]
Figure I, displays the CAAR for Sukuk announcements calculated for the 7 days event
window from 2019 - 2021. The line with the blue circular pattern represents the global
Sukuk market representing all countries were Sukuks were issued. Meanwhile, the orange
diamond patterns warrant those Sukuks issued in the United Kingdom. The purple
triangular pattern presents Sukuks issued in Asian countries while the yellow square
pattern represents Sukuks issued in GCC countries.
Behaviour of Companies During Covid Times
50 Journal of Islamic Banking and Finance Oct – Dec 2023
Usury and its’ Islamic and Interreligious
Dimensions
By
Camille Paldi *
Introduction
Usury or excessive interest is prohibited in all of the Holy Books including the Torah,
Bible, and Qu’ran for similar reasons. All of the great Prophets including but not limited
to Moses (PBUH), Jesus (PBUH), and Muhammad (PBUH) prohibited excessive interest
as it was seen as a mechanism to exploit the poor and actually steal their wealth. Usury is
an unproductive means of earning income leading to societal decay, exploitation, and
warfare among other things. In this paper, I will examine the concepts of usury in
Judaism, Christianity, and Islam and show the similarities and differences in how each
religion defines, examines, and punishes usury respectively.
Usury in Judaism
In Judaism, usury is prohibited amongst Jews themselves in Exodus 22:24,
Leviticus 22: 35-37, and Deuteronomy 15:7-8; 23: 20-21. Exodus 22:24 states,
“If you lend money to my people, to the afflicted-one (who lives) beside you, you are not
to be to him like a creditor, you are not to place on him excessive interest.” (Fox 1995,
382)
Leviticus 25: 35-38 states,
* Camille Paldi is the CEO of Center for Holy Book Finance
at http://www.holybookfinance.com and can be reached at camille@holybookfinance.com.
Journal of Islamic Banking and Finance Oct – Dec 2023 51
“Now when your brother sinks down (in poverty) and his hand falters beside you, then
shall you strengthen him as (though) a sojourner and resident-settler, and he is to live
beside you. Do not take from him biting-interest or profit, but hold your God in awe, so
that your brother may live beside you! Your silver you are not to give him at interest, for
profit you are not to give (him) your food; I YHWH am your God who brought you out
of the land of Egypt to give you the land of Canaan, to be for you a God!” (Fox 1995,
631) Deuteronomy 23: 20-21 states, “You are not to charge interest to your brother,
interest in silver, interest in food, interest in anything for which you may charge-interest.
The foreigner you may charge interest, in order that YHWH your God may bless you in
all the enterprises of your hand on the land that you are entering to possess.” (Fox 1995,
957)
It is clear that the Torah prohibits usury between Jews, however, in Judaism, the
interpretation of the Torah or the Oral Torah carries more weight than what is clearly
written in the actual Torah as Judaism is an interpretative tradition. Therefore, in order to
analyze these few passages about usury in the Torah, one would have to examine the
Mishnah and possibly the Gemarra and the Midrash amongst other things.
“The Written Torah is the primary source of Judaism transmitted from God to Prophet
Moses (PBUH) on Mt. Sinai. However, there were gaps in the Torah, which needed
explanation, especially to connect the words of the Torah to modern day life, as Judaism
is also an ethos or spirit of the Jewish people. Therefore, sages interpreted the Written
Torah into an Oral Torah and formulated the Mishnah and Gemara (Talmud) and
midrash, which have just as much if not more clout than the written Torah and is also
considered the word of God. “Although the Written Torah, as a physical object, has
greater iconic significance…Jewish life (especially halakhic) life is much more based on
the Oral law than on the Written Law. (Fraade 2012, 39)””(Paldi 2023)
According to Meir Tamari, “It is quite clear that almost all authorities follow the
Mishnaic ruling permitting interest-bearing loans involving non-Jews: ‘It is not
permissible to receive assets [for the purpose of operating with them, e.g. sheep given to
a shepherd under condition that the owner and shepherd share in the wool, lambs, and
milk] with responsibility, [where the full responsibility in case of theft or death of the
flock falls on the receiver] from a Jew, since this is interest. [It is rabbinic interest,
according to Maimonides, since the owner has no share in the risk. Other authorities, like
Tosafot, see this as ribbit mideoraita as the profit accrues to the shepherd, who pays a
fixed sum annually to the owner for the use of his capital.] It is permissible, however to
accept such assets from a Gentile. It is permitted to borrow from Gentiles and to lend to
them interest-bearing loans. This ruling also applies to a gertoshav [a Gentile who lives in
the Land of Israel and accepts the seven Noahide laws].’” (Tamari 2014, 194-195)
Usury and Its’ Islamic and Intereligious Dimension
52 Journal of Islamic Banking and Finance Oct – Dec 2023
Meir Tamari says that in terms of punishment for usury, “all parties to the transaction are
guilty of violating religious injunctions.” (Tamari 2014, 191) According to Tamari, this
includes the lender, the agents and go-betweens, and the receiver of the loan with interest.
(Tamari 2014, 191) Tamari says that, “The halakha distinguishes between that interest
forbidden directly by the Torah (ribbit mideoraita) and that which is forbidden according
to rabbinic law (ribbit miderabbanam).” (Tamari 2014, 192) Tamari explains, “Although
both of them are forbidden to Jews, the religious implications of the former are more
stringent.” (Tamari 2014, 192) In terms of the first category, “The Torah is understood to
directly forbid loans in which the recipient is liable to pay a known sum for the use of
money…This is known as apportioned interest, or ribbit ketsutsa.” (Tamari 2014, 192) In
terms of rabbinic interest, “The easiest example to cite is the hire-purchase (installment
plan) system. In this case, Reuven does not formally loan Shimon the thousand dollars.
Rather, he sells him goods that are valued at the time of sale at a thousand dollars and
gives him sixty days credit. In exchange for this credit, Shimon will pay Reuven an
additional, agreed-upon fee over and above the purchase price. In actual fact, however,
Reuven is receiving a payment in exchange for waiting for his money, which is in the
economic sense considered interest. Halakhically, too, this is considered interest. Yet, it
is distinct from that defined by the Torah, and so is considered ‘rabbinic interest.’ The
levying of rabbinic interest is forbidden…” (Tamari 2014, 193)
“One Mishnah says, “Moreover Hillel used to say, “A woman may not lend a loaf of
bread to her neighbor unless she determines its value in money, lest wheat should rise in
price and they are found to be engaging in usury.”” (Mishnah Bava Metzia 5:9) (Sefaria)
In Islam, this can be seen as a kind of riba (usury) of excess or riba al fadl. If the woman
wants to avoid usury, she should determine the price of the bread in money at the time of
delivery to avoid riba of excess in case the price of wheat should rise and she might
receive back something worth more than what she lent.
Islamically speaking, “If there is exchange among the same specie of ribawi goods, it has
to be done on the spot and should be of equal quantities. If the quantities exchanged
differ, even in spot transactions, then it will constitute riba of excess (Riba al fadl) or
surplus riba. Rules of riba of excess also prohibit exchange of dissimilar quantities of a
genus with different qualities (such as exchanging one unit of high- quality dates with
two units of low- quality dates). According to Visser, there is a ban on exchanging, for
example, two low-quality dates for one high-quality date, even if it is permitted to sell the
low-quality dates for money and use the receipts for buying a high-quality date.” (Paldi
2014, 252) “Zuhayli says that ‘Surplus riba is the sale of similar items with a disparity in
amount in the six canonically-forbidden categories of goods: gold, silver, wheat, barley,
salt, and dry dates.’ It is the violation of the ‘equal for equal’ rule in spot transactions of
the same goods of a particular genus. Zuhayli explains that, “This type of riba is
forbidden in order to prevent it being used as a pretext to committing credit riba, such
that a person sells gold, for example, on credit, then pays back in silver more than the
equivalent of what he had taken in gold.” To avoid riba, the commodity has to be
exchanged with some other genus and then traded with the desired commodity (high-
Journal of Islamic Banking and Finance Oct – Dec 2023 53
quality dates with wheat or silver and then wheat or silver with low quality
dates).””(Paldi 2014, 252).
“Narrated by Abu Said Al-Khudri and Abu Huraira: Allah’s Apostle (PBUH) appointed
somebody as a governor of Khaibar. That governor brought to him an excellent kind of
dates (from Khaibar). The Prophet asked, ‘Are all the dates of Khaibar like this?’ He
replied, 'By Allah, no, Oh Allah’s Apostle! But we bartered one Sa of this type (type of
dates) for two Sas of dates of ours and two Sas of it for three of ours.’ Allah’s Apostle
said, ‘Do not do so (as this is a kind of usury) but sell the mixed dates (of inferior quality)
for money, and then buy good dates with that money’” (Bukhari, vol. 3, book 34, no. 405;
see also Muslim, book 10, number 3875)(Paldi 2014, 252).
Either the woman should give the bread a monetary price upon loaning it or
exchange the bread for money and then give the money as a loan. As I have
demonstrated, the concept of riba corresponds and correlates between the Abrahamic
religions and this connection deserves to be explored further.” (Paldi 2023)
Usury in Christianity
Many people remember in the Bible when Jesus smashes the moneylenders’ stalls. Why
was Jesus so vehemently opposed to usury? Precisely because it was a tool being used by
the rich to exploit the poor, turning the people into slaves, and served as a way for the
moneylending class to usurp the wealth and land of the people. Usury is mentioned in the
Bible at 2 Kings 4: 1-7; Nehemiah 5:1-5, 6-13; Psalm 15; Proverbs 28:8; Isaiah 24:2;
Jeremiah 15:10; Ezekiel 18: 8-17; St. Matthew 6:12; St. Matthew 18: 21-35; St. Matthew
21: 12-13; St. Matthew 25:27; St. Mark 11: 15-17; and St. Luke 19: 45-47.
2 Kings 4: 1-7 states,
“Now there cried a certain woman of the wives of the sons of the prophets unto Elisha,
saying, Thy servant my husband is dead; and thou knowest that thy servant did fear the
Lord: and the creditor is come to take unto him my two sons to be bondmen. And Elisha
said unto her, What shall I do for thee? Tell me, what hast thou in the house? And she
said, Thine handmaid hath not anything in the house, save a pot of oil. Then he said, Go,
borrow three vessels abroad of all thy neighbors, even empty vessels; borrow not a few.
And when thou art come in, thou shalt shut the door upon thee and upon thy sons, and
shalt pour out into all those vessels, and thou shalt set aside that which is full. So she
went from him, and shut the door upon her and her sons, who brought the vessels to her;
and she poured out. And it came to pass, when the vessels were full, that she said unto
her son, Bring me yet a vessel. And he said unto her, There is not a vessel more. And the
oil stayed. Then she came and told the man of God. And he said, Go, sell the oil, and pay
thy debt, and live thou and they children of rest.” (Bible 2019, 452-453)
Usury and Its’ Islamic and Intereligious Dimension
54 Journal of Islamic Banking and Finance Oct – Dec 2023
In this passage, the creditor has come to take the two sons of the woman as slaves. This
passage correlates with the phenomena we are witnessing today where humanity is on the
brink of mass slavery. Some say we are already debt slaves. This Biblical passage aligns
with the Islamic belief that one should help relieve or relieve the debts of others if only
ye knew what was good for you. (Qu’ran 2: 280) During the course of events, Elisha
displays mercy on the woman and shows the woman how she can sell her oil and save her
sons from slavery.
In Nehemiah 5:1-5, 6-13,
“And there was a great cry of the people and of their wives against their brethren the
Jews. For there were that said, We, our sons, and our daughters, are many: therefore we
take up corn for them, that we may eat, and live. Some also there were that said, We have
mortgaged our lands, vineyards, and houses, that we might buy corn, because of the
dearth. There were also that said, We have borrowed money for the king’s tribute, and
that upon our lands and vineyards. Yet now our flesh is as the flesh of our brethren, our
children as their children: and, lo, we bring into bondage our sons and our daughters to be
servants, and some of our daughters are brought unto bondage already: neither is it in our
power to redeem them: for other men have our lands and vineyards.
And I was very angry when I heard their cry and these words. Then I consulted with
myself, and I rebuked the nobles, and the rulers, and said unto them, Ye exact usury,
every one of his brother. And I set a great assembly against them. And I said unto them,
We after our ability have redeemed our brethren the Jews, which were sold unto the
heathen; and will ye even sell your brethren? Or shall they be sold unto us? Then held
their peace, and found nothing to answer. Also I said, it is not good that ye do: ought ye
not to walk in the fear of our God because of the reproach of the heathen our enemies? I
likewise, and my brethren, and my servants, might exact of them money and corn: I pray
you, let us leave off this usury. Restore, I pray you, to them, even this day, their lands,
their vineyards, their olive yards, and their houses, also the hundredth part of the money,
and of the corn, the wine, and the oil, that ye exact of them. Then said they, We will
restore them, and will require nothing of them: so will we do as thou sayest. Then I called
the priests, and took an oath of them, that they should do according to this promise. Also,
I shook my lap, and said, So God shake out every man from his house, and from his
labor, that performeth not this promise, even thus be he shaken out, and emptied. And all
the congregation said, Amen, and praised the Lord. And the people did according to this
promise.” (Bible 2019, 586-587)
Here, In this biblical passage, the money-lenders have usurped the land of the people and
their children as well as themselves are in danger of becoming slaves to the new
landowners. These are the dangers of usury present across all religions and cultures and
prevalent today in the modern world. In fact, Thomas Jefferson famously said,
"If the American people ever allow private banks to control the issue of their currency,
first by inflation, then by deflation, the banks and corporations that will grow up around
Journal of Islamic Banking and Finance Oct – Dec 2023 55
them will deprive the people of all property until their children wake up homeless on the
continent their Fathers conquered." (Monticello 2023)
This is a powerful statement by one of the Founding Fathers, who was known to have
studied Islam. In modern times, if the private banks print money and then loan it out at
interest, the people will not only become slaves to corporations and other entities, but
they will also wake up homeless on their own land according to Jefferson. In fact,
President Kennedy tried to issue silver certificates printed by the government as currency
in the USA, but was unsuccessful.
In addition, if private banks print and lend money at interest, the earth will become a
playground for war-profiteering, killing two birds with one stone. On the one hand,
money-lenders will become richer from pitting people against each other including the
People of the Book, while humanity will be distracted from the fact that they are being
turned into slaves. The only way out is to build a financial system, which does not
transact in usury. It would also be helpful if the People of the Book, Jews, Christians, and
Muslims united in this cause. According to Dr. Muhamad Hanif, “It is the responsibility
of all true believers in God (Jews, Christians, and Muslims) to give up interest based
transactions from their personal lives immediately and input their energies collectively to
design, promote, and implement a financial system free of interest.” (Hanif 2014, 39)
Psalm 15 states,
“Lord, who shall abide in thy tabernacle? Who shall dwell in thy holy hill? He that
walketh uprightly and worketh righteousness and speaketh the truth in his heart. He that
backbiteth not with his tongue, nor taketh up a reproach against his neighbor. In whose
eyes a vile person is condemned; but he honoreth them that fear the Lord. He that
sweareth to his own hurt, and changeth not. He that putteth not out his money to usury,
nor taketh reward against the innocent. He that doth these things shall never be moved.
“(Bible 2019, 649)
Who might abide in the Lord’s house…’He that putteth not out his money t o usury, or
taketh reward against the innocent.” (Bible 2019, 649)
Proverbs 28:8 states:
“He that by usury and unjust gain increaseth his substance, he shall gather It for him that
will pity the poor.” (Bible 2019, 750)
According to Bible ref, “Ill-gotten gain through usury will ultimately pass into the hands
of the person who is generous to the poor. Justice will overcome injustice.” (Bibleref
2023)
Jeremiah 15:10 states,
Usury and Its’ Islamic and Intereligious Dimension
56 Journal of Islamic Banking and Finance Oct – Dec 2023
“Woe is me, my mother, that thou hast borne me a man of strife and a man of contention
to the whole earth! I have neither lent on usury, nor men have lent to me on usury; yet
every one of them doth curse me.” (Bible 2019, 848)
In this instance, the man in question neither lent on usury nor received with usury, yet he
is still being cursed. In Biblical times, engaging with interest was seen as an evil.
Ezekial 18: 8-17 states,
“He that hath not given forth upon usury, neither hath taken any increase, that hath
withdrawn his hand from iniquity, hath executed true judgment between man and man,
Hath walked in my statutes, and hath kept my judgments, to deal truly; he is just, he shall
surely live, saith the Lord God. If he beget a son that is a robber, a shedder of blood, and
that doeth the like to any one of these things, And that doeth not any of those duties, but
even hath eaten upon the mountains and defiled his neighbor’s wife, Hath oppressed the
poor and the needy, hath spoiled by violence, hath not restored the pledge, and hath lifted
his eyes to the idols, hath committed abomination, Hath given forth upon usury, and hath
taken increase: shall he then live? He shall not live: he hath done all these abominations;
he shall surely die; his blood shall be upon him. Now, lo, if he beget a son, that seeth all
his father’s sins which he hath done, and considereth, and doeth not such like, That hath
not eaten upon the mountain, neither hath lifted up his eyes to the idols of the house of
Israel, hath not defiled his neighbor’s wife, Neither hath oppressed any, hath not
withholden the pledge, neither hath spoiled by violence, but hath given his bread to the
hungry, and hath covered the naked with a garment, That hath taken off his hand from the
poor, that hath not received usury not increase, hath executed my judgments, hath walked
in my statutes; he shall not die for the iniquity of his father, he shall surely live.” (Bible
2019, 925-926)
If you have followed God’s laws including but not limited to NOT taking an increasing in
wealth through usury and exploiting the poor, you shall live!
St. Mathew 18: 21-35 states,
“Then came Peter to him, and said, Lord, how oft shall my brother sin against me, and I
forgive him? Till seven times? Jesus saith unto him, I say not unto thee, Until seven
times; but; Until seventy times seven. Therefore is the kingdom of heaven likened unto a
certain king, which would take account of his servants. And when he had begun to
reckon, one was brought unto him, which owed him ten thousand talents. But forasmuch
as he had not to pay, his lord commanded him to be sold, and his wife, and children, and
all that he had, and payment to be made. The servant therefore fell down, and worshipped
him, saying, Lord, have patience with me, and I will pay thee all. Then the lord of that
servant was moved with compassion, and loosed him, and forgave him the debt. But the
same servant went out, and found one of his fellow servants, which owed him an hundred
pence; and he laid hands on him, and took him by the throat, saying, Pay me that thou
owest. And his fellow servant fell down at his feet, and besought him, saying, Have
patience with me, and I will pay thee all. And he would not: but went and cast him into
Journal of Islamic Banking and Finance Oct – Dec 2023 57
prison, till he should pay the debt. So when his fellow servants saw what was done, they
were very sorry, and came and told unto their lord all that was done. Then his lord, after
that he had called him, said unto him, O thou wicked servant, I forgave thee all that debt,
because thou desiredst me: Shouldest not thou also have had compassion on they fellow
servant, even as I had pity on thee? And his lord was wroth, and delivered him to the
tormentors, till he should pay all that was due unto him. So likewise shall my heavenly
Father do also unto you, if ye from your hearts forgive not everyone his brother their
trespasses.” (Bible 2019, 1070)
In this passage, “Jesus tells a parable about the servant of a king. The king forgives the
man's enormous, unpayable debt. In turn, the servant refuses to forgive the much smaller
debt owed him by another and has that man thrown in prison. The king is furious and
asks the servant why he did not show the same mercy he had been given. The king has
the man jailed until he pays everything. Jesus says that God the Father will do the same to
those who do not forgive their brothers.” (Bibleref 2023)
Again, one should display mercy in cancelling the debts of others (if only you knew what
was good for you) and especially so if in your life, someone showed you mercy through
the cancellation of debt. In this passage, importance is placed on helping fellow humanity
out of debt, whether through cancelling debt or otherwise indirectly through devising a
new financial system, which is based on alternative modes of finance rather than usury.
Whichever the case, it is important to do your part to help humanity out of debt slavery,
as it may have many adverse effects on human kind.
St. Matthew 21: 12-13 states,
“And Jesus went into the temple of God, and cast out all them that sold and bought in the
temple, and overthrew the tables of the moneychangers, and the seats of them that sold
doves, And said unto them, It is written, My house shall be called the house of prayer, but
ye have made it a den of thieves.” (Bible 2019, 1073)
And in this last Biblical passage, Jesus smashes the moneylenders’ stalls at the temple,
calling it a ‘den of thieves.’ It is clear that in the Bible, usury is frowned upon and that
helping each other out of debt and debt slavery is encouraged and rewarded.
Usury In Islam
The prohibition of excessive interest or riba can be found in various verses of the Qu’ran
and in the Shari’ah. For the purposes of this paper, I will focus on the verses found in the
Qu’ran itself, the direct word of God. The Qu’ran uses harsh language concerning the
prohibition of usury, but in my opinion, that is because those who utilize usury to exploit
the masses are actually engaging in a type of war against humanity. In addition, it is
stressed in the Qu’ran to relieve the debts of others, similar to the Bible. Although the
Bible emphasizes the usurpation of land and wealth and the imminent possibility of
Usury and Its’ Islamic and Intereligious Dimension
58 Journal of Islamic Banking and Finance Oct – Dec 2023
slavery for the people, the Qu’ran focuses on the hellfire and warfare against those who
engage in usury. As you will see below, charity is also a large component of Islam. I
referred to the Meezan Guide to Islamic Banking as a reference for the below verses.
Surah al Baqarah (The Cow) states,
(2:275 – 2:281)
(2:275)
“Those who devour usury will not stand except as stands one whom the Satan by his
touch hath driven to madness. That is because they say: “Trade is like usury and Allah
hath permitted trade and forbidden usury. Those who after receiving admonition from
their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but
those who repeat (the offence) are Companions of the Fire; they will abide therein
(forever).”
The hellfire is reserved for those who engage in usury. Trade is permitted, but usury is
prohibited. One should earn one’s living through a productive activity, which fuels the
economy and economic growth. Islamic finance has developed various modes of finance
without usury and based on profit and loss sharing. In contrast, in interest-based
financing, the creditor and lender do not engage in profit and loss sharing.
“In an interest- based loan, the creditor receives a fixed rate of return no matter how
much profit or loss the venture makes. If the venture makes a lot of money, the creditor
receives a fixed rate of return. It would be more just if the creditor shared in the profits
rather than just receiving a low fixed rate of return in the form of interest. If the venture
makes a loss, the creditor still receives a fixed rate of return and the debtor bears the risk
of the loss. It would be more equitable if the creditor shared in the loss rather than
receiving an abnormally high rate of return in the form of interest.” (Taqi Usmani) (Paldi
2014)
(2:276)
“Allah will deprive usury of all blessing but will give increase for deeds of charity: for
He loveth not any ungrateful sinner.”
There is an emphasis on giving charity in Islam.
(2:277)
“Those who believe, and do deeds of righteousness, and establish regular prayers and
give Zakat, will have their reward with their Lord: on them shall be no fear, nor shall they
grieve.”
Those who give Zakat will be rewarded.
(2:278)
Journal of Islamic Banking and Finance Oct – Dec 2023 59
“O ye who believe! Fear Allah, and give up What remains of your demand for usury, if
ye are indeed believers.”
Indeed, the believers will give up usury.
(2:279)
“If ye do it not, take notice of war from Allah and His Messenger: but if ye repent ye
shall have your capital sums: deal not unjustly, and ye shall not be dealt with unjustly.”
Here, it is said that Allah will wage war against those who engage in usury. Again, such
harsh language may be being used so as to emphasize the possibility that money-lenders
are actually waging an economic war against the people.
(2:280)
“If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if ye
remit it by way of charity, that is best for you if ye only knew.”
Cancelling debt is also rewarded and is emphasized similar to that in the Bible. It is better
for you, if you only knew.
(2:281)
“And fear the Day when ye shall be brought back to Allah. Then shall every soul be paid
what it earned, and none shall be dealt with unjustly.”
And fear the day when ye shall be brought back to Allah! One shall be judged, and the
Book of Deeds shall be opened. It is interesting to note that one shall be paid what one
actually earned while on earth. I wonder how He was aware that people would be
exploited through the wage-earning system, where people receive a wage rather than the
value – added to the work/product and do not share in the profit with the owners of the
means of production.
Surah al Imran (The Family of Imran) states,
(3:130)
“O ye who believe! Devour not Usury, doubled and multiplied: but fear Allah: that ye
may (really) prosper.”
(3:131) 41
“And fear the Fire, which is prepared for those who reject Faith.”
(3:132)
“And obey Allah and the Messenger; that ye may obtain mercy.”
Usury and Its’ Islamic and Intereligious Dimension
60 Journal of Islamic Banking and Finance Oct – Dec 2023
One can (really) prosper through transacting in a financial system without interest. Again,
the punishment for those who engage in usury is the Hellfire. Mercy is the reward for
those who obey Allah and the Messenger.
Sura An-Nisaa (Women) states,
(4:161)
“That they took usury, though they were forbidden; and that they devoured men’s wealth
wrongfully; - We have prepared for those among them who reject Faith a grievous
chastisement.”
Those who earned wealth through usury and exploited the poor will surely be punished.
Surah ar-Rum (The Romans) states,
(30:39)
“That which you give in usury for increase through the property of (other) people, will
have no increase with Allah; but that which you give for charity, seeking the
Countenance of Allah, (will increase); it is these who will get a recompense multiplied.”
Giving in charity will be rewarded, whether it is the return of that money in the afterlife
or the avoidance of calamity during the life in the dunya.
What is the benefit of financing in Islam without interest? Taqi Usmani says that every
financing in Islam creates real assets. Taqi Usmani says, “It is known, on the other hand,
that interest-based financing does not necessarily create real assets, therefore, the supply
of money through the loans advanced by financial institutions does not normally match
with the real goods and services produced in the society, because the loans create
artificial money through which the amount of money supply in increased, and sometimes
multiplied without creating real assets in the same quantity. This gap between the supply
of money and production of real assets creates or fuels inflation. Since financing in an
Islamic system is backed by assets, it is always matched with corresponding goods and
services.” (Usmani 2001, 14) Thomas Jefferson, who noted the inherent dangers of
allowing private banks to print and loan out money at interest, would most likely agree
that the Islamic financial system should be studied to create a new financial system for
America and possibly the world without interest. When banks print and loan out money
at interest, humanity is at danger of imminent slavery and becoming pawns on the stage
of divisive war-profiteering. When existing in a financial system where one person’s gain
is another person’s loss and where people are admired for making the zero-sum financial
‘killing’ to gain wealth, the side effects might include death and destruction for the planet
and its’ people.
Journal of Islamic Banking and Finance Oct – Dec 2023 61
Conclusion
This paper includes passages from all of the Holy Books including the Torah, Bible, and
Qu’ran regarding usury and its’ prohibition and punishment. Similar themes of the evils
of exploitation and poverty and the hopes of justice and mercy parallel each other in the
sacred texts. Transacting in a financial system based on interest leads to the creation of an
elite wealthy class, who exploits the masses to gain wealth at the expense of the majority
of humanity through a means of unproductive labor. This has deleterious consequences
for the people of the earth as we have seen in the case of slavery, debt-bondage, warfare
and war-profiteering, and the destruction of the planet. The momentous occasion is upon
us where we now have the opportunity to encourage collaboration between Jews,
Muslims, and Christians to cooperate based on the teachings of their respective religions
to study, discuss, and formulate modes of interest-free finance for each other and the
world.
Bibliography
Ahmed, Habib, Product Development in Islamic Banks (Edinburgh, Edinburgh
University Press: 2011)
Bible, King James Version (Vereeniging, Christian Art Publishers: 2019)
Bibleref, “The Meaning of Proverbs 28:8,” accessed on December 3, 2023,
https://www.bibleref.com/Proverbs/28/Proverbs-28-8.html.
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Matthew 18:21 mean? | BibleRef.com
Everett Fox, The Five Books of Moses (New York, Schocken Books: 1995) 382, 631,
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Christianity or Islam,” Holy Book Finance (blog), December 1, 2023,
http://holybookfinance.com/blog.
Camille Paldi, “A Brief Case-Study of Usury in Judaism.” Holy Book Finance (blog),
December 1, 2023, http://holybookfinance.com/blog.
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Banking and Finance Vol. 2, No. 1 (2014): 249-259, Microsoft Word - 15.docx
(jibfnet.com).
Meir Tamari, With All Your Possessions Jewish Ethics and Economic Life (Jerusalem,
Korenpub: 2014) 191-196.
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Dr. Muhammad Imran Ashraf Usmani, Meezan Bank’s Guide to Islamic Banking
(Karachi, Darul-Ishat Urdu Bazar: 2002) 34-36.
Taqi Usmani, Introduction to Islamic Finance (Karachi, Idara Isha’at-e-Diniyat (P) Ltd.:
2001) 1-15.
Visser, Hans, Islamic Finance Principles and Practice (UK, Edward Elgar: 2009)
Qu’ran, (New Delhi, Kitab Bhavan: 2021)
Wikipedia; Wikipedia’s “Sharia” Entry, accessed October 26, 2023, Sharia - Wikipedia
Zuhayli, Sheikh Wahba, “The Juridicial Meaning of Riba,” in Interest
in Islamic Economics (New York, Thomas Routledge: New York: 2006) 22-52.
Journal of Islamic Banking and Finance Oct – Dec 2023 63
The ‘Participatory Finance’ initiative in a
Conventional Setting:
A call for interest-free applications without a religious character.
By
Professor Badr El Din A. Ibrahim
Abstract
This article aims to lay the foundation for what I call a ‘global participatory model of
interest-free financing without a religious connotation’. Here we propose a non-
religious, scalable, profitable, and sustainable financing model to serve the banking
systems that are not interest-free financing regulated. This argument is predicated on the
idea that Islamic banking applications are revised from conventional commercial
formulas that are used in traditional business settings. In addition to the benefits of the
interest-free finance system and the ease with which the interest-free conventional
business formulas can be modified and applied in the conventional banking system,
regardless of its label. The approach of this article depends on the theoretical analysis of
the similarities and differences of the modes of finance of the conventional and interest-
free systems. In addition, our observation is that the products of interest-free formulas
are now pursued in some countries in a conventional setting without having an Islamic
classification. Although this global participatory model is likely conceivable, some
constraints are ahead. These constraints include the absence of suitable models/channels
for providing interest-free financing in the conventional banking systems that meet
customer needs, the weak previous conventional system experience in interest-free
financing, fear of failure with this new type of financing in the traditional system, and the
Senior Advisor to the Arab Gulf Program for Development, AGFUND, and Ex-governor, Central Bank
of Sudan.
64 Journal of Islamic Banking and Finance Oct – Dec 2023
wide-ranging incorrect view that interest-free finance is only religious, charity-based,
and non-profitable system of finance.
Keywords: Participatory finance, interest-free finance, conventional banks, Islamic
banks, participatory model.
The interest-free modes in a conventional setting.
The framework for current research agendas in Islamic finance is more narrowly focused
and covers topics such as how Islamic and conventional approaches to finance differ
from one another, an outline of the Islamic financial system and its institutions, financing
modes, the profitability and efficiency of Islamic banks, and a comparison of their
performance with that of conventional banks. The emulation side and how the Islamic
system can be helpful within the current conventional framework are left out when
discussing what separates the Islamic financial system and its institutions from the
conventional financial system. This article attempts to unlock the potential of Islamic
finance to conventional finance without the need for new regulations. Furthermore, we
contended that it is inaccurate to view Islamic banking formulas as alien to conventional
business finance. Furthermore, asset-backed Islamic finance, which unites the real and
financial sectors and shares rewards and risks, has much to give to conventional finance.
Islamic banking is not just a system for Muslims; non-Muslims can also utilize it without
any severe restrictions.
Islamic Banking and financing have for a long time been considered a product for the
Islamic states only. However, after the financial crisis, it was assessed that Islamic banks
seemed to have been less affected prompting conventional banks and their customers to
consider Islamic financing as an alternative to conventional financing.On the contrary,
here and because of the non-contradictory nature of the two systems, we recommend
interest-free finance in a conventional system without any religious connotation and only
as a supplement to interest-based lending.
Contrary to popular belief, the investment formulas of the two systems are not far from
each other. The basis of this argument is that scholars, economic analysts, and researchers
are not linking Islamic finance to what is practiced in conventional commercial
companies in the West. In addition, the researchers do not see that Islamic banking
applications are originally derived are modified from the conventional commercial
formulas that operate in traditional business. There may be a strong link between
. Badr El Din A. Ibrahim, 2020, Iinterest-Free Micro-Finance Without Any Religious
Connotation: An Inclusive Global Model.: Handbook of Research on Theory and Practice of
Global Islamic Finance, IGI Global Publisher, USA, 2020, DOI: 10.4018/978-1-7998-0218-
1.ch011, https://www.igi-global.com/chapter/interest-free-micro-finance-without-any-religious-
connotation/247201?camid=4v1/Reprinted in IGI Global Research Anthology (Critical
Exploration) on ‘Microfinance Services and Roles in Social Progress’, Dec. 2022, Research
Journal of Islamic Banking and Finance Oct – Dec 2023 65
interest-free and interest-based financing patterns, and we believe that market-based,
interest-free financing without any religious connotation will be acceptable in practice in
the world, based on the following justifications:
Musharaka, equity participation profit-and-loss sharing joint venture, as a form of
interest-free partnership financing, is merely a traditional commercial partnership with
limited responsibility and duration. Traditional partnerships in business and Islamic
partnerships differ only in partners' responsibility and duration of time . Moreover,
while the traditional partnership contract is a long-term legal contract without an
expiration date and depends on the death or withdrawal of one of the partners, the Islamic
partnership contract is a legal contract with a specific period and specified expiration
date. The liability of a statutory conventional partnership contract is a limited or
unlimited liability between natural persons and there is room to include other partners as
well. In contrast, a specific liability and a written contract between a natural person and a
financial institution governing an Islamic partnership can allow the entry of new partners
only if they are specified in the original contract or the partners agree to them later, and
withdraw from the partnership is not possible. In addition, in the Islamic partnership
contract, profits are distributed according to both capital shares and management shares.
Here the project ends and is liquidated at the end of the contract period. In the
conventional partnership contract, profits are distributed according to shares or added to
the capital while the project continues. It seems that the interest-free partnership contract
modifies the conventional one to suit the purpose of a single and limited-duration and
liability transaction between the clients and the bank, and so the difference is not in the
idea but in the specifications of the two contracts.
Murabaha (deferred payment sale with a profit margin) is such that instead of lending
money to borrowers, banks buy products from third parties and resell them to customers
at a higher price that includes the original cost and a profit margin, the initial costs and
profits are disclosed to the buyer. The main difference between this funding mechanism
and interest-based lending lies in the structure of the contract. Murabaha is a sales
contract, while a conventional loan is an interest-based loan agreement and transaction.
Anthology on Microfinance Services and Roles in Social Progress: 9781668475522: Business &
Management Books | IGI Global (igi-global.com), Nov. 2022.
Badr El Din A. Ibrahim, 1999, ‘Can Musharaka Financing of SMEs be Applied to the Interest-
Based Banking System?’, Small Enterprise Development Journal, Grandfield University, United
Kingdom, Vol. 10, No. 3, Sep.
.
The ‘Participatory Finance’ initiative in a Conventional….
66 Journal of Islamic Banking and Finance Oct – Dec 2023
Murabaha is similar to and complementary to interest-rate financing except that the
lender gives assets, not money. Murabaha financing is like a rent-to-own arrangement in
the conventional world, in which the lending bank retains ownership of the item being
sold until the loan is repaid. Murabaha, with its fixed margin, provides the bank with a
more predictable revenue stream and it is easier to implement and more profitable. That
is why most Islamic banks’ loans come from Murabaha. Given these benefits,
conventional banking systems can opt for Murabaha as a supplementary mode of finance
if they’re ready to move to trading with clients. I perceive that Murabaha is merely a
trading formula that makes sure the credit from the conventional bank is used for the
intended purpose. This characteristic is more needed when financing weak- financial-
based small and microenterprises which need to use the intended credit in the business
and not in consumption.
Ijara (operational or financial leasing contracts) is also practiced in Europe and Africa as
conventional leasing in business without having a religious character. There are two
distinct kinds of leasing agreements: Islamic Ijara and Conventional Leasing.
Comparisons between Ijara and traditional operating leases are based on various aspects
of these agreements, including ownership, identification of risk bearers, type of
contracted assets, and payment details.
When comparing Ijara and traditional operating leases, there are several similarities. As
far as ownership of the asset is concerned, the lessor retains ownership both under his
Ijara and traditional operating leases. In both types of contracts, the lessor assumes the
risk and liability, as well as the cost of maintaining the asset. This liability also applies if
the property is damaged by reasons beyond the lessee's control. On the details of the
rental agreement, both forms of contract, the first rental payment occurs when the lessee
receives the asset in a usable condition and can fulfill the purpose of the rental. In the
Ijara mode of Islamic finance, the assets rented must not be lost during use. Traditional
operating lease agreements specify that leased items cannot be "limited use" items. In a
traditional operating lease, the lessor has the right to impose penalties on the lessee for
late or non-payment. The Ijara contract provides similar provisions but is amended to
include a condition that the amount received by the landlord as a penalty may only be
used for charitable purposes, thereby avoiding riba (usury). In terms of sale and
leaseback terms, Ijara allows both transactions, but separately. However, in a traditional
operating lease, one company sells an asset to another company, which then leases the
asset back to the original seller. If leasing has been effectively replaced by Ijara in the
traditional financial system, why not the traditional system cannot use Ijara. We believe
that Ijara (Islamic lease) has the same meaning as a conventional lease but has risk-
. Ijara Vs Conventional Lease, Comparisons between Ijara and Conventional operating lease
contracts, 2023, Ijara Community Development Corp. (ijaracdc.com), https://ijaracdc.com/ijara-vs-
conventional-lease/, accessed on 24th December 2023).
.
Journal of Islamic Banking and Finance Oct – Dec 2023 67
benefit characteristics and other contractual elements. The two modes of financial
arrangements working principles and specific benefits are not far from each other and
hence with or without modification, the conventional bank can be able to use this mode
as a supplementary one.
One kind of Islamic finance contract used for forward sales is called a Salam (advance
payment sale). This contract defers the asset's delivery to a predetermined future date in
exchange for the buyer paying the seller the whole amount upfront. It is not far from
forward lending in the traditional lending system. Farmers' and traders' needs are met
through Salam. The commodity price is fixed at a lower rate under this financing method
than the price of those commodities provided on the spot. The banks or other financial
organizations may be able to benefit legitimately from the difference between the two
prices. In the conventional forward sale contract, the asset's delivery is postponed until a
later date and the buyer pays the seller in advance. In the context of conventional finance,
advance contracts are pacts wherein one party guarantees to purchase goods or services
from the other at a later time. The seller accepts payment in advance from the buyer and
promises to deliver the good or service later. Numerous industries, including agriculture,
energy, and finance, use these contracts.
Farmers can obtain credit facilities from conventional banks, but they must pay interest.
The farmers under Salam receive the same service from Islamic financial institutions, in
which farmers receive cash for the purchase of seeds and fertilizer—not as a pure loan,
but rather as payment for completed crops that farmers must deliver. This is the only
distinction between the two systems. In sum, the Salam form of funding has no direct
parallel to conventional loans. Nonetheless, the Salam form of financing that is used to
purchase goods in advance and receive them at a later date, and the idea of a forward
contract in conventional finance, an agreement between two parties to buy or sell an asset
at a future date for a specified price, are comparable. The Salam formula is not exclusive
to Islamic finance and can be used as an extra mode by conventional banks as
well particularly to fund the agriculture sector.
Non-interest financing practices in Africa without legislation
Interest-free formulas are practiced in Africa without being linked to the Islamic religion.
During the author's field visit to the Kenya Women's Microfinance Bank, KWFT, the
general manager emphasized that because most women ask for finance to buy cows, the
bank had decided to buy cows and offer them to the customer instead of money, with the
payment to be made in installments and the interest rate added to the total cost. He
justified this by making sure that the loan goes to the intended project. This business is
exactly Murabaha, which provides assets instead of money. In Kenya, besides KWFT,
some conventional banks have introduced or are setting up Islamic finance products in a
bid to attract that segment of the population that would prefer financial services
The ‘Participatory Finance’ initiative in a Conventional….
68 Journal of Islamic Banking and Finance Oct – Dec 2023
consistent with Islamic laws, even before receiving any pertinent regulations from the
Central Bank of Kenya, CBK.
Moreover, during the author's field visit to small farmers’ associations in the village of
Zaria near Kano/Nigeria, I was informed that in the absence of financing institutions, the
women farmers take bags of their produce from village merchants and sell them to
finance agricultural operations and repay the same product it in kind after the harvest for
the same amount. These women are practicing Salam interest-free finance without
realizing it.
Leasing formulas are practiced in Europe and Africa without labeled interest-free
formulas. In Ethiopia, non-interest financing is practiced in rural areas under local names
without their knowledge of its origins. Leasing operations in Ethiopia resemble Islamic
Ijara. It began before the application of Islamic finance, after the issuance of the Civil
Code and the Commercial Code in 1950 and 1960 respectively.
Islamic finance as a supplement to conventional credit.
Islamic finance industry has developed significantly over the years to become a
noticeable part of the international financial system, in the Gulf States, America, South-
East Asia, Africa, and Europe. Despite the growing Islamic finance worldwide, it is still
some way from being a mainstream form of finance. Nevertheless, this movement has not
only exhibited the merits of interest-free finance but also bridged the gap between interest
and conventional finance. Moreover, the existing laws and regulatory frameworks in the
conventional system were not designed to cater to interest-free financings based on the
sharing of economic risks and rewards. The creation of economically viable structures
that do not only rely on interest probably complicates the introduction of interest-free
finance in non-Muslim countries. Moreover, Islamic finance arrangements are more
complex for a conventional system, and perhaps more costly but more profitable, than
their conventional equivalents. Nevertheless, conventional banks can benefit from
seeking any similarities between the two systems and launching suitable interest-free
modes of finance that are non-religious and that fit precisely within the existing
conventional regulatory frameworks.
The goal of Islamic finance is the same as that of Conventional finance, but it operates
differently. Nonetheless, here we contended that Islamic finance needs to change to meet
the demands of the global financial industry, as a complement to traditional finance rather
than a replacement for it. In sum, financing formulas based on sales, profit-sharing, and
. For more detail see Badr El Din A. Ibrahim, 2017, Cases of Microfinance in Africa: Characteristics,
Legal Framework, policies and Strategies (a book https://www.lap-publishing.com/ LAP Lambert
Academic Publisher, Germany, (ISBN: 978-330-32162-5), https://www.amazon.com/Cases-
Microfinance-Africa-Characteristics-strategies/dp/3330321628.
.
Journal of Islamic Banking and Finance Oct – Dec 2023 69
leasing can be derived and used by traditional bank lenders as “supplementary” lending
to the interest rate to expand financing. This argument is based on that, in the absence of
ready-made alternative formulas that suit Islamic finance principles, Islamic banking
applications are originally derived and modified from the conventional commercial
formulas that operate in traditional/conventional business. Moreover, In contrast to
conventional finance, which is primarily based on cut-off from the real economy, Islamic
finance can offer a credible supplement because it is founded on the principles of direct
participation in the risk of investment and the prohibition of selling products that do not
exist. Furthermore, Islamic finance is regarded as a type of financing that satisfies market
demands. These merits of the interest-free finance system are out of doubt and should be
worth considering by the conventional system. In addition, if the interest-free system
managed to modify and apply the conventional business formulas, there is no harm or
difficulty that the conventional banking system might do the same, under whatever label.
We should not look at the interest-free formulas under the prevailing traditional
legislation from a religious point of view, but rather from a practical point of view, in this
way, they will have global and regional applications, without being identified as Islamic.
Likewise, countries that do not have legislation for Islamic finance should not be
embarrassed to apply non-interest-based formulas as a financing model called
(participatory financing) to expand and diversify the financing base, as a lending
supplement without being linked to Islamic legislation from regulators.
Challenges facing the initiative.
The participatory finance initiative, although seems possible, but some challenges ahead
that need to be overcome. These challenges can be classified as follows:
The absence of suitable models/channels for providing interest-free financing in
traditional systems that meet customer needs.
7
Weak previous experience in interest-free financing and fear of failure with this
new type of financing within the traditional system,
7
. According to the Bill & Melinda Gates Foundation, many traditional banking and financial
institutions offer parallel Islamic services only through dedicated “windows” or divisions,
including JPMorgan Chase, Standard Chartered, Citi, and BNP Paribas. For some suggested
business models for interest-free finance in Ethiopian conventional microfinance institutions see
Badr El Din A. Ibrahim, 2016, Suggested Business Models To Extend Interest-Free Microfinance
in Ethiopia.Recent Innovations in Inclusive Finance for Sustainable Development in Ethiopia,
Proceedings of the 9th Biennial AEMFI Conference, Shegar Printing Press, Ethiopia, pp. 204-217,
ISBN: 978-99944-56-08-6.
The ‘Participatory Finance’ initiative in a Conventional….
70 Journal of Islamic Banking and Finance Oct – Dec 2023
Misunderstandings regarding interest-free financing as non-profit financing,
including its focus on charitable activities.
8
Linking interest-free financing to the Islamic religion (interest-free financing is
only viewed as religiously biased financing)
Conclusion
This article, which originated from revised Islamic banking formulas used in
conventional business settings, argued for interest-free financing in conventional banking
systems without any religious implications. The arguments are supported by some
theoretical and practical evidence. The article shows (just as in the Islamic finance
system) the potential for interest-free conventional business formulas to be altered and
used in the traditional banking system. It also highlights the advantages of the interest-
free financing system in a conventional setting. These lines of reasoning, we believe, are
encouraging, but to make them applicable more thorough work to overcome the
challenges must be done.
8
. Contrary to this enormous belief Badr El Din A. Ibrahim empirically showed that interest-free
finance is profitable compared with conventional finance. The net rewards (and the returns on
capital) of this partnership arrangement to the entrepreneur are greater than the net income (and
the returns on capital) of a similar conventional interest-based project. See Badr El Din, A.
Ibrahim & Malcolm Harper, 2011, “Crossfire Debate: Islamic banking avoids interest
payments and thus prevents rich investors profiting from the poor”, Small Enterprise
Development & Microfinance, UK, Volume 22 Number 4 December, Practical Action Publishing
(formerly ITDG Publishing).
.
Journal of Islamic Banking and Finance Oct – Dec 2023 71
Islamic Microfinance in India: A
Quantitative Approach
By
Huma Mahmood*, Rusni Hassan**,
Syed Ahmed Salman***
Abstract
Islamic microfinance institutions (IMFIs) have had their roots in India
originating as far back as 1918. It is founded on the principle which
prohibits interest and hence is a form of non-interest microfinance to the
poor. It also provides micro-credit services through Shari’ah compliant
structures to small dealers and traders who have limited to no access to the
formal financial services. Islamic microfinance offers a more sustainable
and successful microfinance which not only creates financing but also
blends in empathy for the poorest of the poor. In the Islamic perspective,
poverty alleviation is more comprehensive than the conventional one. It
flags equity and cooperation-based models in contrast to models that create
and perpetuate debt. However, the past of IMFIs in India depicts an
unfortunate tale. The IMFIs established during the eighties, rose and
matured quickly. Nevertheless, over the course of time they encountered
numerous hurdles that lead to their closure in many places. Therefore, it
becomes vital to study the factors that caused the IMFIs downfall in India.
The objective of this research is to know the challenges of Islamic
* Authors: Huma Mahmood, IIUM Institute of Islamic Banking and Finance Malaysia.
** Dr. Rusni Hassan is a Professor at IIUM Institute of Islamic Banking and Finance (IIiBF),
International Islamic University Malaysia (IIUM).
*** Dr. Syed Ahmed Salman is a Senior Lecturer at Faculty of Business and Accountancy,
Lincoln University College.
72 Journal of Islamic Banking and Finance Oct – Dec 2023
microfinance in India and give suggestions and possible solutions to
resolving the issues. This study adopts the quantitative approach. In this
research the population is known and hence probability sampling or random
sampling is selected. The data gathered from the303 responses received is
analyzed using SPSS22 software. The findings of this research show that the
majority agrees that there is lack of government support, no proper
marketing of Islamic microfinance products, no effective Islamic
microfinance products in India, lack of human capital in microfinance, high
interest rates that make the poor financially unstable and lack of
microfinance institutes in rural areas. This study offers robust
recommendations on the challenges of Islamic microfinance in India and
henceforth, it will be of interest to regulators, stakeholders, as well as the
existing and potential customers.
Keywords: Islamic Microfinance, Challenges, Suggestions and India
1.0 Introduction
Among the many factors that were responsible for the microfinance crisis in India,
one major factor was the high interest rate which still continues to exist (Shafi, 2015;
Haldar & Stiglitz, 2014). The giants of microfinance in India until today are known to be
charging high interest rates. This defies the sole purpose of microfinance to serve the
poor and the poorest of the poor with income as low as 2 dollars per day as they are
unable to pay the high interest rates. Moreover, on looking into the population of the
financially excluded, the majority of them are Muslims who are of the belief that giving
or taking of interest is not permissible (Pandey & Aziz, 2017).
To address the need of the financially excluded Muslims in India, the establishment
of non-interest-based microfinance model proves to be extremely effective. It can provide
for a more sustainable and successful microfinance which not only creates financing but
also blends empathy for the poor and the poorest of the poor. Islamic microfinance
institutions (IMFIs) are institutions that work solely on non-interest-based models. Their
perspective of poverty alleviation is more inclusive and functions using equity and
cooperation-based models such as a) partnership arrangements of profit and loss sharing
(e.g. Musharakah and Mudharabah) and b) asset financing (e.g. Murabahah and ijarah) in
contrast to models that create and perpetuate debt.
IMFIs in India have been existing since the 20th century (Nisar & Aziz, 2004;
Chakrabarty, 2015), however, the history of IMFIs in India narrates a painful tale. The
IMFIs initiated during the eighties, grew and matured rapidly but due time they were met
with hurdles leading to their closure in many places. Two most trusted companies in
India, Barkat Investment Group and Baytu-n-Nasr faced a shut down and others existing
started reporting negative growth (Nisar, 2002). Hence, it becomes crucial to study the
issues and challenges of IMFIs in India. To the extent of the researchers’ knowledge,
Journal of Islamic Banking and Finance Oct – Dec 2023 73
study on challenges of Islamic microfinance in India is quite limited. Therefore, in order
to fill this void, this research will examine and gauge the challenges of Islamic
microfinance in India and subsequently, the study will also give suggestions and possible
solutions to resolving the issues and building the awareness in India.
This paper is organized into five sections. Section two gives a brief picture of the
literature review on Islamic microfinance, whereas section three explains the research
methodology. Section four describes the challenges of Islamic microfinance in India.
Lastly, section five concludes the paper.
2.0 Literature Review
Nisar (2002) in his article sought to analyze the current state of Islamic finance in
India. He stated that the ‘non-performance’ of the first-generation reforms and the weak
financial market being technically not sound became the basic reasons for many finance
sector scams to take place. The article then focused on the regulation aspect of NBFCs
pointing out that the regulation initiated by the Reserve Bank of India to effectively
supervise, control and regulate was solely limited to deposit acceptance activities of
NBFCs and hence rendered the regulatory framework inadequate to control other
operations of NBFCs. The findings depicted that the changing government and elections
caused the NBFCs to become unstable with their outflows becoming bigger than their
inflows. Moreover, the number of scams lead to loss of trust and confidence of the public
in IMFIs and the lack of creating a proper mental attitude and educating the society to
accept Islamic Banking and Finance in India.
Nisar & Aziz (2004) in their study examine the rise of Non-Banking Finance
Companies (NBFCs) and their subsequent failures by conducting detailed case studies on
prominent Islamic NBFCs of India; Barkat Investment Group (BIG), Baitun Nasr Urban
Cooperative Credit Society (BUN), Al-Najib Milli Mutual Benefits Limited (AMMB)
and Al-Barr Finance House Ltd. (ABFL). Their findings highlight the sudden
introduction of large-scale regulatory changes in the non-banking financial sector coupled
with worse economic conditions to be one of the main factors behind the closure of
majority of the Islamic NBFCs in India. The other issues faced by the NBFCsin their
operation was the limited investment opportunities, limitation of addressing liquidity
needs following Shariah commitment prohibiting conventional loans, non-availability of
Shariah compliant options or lender of last resort in India and also rumors and contagion
effect being the cause behind closure of some of the Islamic NBFCs.
Sherwani (2010) in his study to measure the problems and challenges for
formulating interest free models in India conducted both statistical and qualitative
research based on secondary data. The author in his findings stated that the major hurdle
in the path of development of Islamic microfinance is lack of supply of fund. The other
challenges highlighted in the study were legal barriers and mounting operating costs and
Islamic Microfinance in India: A Quantitative Approasch
74 Journal of Islamic Banking and Finance Oct – Dec 2023
grass root level awareness and lack of MFIs ability to fully monitor the clients in a
mudaraba microfinancing hence becoming an easy target of clients to manipulate
documents and under report the profits realized in order to reduce the share of MFI as per
agreement.
Wasiullah, Backer, & Waheed (2015) sought to study the technical feasibility of
one of the major Islamic Finance contract – Murabaha in the Indian context discussing
issues and theories at the conceptual level in comparison to the existing modes of
conventional finance. The findings show that lack of funds and restriction by the
regulation on taking deposits hinders IMFIs from offering saving and equity-based
products. Apart from that, equity financing and risk sharing products are ignored due to
moral hazard and agency issues. Moreover, Islamic Institutes are required by the
regulation to pay fixed percentage of interest to its depositors. The study also highlighted
that IMFIs in India lack financial and human resources required to conduct R&D
activities to make products offered Shariah compliant. Murabaha and other existing
fixed-return financing instruments like Ijarah, Salam and Istisna lack effective marketing
to increase their outreach and acceptability. Also, Murabaha product/transaction in India
is more expensive than the conventional mode due to the tax levied at the various stages
of a Murabaha transaction making its application in India more strenuous.
Mohammed & Waheed (2016) analyze the feasibility of providing Islamic financial
services in India, mainly in the areas of Retail Banking, Microfinance and Venture
Capital financing by identifying the major regulatory challenges facing Islamic finance in
India. The authors in order to conduct this study examine the regulations that are
governing these sectors in India such as the ‘Banking Regulation Act, 1949’, ‘Multistate
Cooperative Societies Act 2002’, ‘Reserve Bank of India Act, 1934’, ‘Securities and
Exchange Board of India (Venture Capital Funds) Regulations, 1996’ and ‘Securities and
Exchange Board of India (Foreign Venture Capital Investor) Regulations, 2000’. For
regulations related to Islamic finance, the authors considered the Shariah Standards
published by the Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI). The authors in their findings opined that in the case of NBFC-MFI model, few
of the provisions of the RBI Act, 1934 and directions issued for NBFC-MFI do not
support NBFCs to provide Islamic Microfinance services. There by highlighting the
existing regulations to be an issue in the growth and development of Islamic
Microfinance in India.
Al-Aboud & Faisal (2016), attempt to explore some major challenges, growth
and status of microfinance in India and Saudi Arabia during the period of 2015-16. The
paper also explored poverty assessment and social performance methods by using
microfinancing tool and techniques in India and Saudi Arabia. Their findings show that
both Saudi Arabia and India are facing lack of proper regulation, supervision and
assistance from apex financial bodies. The major challenge highlighted in the study was
inadequate capital support in order to finance low income group and individuals in India.
Another obstacle in the growth of MFIs is the absence of proper guidelines in dealing
Journal of Islamic Banking and Finance Oct – Dec 2023 75
with defaulters. The lack of proper audit methodology as per AICPA and GAAP
guidelines for maintaining financial records on yearly basis in both India and Saudi
Arabia and also the lack of Risk Management Framework as per guidelines are all factors
that hamper the growth of MFIs.The findings highlighted that it becomes equally
imperative for all MFIs in India and Saudi Arabia to build confidence of all customers
and stakeholders.
Shafi (2015) in his study analyzes the prospects, the challenges of applying Islamic
economic principles and its practical products and services in India. The researcher draws
solutions to regulatory problems by adopting an exploratory method using secondary data
from books, dissertations, reports of different organizations such as IFSB, S and P, and
other financial periodicals. His study highlights that in the operation of an alternative
Islamic financial system in India, the regulatory becomes a major obstacle in its path to
development. Over 500 Islamic institutes existing in India if registered under the
regulation are restricted from taking deposits and if not registered, they cannot expand
due to being unrecognized and hence remain small in size and risk being closed down.
Mohammed & Waheed (2018) conduct a case study on Al-Khair Cooperative
Credit Society, an interest free microfinance institute in India. Their research was based
on primary data collected using Questionnaire shared with Managing Director of Al-khair
and also various borrowers of the institute. The authors in their findings highlight some
key issues arising in the collection of service charge on loans. The service charge being
calculated was based on assumption and not on the basis of the actual cost incurred.
There was absence of cost segregation based on the type of loan which may be different
from one another. The researcher noted that the cost was being levied solely on the
amount of the loan and was not linked with the time period, hence the positive and the
negative impact of the loan repaid based on the time frame did not reflect in the service
charges which is objectionable in the calculations as per the Shariah AAOIFI standards.
The findings further stated issues in the method of calculation and distribution of profit
and loss in the light of AAOIFI guidelines. The deduction of Al-Khair’s share of profit at
the inception of loan itself, no share in loss by the society, and the lack of track record of
profit earned are also Shariah objections as per AAOIFI guidelines on equity base
financing.
Yaqoob (2009) in his empirical study on Interest Free Financial Institutions in
Kerala covers both the organized and unorganized sectors. The study makes an in-depth
analysis of the functioning of the institutions and the satisfaction levels of beneficiaries
also examining the problems and prospects of interest free institutions in Kerala. The
findings show that among the general problems faced by interest free institutes are
income tax laws on interest paid on loans, statutory Reserve requirements by RBI,
investment of a part of the financial debt on interest bearing securities issued by the
government, shortage of working capital, how to deal with cases of delay in repayments,
non-availability of well trained personnel understanding Islamic finance, lack of
Islamic Microfinance in India: A Quantitative Approasch
76 Journal of Islamic Banking and Finance Oct – Dec 2023
awareness and outreach, the lack of harmonization of Shariah standards with regards to
screening of projects and lack of ethics and morality in conducting the principle of PLS
in Islamic finance institutions.
3.0 Research Methodology
Since this research is both exploratory and descriptive in nature where by the
examination will be on the issues and challenges of Islamic microfinance institutions, the
study adopts the Quantitative approach. In this research, the primary data collected is
quantitative in nature and the secondary data is entirely qualitative.The population is
known and hence probability sampling or random sampling is selected. Hair, C.Black,
J.Babin, & E.Anderson (2014) suggest that the minimum requirement for sample size is
to have at least five participants per item.The questionnaire once completed was designed
as a Google form, the link of which was then shared across various online social media
applications and via emails. About 500 respondents were sent the link of which 303
responses were received. This sample size as stated earlier is considered to be significant
as each variable or question in the data has more than five observations/respondents (Hair
et al., 2014).In preparing the actual survey questionnaire, five-point Likert-scale is used,
from 1 to 5 (1= strongly disagree to 5= strongly agree). The prior researchers who use
five-point Likert-scale are Htay & Salman (2013), Htay & Salman (2014; 2013), Hassan
et at. (2018), Hassan & Salman (2017), and Salman & Htay (2014).
4.0 Findings
Out of 303 respondents, 202 (72.6%) are male respondents and 83 (27.4%) are
female respondents. The percentage shows that the male respondents are much higher
than the female respondents. In terms of age, in this study, majority of the respondents
are from the age group of 31-35 years with 63 respondents (20.8%), followed by the age
group of 21-25 years and 36-40 years with 48 respondents in each representing 15.8% of
the study. The age group of 26-30 years and 41-45 years had 42 respondents (13.9%) and
36 respondents (11.9%) respectively. The minority of the respondents are from the age
groups 51- 60 years, 61- 65 years, 46 - 50 years and 66 years and above with 24, 18, 16
and 8 respondents representing 7.9%, 5.9%, 5.3% and 2.6% of the study respectively.
The study shows that majority of the respondents are aged 21 to 45 years which
represents a total of 78.2% of the study. This is because the questionnaire was disbursed
online with links shared on various social network platforms like Facebook, Instagram,
and WhatsApp and via emails.
4.1 Challenges of Islamic Microfinance in India
Statements in this section were drafted diligently after reviewing the challenges of
Islamic microfinance in India. This section is devised based on Likert scale with 5
options, from one being strongly disagree to five being strongly agree.
Table 1 starts with a statement on India having no awareness of Islamic
microfinance to which 77.6% agreed and strongly agreed, 12.9% remained neutral and
9.5% disagreed and strongly disagreed. This is consistent with Huma et al. (2019), where
Journal of Islamic Banking and Finance Oct – Dec 2023 77
the respondents responded in majority with 90% saying yes there is lack of understanding
of Islamic microfinance amongst the public of India.
When inquired about interest charge being the same in Islamic microfinance and
other conventional finance institutions 35.3% disagree and 23.1% strongly disagreed.
24.4% remained neutral on the matter. The minorities 13.2% agree and 4% strongly agree
that there is no difference of interest charged in Islamic institutions and conventional
ones. The means in Table 1 range from 3 to 4. Except in this question the mean is 2.4
being the lowest average in the table. Likewise, the standard deviation in table 1 is in
general below 1. But in this question standard deviation is above 1 at 1.099 which means
the consistency in this question as compared to others is relatively low.
Studies have shown that Islamic microfinance lacks support from the government
of India. Since the banking Act does not allow Islamic banks to operate in India, hence
microfinance becomes the only way for Islamic finance to exist in India. But as stated by
Nisar & Aziz (2004) microfinance institutions have no proper regulatory body for
supervision and this becomes a major factor that hinders the performance of Islamic
microfinance in India. This holds true in the survey when stated that there is no support
from the Indian government for Islamic microfinance. Out of the total, 74% of the
respondents agreed and strongly agreed that there is no support from the government.
Amongst the total, 20.8% were neutral and merely 5.3% disagreed with the statement.
Previous studies have also shown that potential microfinance customers in India are
in millions such that microfinance institutes would fall behind in meeting the demands
for their services. But the coverage shown by microfinance service providers in the
outreach hardly exceeds a million (Pandey & Aziz, 2017). This is clear in the survey
when majority of the respondents at a whopping 92.1% responded positively to no proper
marketing of Islamic microfinance products in India. Only 5.3% stood neutral and a mere
2.7% disagreed. The same reflects in the next statement where 68.6% agree there are no
effective Islamic microfinance products in India. Although in this case 25.7% remained
neutral. This could be due to lack of awareness of Islamic products as highlighted by
Huma et al. (2019). The rest 5.7% disagreed with the statement.
The next question enquired from the respondents about there being no Shariah
compliant investment institutions in India to which a majority of them at 59.1%
responded positively, 25.4% decided to remain neutral and 15.5% disagreed to the
statement. This shows that although there are Shariah compliant investments available in
India, majority of the respondents have not heard of them. This is either due to the
existing firms not being registered or licensed or being small in size or due to lack of
proper advertisement as pointed out earlier.
The largest number of neutral responses found in table 1 at 37.6% was when
enquired about the statement that there is no support from Islamic institutions like
Islamic Microfinance in India: A Quantitative Approasch
78 Journal of Islamic Banking and Finance Oct – Dec 2023
Darululoom Deoband and DarululoomNadwatul Ulama. This could imply that out of the
303 respondents, 114 have either not heard of the named Islamic institutes or are unaware
of their activities and involvement with Islamic microfinance. In any case, as pointed out
by Kamal, 2013 from Sahulat Microfinance Society, lack of education in Islamic finance
not only amongst the beneficiaries of Islamic microfinance but also the staff is a
challenge in the growth and development of Islamic microfinance. The majority at 50.8%
responded positively while 11.6% disagree that Islamic institutes provide no support to
Islamic microfinance institutes. It is safe to say that for Islamic microfinance to be known
and advertised well, Islamic institutes in India too need to advertise broadly their services
and degrees offered in Islamic finance along with expanding their outreach to cover all
parts of India.
The next question reflects the need of education in Islamic finance. The
respondents were asked about the lack of human capital in microfinance in India and
majority at 60.7% responded positively suggesting that there is a dire need of human
capital in India. Out of the total, 20.8% remained neutral and 18.5% disagreed with the
statement.
India is country of diverse beliefs and religions. Within the religion of Islam, there
exist many sects. Within a sect, there exists more than one madhab. In general, the
madhab of Abu Haneefah (may Allah have mercy on him) is followed in India but other
madhabs exist as well and sometimes there are differences of opinion within a madhab
itself. A majority at 42.2% responded positively when said that following different
madhabs in a company can cause difficulties. 30% disagreed and strongly disagree to the
statement whilst 27.7% remained neutral.
According to Nisar (2002), the public has lost confidence in Islamic microfinance
institutes and do not want to engage with them. When enquired in the survey, 32.4%
agreed and strongly agreed with the statement. 25.1% remained neutral and 42.6%
disagreed with the statement. Although the majority lies with the ones who disagreed but
the difference between the agreed and disagreed is small. Moreover, the mean calculated
in this statement is 2.88 which show that the average is very low. The standard deviation
as well is higher than 1 at 1.133 which depicts the data is not as consistent as the others.
High interest rates which was noted in many studies to be one of the issues in
conventional microfinance, makes the poor in the society poorer and financially unstable.
The results show that 88.1% of the respondents agree with this fact and 8.3% remain
neutral while 4.6% disagreed with the statement.
Another issue with the outreach of Islamic microfinance as stated by previous
studies is that microfinance institutes are concentrated in states that have lower poverty
rate rather than focusing on rural areas. Majority of the respondents at 68% agreed to the
statement that MFIs are mostly based in urban areas making it difficult to reach the poor.
About 10.2% responded negatively and 21.8% opted neutrality.
Journal of Islamic Banking and Finance Oct – Dec 2023 79
As stated earlier in multiple research like that of Nisar & Aziz (2004) and
Mohammed, H, & Waheed (2016) that there is a need of regulatory body for supervision
of Islamic microfinance institutes. There is a need for a common Shari’ah Board that can
govern the Islamic Finance activities within the country. In the survey, majority at 80.8%
agreed and strongly agreed with the statement and a mere 3% responding negatively and
the rest 16.2% remained neutral.
Conventional microfinance is meant to alleviate poverty. Several studies have been
done to gauge the impact of microfinance on poverty. Many studies claim poverty
reduction through microfinance whilst others criticize pointing it increases debt and
financial instability. One of the reasons cited in the Andhra Pradesh crisis in 2010 was
high interest rates charged by the microfinance institutes. Islamic microfinance on the
other hand free from interest is believed to enhance in poverty alleviation.The
respondent’s response to the statement that Islamic microfinance does not reduce poverty,
was negative at 39.3% and 26.8% agreed and strongly agreed with the statement and 34%
remained neutral. The gap between those who agreed and disagreed is very small with the
response of those neutral much high. Apart from this, the mean evaluated for this
statement is much low at 2.82 signifying a very low average and a high standard
deviation at 1.084. This shows inconsistency in the data for this particular statement in
comparison to other statements in the survey.
The next survey questions were based on the need of tools that can provide
transparency to the clients, need for new and different products offered by IMFIs, need
for Payment Systems and electronic fund transfer and need for better networking between
the company and the clients. To all these statements, majority responded positively
agreeing and strongly agreeing to them with 90.8% being the highest amongst the
responses. The minority that disagreed and strongly disagreed with the statements made
was not more than 3.6%. The highest number of neutral responses for these statements
was 12.9%.
Amongst the last questions in this section was that illiteracy, lack of education
especially in finance in India in general makes it difficult for Islamic microfinance
institutes to reach out to public. With only 10.6% taking a neutral stand, 85.4% agree
with the statement and 4% disagree and strongly disagree with the statement.
Hence in this section, in Table 1 the expected challenges of Islamic Microfinance
inferred from the literature review concur with the respondent’s views in the survey.
Table 1: Challenges of Islamic Microfinance in India
No
Mean
Std.
Deviation
Percentage
1
There is no awareness of
3.99
.993
Strongly
8
2.6
Islamic Microfinance in India: A Quantitative Approasch
80 Journal of Islamic Banking and Finance Oct – Dec 2023
Islamic microfinance in India
disagree
Disagree
21
6.9
Neutral
39
12.9
Agree
132
43.6
Strongly
Agree
103
34.0
Total
303
100.0
2
There is no difference between
Islamic microfinance and other
financial institutions in terms
of interest charging.
2.40
1.099
Strongly
disagree
70
23.1
Disagree
107
35.3
Neutral
74
24.4
Agree
40
13.2
Strongly
Agree
12
4.0
Total
303
100.0
3
There is no support from the
Indian government for the
Islamic microfinance
4.04
.934
Strongly
disagree
5
1.7
Disagree
11
3.6
Neutral
63
20.8
Agree
112
37.0
Strongly
Agree
112
37.0
Total
303
100.0
4
There is no proper marketing
of Islamic microfinance
products in India.
4.33
.725
Strongly
disagree
2
.7
Disagree
6
2.0
Neutral
16
5.3
Agree
146
48.2
Strongly
Agree
133
43.9
Total
303
100.0
5
There are no effective Islamic
microfinance products in India
3.88
.906
Strongly
disagree
5
1.7
Disagree
12
4.0
Neutral
78
25.7
Agree
127
41.9
Strongly
Agree
81
26.7
Total
303
100.0
6
There is no Shari’ah complaint
investment institutions in India
3.62
1.054
Strongly
disagree
10
3.3
Disagree
37
12.2
Journal of Islamic Banking and Finance Oct – Dec 2023 81
Neutral
77
25.4
Agree
114
37.6
Strongly
Agree
65
21.5
Total
303
100.0
7
There is no support from the
Islamic institutions such as
Darululoom Deoband
&DarululoomNadwatul Ulama.
3.56
.998
Strongly
disagree
9
3.0
Disagree
26
8.6
Neutral
114
37.6
Agree
94
31.0
Strongly
Agree
60
19.8
Total
303
100.0
8
There is a lack of human
capital for microfinance in
India
3.53
1.054
Strongly
disagree
14
4.6
Disagree
42
13.9
Neutral
63
20.8
Agree
138
45.5
Strongly
Agree
46
15.2
Total
303
100.0
9
Following different madhabs in
a company in India can cause
difficulties.
3.13
1.121
Strongly
disagree
27
8.9
Disagree
64
21.1
Neutral
84
27.7
Agree
100
33.0
Strongly
Agree
28
9.2
Total
303
100.0
10
People do not want to engage
with Islamic microfinance.
2.88
1.133
Strongly
disagree
30
9.9
Disagree
99
32.7
Neutral
76
25.1
Agree
73
24.1
Strongly
Agree
25
8.3
Total
303
100.0
11
High interest rates make the
poor even poorer and
financially unstable.
4.39
.838
Strongly
disagree
4
1.3
Disagree
7
2.3
Neutral
25
8.3
Agree
97
32.0
Strongly
170
56.1
Islamic Microfinance in India: A Quantitative Approasch
82 Journal of Islamic Banking and Finance Oct – Dec 2023
Agree
Total
303
100.0
12
MFIs are mostly based in
Urban areas instead of rural
area making it difficult to reach
the poor and those in need.
3.73
.918
Strongly
disagree
7
2.3
Disagree
24
7.9
Neutral
66
21.8
Agree
154
50.8
Strongly
Agree
52
17.2
Total
303
100.0
13
There is a lack of a common
Shari’ah Board that can govern
all the Islamic Finance
activities of the state or the
country
4.04
.762
Strongly
disagree
2
.7
Disagree
7
2.3
Neutral
49
16.2
Agree
164
54.1
Strongly
Agree
81
26.7
Total
303
100.0
14
Islamic Microfinance have a
low effect on removing
poverty.
2.82
1.084
Strongly
disagree
36
11.9
Disagree
83
27.4
Neutral
103
34.0
Agree
62
20.5
Strongly
Agree
19
6.3
Total
303
100.0
15
There is a need of services and
tools that can provide more
transparency to the clients.
4.25
.667
Strongly
disagree
1
.3
Disagree
2
.7
Neutral
27
8.9
Agree
164
54.1
Strongly
Agree
109
36.0
Total
303
100.0
16
There is a need of more new
and different type of products
offered by the Islamic
microfinance Institutes.
4.11
.676
Strongly
disagree
1
.3
Disagree
3
1.0
Neutral
39
12.9
Agree
178
58.7
Strongly
Agree
82
27.1
Total
303
100.0
17
There is a need of Payment
4.10
.774
Strongly
3
1.0
Journal of Islamic Banking and Finance Oct – Dec 2023 83
systems and electronic funds
transfer.
disagree
Disagree
8
2.6
Neutral
35
11.6
Agree
167
55.1
Strongly
Agree
90
29.7
Total
303
100.0
18
Overall illiteracy, lack of
education, especially in matters
of finance makes it difficult for
Islamic Microfinance Institutes
to reach out to public.
4.20
.842
Strongly
disagree
5
1.7
Disagree
7
2.3
Neutral
32
10.6
Agree
138
45.5
Strongly
Agree
121
39.9
Total
303
100.0
19
There is a need of a more
developed reliable information
software for better
transparency
4.21
.760
Strongly
disagree
6
2.0
Disagree
2
.7
Neutral
20
6.6
Agree
169
55.8
Strongly
Agree
106
35.0
Total
303
100.0
20
There is a need of better
networking between the
company and the clients.
4.25
.712
Strongly
disagree
3
1.0
Disagree
2
.7
Neutral
24
7.9
Agree
161
53.1
Strongly
Agree
113
37.3
Total
303
100.0
5.0 Conclusion, Suggestion and Recommendations
Interest free microfinance or Islamic microfinance is the need of not just the
Muslims of India, but all those in India who are financially excluded. Such institutes have
been in existence in India since the 20th century and were gaining momentum during
their initial stages. But over the course of time, Islamic microfinance institutes started
facing hurdles in the path of development and could not reach the pinnacle achieved in
countries like Malaysia, Indonesia and other GCC countries.
Not many studies have been conducted on Islamic microfinance in India. The
limited literature available on the subject is mostly either a conceptual study, a case study
Islamic Microfinance in India: A Quantitative Approasch
84 Journal of Islamic Banking and Finance Oct – Dec 2023
on a particular IMFI in India, a general overview of IMFIs in India or IMFI from the
institute’s perspective. Little to no literature exists on the customers’ view on IMFI in
India. In order to fill this void, the focus of this study was to gauge the challenges of
Islamic microfinance amongst the general public of India.
The majority agrees that there is lack of government support, no proper
marketing of Islamic microfinance products, no effective Islamic microfinance products
in India, lack of human capital in microfinance, high interest rates make the poor
financially unstable and lack of microfinance institutes in rural areas. When asked about
Islamic institutes like Darululoom Deoband and DarululoomNadwatul Ulama supporting
Islamic microfinance, 37.6% of the respondents remained neutral. This could imply that
the respondents have not heard of the Islamic institutes or not aware of their activities.
This also highlights the need for existing Islamic Institutes in India to advertise their
services and degrees offered in Islamic finance along with supporting Islamic financial
institutes in their operations. Majority of the respondents also believe that there is need
for tools that can provide transparency to the clients, need for new products offered and
better payment systems with electronic fund transfer to ease transaction and enhance
networking between the institute and the clients.
For any structure to remain strong and long lasting, its foundation must be built
strong. A strong regulatory framework is the foundation for a successful sustainable
microfinance industry. Although Self Help Group Bank Linkage Program model is well
supervised and managed in India but there is no distinctive regulatory framework for
microfinance in India and more so for Islamic microfinance in India. Currently,
regulation is under the purview of the state governments, hence there is a need for an
exclusive regulation to regulate MFIs in India.
The objective of Islamic microfinance institutions is to provide the poor cheap
financial services. In order to recognize the poor in India, research needs to be done and
transparency is needed in reporting the financial status of the individuals in India. The
research will highlight financial barriers and the regions and communities that need to be
targeted by the microfinance industries to further financial inclusion. The result of the
research will give way to policies and impact of such policies on poverty alleviation.
Providing the right type of products will cater to the supply side of IMFIs in
India and financial inclusion. In order to cater to the demand side, financial education and
promoting awareness among the people about the needs and benefits of financial services
is essential. IMFIs need to effectively market their products through continuous
advertisements across different social media platforms. As seen from the results of the
survey, that although respondents maybe aware of the term Islamic microfinance, they
have not much knowledge of the products and services offered by IMFIs. Hence much
attention should be directed in educating the masses on the functions and products of
IMFIs through campaigns, seminars, short courses etc.
Journal of Islamic Banking and Finance Oct – Dec 2023 85
In this regard, Islamic Institutes and Islamic schools/Madrasas should include extensive
education on finance and Islamic finance in their syllabus. Imams of the masajid should
impart knowledge and importance of Islamic finance through their sermons and initiate
courses for not just the men but also the women of the society. Universities and colleges
should include Islamic Finance into their curriculum which will not only cater to the
increase in human capital for IMFIs in India but also enable the graduate to avail stable
jobs in India and across globe.
Along with this, IMFIs need to strengthen capacity building initiatives. This will
help promote proper use of credit and timely recovery. IMFIs need to closely engage with
their customers to understand their basic needs and investments needs. Training and
financial advice should be provided to borrowers specifically those who are self-
employed. This will amplify their business skills to manage and use credit productively
and establish market channels for their products. This will ensure lower rate of defaults
on credit.
The operational costs of the IMFIs should be further studied and innovative
concepts should be brought in to reduce operational costs. Bringing IT into the
infrastructure and building the digital services can help boost productivity along with
cutting costs in the long run. New initiatives have been taken by the Reliance telecom
agency in India to provide free of cost internet services to startups along with providing
cheap internet services to the general masses in India. This will also help in building a
stronger and real time communication among IMFI and its customers.
IMFIs should be encouraged to open in areas most needed and open multiple
branches to increase penetration of microfinance amongst the poor and the low-income
population.
There is a need of a unified Shariah Board in India that can affirm the public of
the IMFIs, and their products and services offered. This will build and strengthen
confidence in the public for IMFIs and do away with Ponzi schemes and businesses that
taint the image of IMFIs in India.
Emphasis need to be given to for-profit IMFIs based on the models. This kind of
model ensures stability and less dependency on funds. Care must be taken to ensure that
for-profit IMFIs maintain the objective of reaching the needy and being poor friendly.
The successful operation of IMFIs in India will help in poverty alleviation, uplift the
Muslim minority and also attract foreign investments from across globe thereby boosting
the economy of India.
Islamic Microfinance in India: A Quantitative Approasch
86 Journal of Islamic Banking and Finance Oct – Dec 2023
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Islamic Microfinance in India: A Quantitative Approasch
88 Journal of Islamic Banking and Finance Oct – Dec 2023
Country Model
Democratic Socialist Republic of Sri Lanka
I. INTRODUCTION:
Sri Lanka, formerly known as Ceylon, and officially the Democratic
Socialist Republic of Sri Lanka, is an island country in South Asia. The
country's economy is driven by various industries, including textiles,
apparel, tea and tourism, which significantly contribute to its gross domestic
product (GDP). As per International Monetary Fund (IMF), Sri Lanka has
been facing different economic and social challenges.
II. REGULATORY LANDSCAPE:
Under the Banking Act No. 30 of 1988, amended in 2005, Sri Lanka permits
commercial and specialized banks to offer Islamic finance products. The
Central Bank of Sri Lanka requires these banks to maintain separate books of
accounts and to comply with the same regulations imposed on conventional
banks.
In 2018, amendments to the Inland Revenue Act subjected both Islamic and
conventional finance deals to equal tax treatment. In 2022, the Securities and
Exchange Commission (SEC) proposed introducing Sukuk products on the
Colombo Stock Exchange with technical assistance from the Asian
Development Bank. In 2020, the Colombo Stock Exchange and the SEC
introduced and placed into effect a framework of REITs, followed by the
launch of the country’s first REITs.
III. ISLAMIC BANKING AND FINANCE:
As per IFSB Stability Report 2022, the share of Islamic banking assets in Sri
Lanka is merely 0.8 percent of its total banking assets. However, with about
9.7 percent of the total population being Muslim, there is significant demand
Journal of Islamic Banking and Finance Oct – Dec 2023 89
for Shariah compliant banking and finance. At present, Amana Bank stands as
the only fully-fledged Islamic bank in Sri Lanka, whereas six conventional
banks having standalone Islamic banking windows also offer Islamic
products.
Some non-bank financial institutions are also providing Islamic solutions,
such as LOLC Finance, Citizens Development Business Finance (CDB),
Commercial Leasing and Finance, People's Leasing Finance, Associated
Motor Finance Company, and Richard Pieris Finance, through their Shariah
compliant arm.
IV. SUKUK:
Sri Lanka's Sukuk market has seen some developments, with its debut
issuance from LOLC Finance's Al Falaah Islamic Business Unit in 2016.
Later, CDB issued various tranches of Sukuk Ijarah in 2018. Plans were
underway for sovereign Sukuk issuance to diversify the government's
foreign funding sources, but progress remains uncertain.
V. TAKAFUL SECTOR:
In the Islamic insurance sector, Amana Takaful operates as the sole fully-
fledged Takaful operator in Sri Lanka. The company obtained SEC approval in
2021 for its convertible debenture issue worth US$0.8 million– a pioneering
feat among non-bank, non-financing, and non-capital market institutions in the
country. Conventional players like HNB Assurance, People's Insurance, and
LOLC Insurance also offer Takaful on a window basis.
VI. OUTLOOK:
The demand for Islamic financial products, especially financing facilities
and Takaful, continues to rise in Sri Lanka. It has the potential to achieve
regional significance in Shariah finance since it has been one of the early
adopters of the Islamic finance industry, despite having a minority Muslim
population. The government's potential utilization of the Shariah finance
market to support economic recovery and stability is seen as a positive move
by industry experts.
Country Medel
90 Journal of Islamic Banking and Finance Oct – Dec 2023
SOURCES OF INFORMATION
International Monetary Fund (IMF) {https://www.imf.org/}
IMF Country Report No. 23/116
{https://www.imf.org/en/Countries/LKA}
Islamic Finance News (IFN)
{https://www.islamicfinancenews.com}
Islamic Financial Service Board (IFSB)
{https://www.ifsb.org/}
The Central Bank of Sri Lanka (CBSL) {https://www.cbsl.gov.lk/}
Journal of Islamic Banking and Finance Oct – Dec 2023 91
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