THE POTENTIALITY OF ISLAMIC BANKING IN ETHIOPIA
- The Islamic Society’s perception in Jimma
FIRST & FINAL DRAFT
BY
S.SANKARAMUTHUKUMAR, MBM. M.Phil. MHRM
ASST. PROFESSOR IN BANKING & INSURANCE
DAYANANDA SAGAR GLOBAL EDUCATION
DAYANANDA SAGAR INSTITUTIONS
BANGALORE – INDIA
&
A.DEVAMOHAN MBM, MPhil.
LECTURER
DEPARTMENT OF BANKING & INSURANCE,
FACULTY OF BUSINESS & ECONOMICS
JIMMA UNIVERSITY – ETHIOPIA
A Research Paper to be presented at the Sixth International Conference on the Ethiopian Economy
(June 2008 – Addis Ababa)
ABSTRACT
Ethiopia has a good share of Muslim population. However, the country practices only the conventional banking system and there is absence of Islamic banks to cater to the needs of sizeable Muslim population. This can also be viewed as one of the factors, which hinder the overall financial sector development. Because Islamic society believes that banking with the conventional banks is against their religious faith and thus a good number of potential customers are not banking with the banks available as of now. It is also observed by the researcher that even those who have deposit accounts in bank are getting the interest from the bank so as to distribute it to the poor people. A recent study entitled “Assessment of factors affecting Bank Preference among business organizations in Dessie town“(An unpublished Project Report) shows that 48% of those who don’t have bank accounts say that they don’t bank with commercial banks for religious reasons. It is in this background the researcher has undertaken this study with reference to Jimma town.
The research paper has been segregated into six different parts. The first section gives an introduction about the study and the second part deals with the objectives of the study.
In the third part the researcher has attempted to give an overview about the development of Islamic banking system in both Islamic & non-Islamic countries. Besides, the researcher has also paid due attention in explaining the core concepts with the different products and services of Islamic banks that are available as of now.
The fourth part of this paper deals with the methodology adopted for the study. In this section, the researches has mentioned about the different sources of information for the study, which include primary and secondary data. The primary data consists of opinions of the sample Islamic society in Jimma town. The major secondary sources are different websites of Islamic banking.
The fifth part of this study deals with the analysis of the opinions expressed by the sample respondents to arrive at conclusions.
In the sixth and last part, the researcher has summarized the findings of the study. Besides, this part also consists of the suggestions and conclusions.
( i )
CONTENTS
|
Serial No. |
Description |
Page No. |
|
1 |
Abstract |
(i) |
|
2 |
Contents |
(ii) |
|
3 |
Chapter-1(Introduction, Statement of the Problem & Objectives) |
1 |
|
4 |
Chapter-2 (An overview of Islamic Banking Concept Products) |
4 |
|
5 |
Chapter-3 (Methodology) |
10 |
|
6 |
Chapter-4 (Analysis & Discussion) |
11 |
|
7 |
Chapter-5 (Findings, Suggestions & Conclusion) |
16 |
|
8 |
References |
23 |
|
9 |
Appendix – I (Tables) |
25 |
|
10 |
Appendix – II (Islamic Banking Products) |
31 |
(ii)
CHAPTER-1
“The last decade has seen tremendous growth in the Islamic Financial System. More than 240 financial institutions in more than 48 countries practice some form of Islamic Finance. Islamic Banking assets worldwide are estimated at over US$200 Billion with an annual growth rate of 15% in recent years”
— Dr.Jones Lee, Executive Director & Justin Soong, Associate Director of Financial Services of KPMG.
Introduction:
Ethiopian financial sector is one of the fastest developing sectors in the country with the establishment of new commercial banks and micro-finance institutions. The financial sector of the country is also coping with the recent developments in this field in other countries. Introduction of ATMs and debit cards in recent years prove this fact. Commercial banks are still the dominant participant and contributor in the financial sector of the country, though there are insurance companies and micro-finance institutions. These commercial banks are the engines of growth as they provide the lifeblood to the economy, that is, one of the factors of production, capital. The banking products and services induce both public sector development and private sector development.
Commercial banking has become an essential sector of the modern economy. Whilst in some countries it may be smaller than in others, rarely can a country do without its services completely. In the advanced economies, practically every government department, business organisation, institution and private individual needs, and has, a bank account. In the developing countries too the trend is in this direction. Muslims, who follow the religion of Islam, and who form nearly one fifth of the world’s population and live in all parts of the world, are no exception to this trend. However the Muslim community has a problem with the banking system as it exists today and this essay aims to address their concerns. But before we do so, let us briefly examine the services banks provide and how they do it, so that we can determine exactly where the problems lie. Then we can devise solutions to address the specific issues that concern Muslims. (A.L.M. Abdul Gafoor)
Sound, deep and efficient financial sectors are vital for high, sustained, private sector-led growth. But financial sectors in their current form pose major problems for the economies of sub-Saharan Africa (SSA). Insufficient access to credit by small and medium-sized enterprises constraints their ability to expand and limits countries’ growth potential. Most households cannot build formal savings, so their ability to escape from poverty by investing in education or housing is limited. *
Widespread poverty limits both the demand for and the supply of savings facilities. The share of the population having a formal savings account is strongly correlated with poverty rates and per-capita income (Gulde & others, 2006). Poor people have only small sums to save, which limits banks’ economic opportunities, given the high costs of maintaining small accounts. Banks often respond by charging for opening and maintaining a deposit account, making access to bank services more difficult for small-scale savers. *
Statement of the Problem:
The religion is playing a major role in the development of financial sector in a country like Ethiopia, where there is a sizeable Muslim population. A recent study entitled “Assessment of factors affecting Bank Preference among business organizations in Dessie town“(An unpublished Project Report) shows that 48% of those who don’t have bank accounts say that they don’t bank with commercial banks for religious reasons.
Ethiopia is one of the fast growing countries in Africa. However, the gap between rich and poor is still wide as in the other underdeveloped countries. This is due to non-availability of cheap credit facility from institutions in the organized sector such as banks, micro-finance institutions and cooperative banks. As opposed to the practice adopted by most of the developing agrarian economies, still amount of agricultural loans given by the banks are not quite encouraging in Ethiopia. Even, agricultural loans are one of the high priced assets of any bank in Ethiopia due to the risk attracted by these loans. On the other side, the country with a good share of Muslim population having only the conventional banking system is another hindrance for the financial sector development. Because Islamic society believes that banking with the conventional banks is against their religious faith and thus a good number of potential customers are not banking with the banks available in the country. The poor people are not given choices for banking, and thus they don’t find an opportunity to save their small earnings.
* Jakob Christensen, Anne-Marie Gulde & Catherine Pattillo, “Bankable Assets”, Finance & Development (www.imf.org/fandd), December-2006.
Objectives:
q To highlight the concept of Islamic banking.
q To discuss the different Islamic banking products and services
q To know the various terms connected with Islamic banking
q To analyze the Islamic Society’s perception on Islamic banking in Jimma.
q To address the issues involved in the introduction of Islamic banking system in Ethiopia.
CHAPTER-2
AN OVERVIEW OF ISLAMIC BANKING CONCEPT
What is Islamic Banking?
Islamic banks appeared on the world scene as active players over two decades ago. But “many of the principles upon which Islamic banking is based have been commonly accepted all over the world, for centuries rather than decades”.
The basic principle of Islamic banking is the prohibition of Riba- (Usury – or interest): “While a basic tenant of Islamic banking – the outlawing of riba, a term that encompasses not only the concept of usury, but also that of interest – has seldom been recognized as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the bases of many religions, including Islam.
“The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice. Much of the morality championed by Victorian writers such as Dickens – ranging from the equitable distribution of wealth through to man’s fundamental right to work – is clearly present in modern Islamic society.
Evolution of Islamic Banking
The first modern experiment with Islamic banking was undertaken in Egypt under cover, without projecting an Islamic image, for fear of being seen as a manifestation of Islamic fundamentalism, which was anathema to the political regime. The pioneering effort, led by Ahmad El Najjar, took the form of a savings bank based on profit sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 198l), by which time there were nine such banks in the country. These banks, which neither charged nor paid interest, invested mostly by engaging in trade and industry, directly or in partnership with others, and shared the profits with their depositors. (Siddiqi 1988) Thus, they functioned essentially as saving investment institutions rather than as commercial banks. The Nasir Social Bank, established in Egypt in 197l, was declared an interest-free commercial bank, although its charter made no reference to Islam or Shariah (Islamic law).
The IDB was established in 1974 by the Organization of Islamic Countries (OIC), but it was primarily an intergovernmental bank aimed at providing funds for development projects in member countries. The IDB provides fee based financial services and profit-sharing financial assistance to member countries. The IDB operations are free of interest and are explicitly based on Shariah principles.
In the seventies, changes took place in the political climate of many Muslim countries so that there was no longer any strong need to establish Islamic financial institutions under cover. A number of Islamic banks, both in letter and spirit, came into existence in the Middle East, e.g., the Dubai Islamic Bank (1975), the Faisal Islamic Bank of Sudan (1977), the Faisal Islamic Bank of Egypt (1977), and the Bahrain Islamic Bank (1979), to mention a few.
The Asia-Pacific region was not oblivious to the winds of change. The Philippine Amanah Bank (PAB) was established in 1973 by Presidential Decree as a specialized banking institution without reference to its Islamic character in the bank’s charter. The establishment of the PAB was a response by the Philippines Government to the Muslim rebellion in the south, designed to serve the special banking needs of the Muslim community. However, the primary task of the PAB was to assist rehabilitation and reconstruction in Mindanao, Sulu and Palawan in the south (Mastura 1988). The PAB has eight branches located in the major cities of the southern Muslim provinces, including one in Makati (Metro Manila), in addition to the head office located at Zamboanga City in Mindanao. The PAB, however, is not strictly an Islamic bank, since interest-based operations continue to coexist with the Islamic modes of financing. It is indeed fascinating to observe that the PAB operates two ‘windows’ for deposit transactions, i.e., conventional and Islamic. Nevertheless, efforts are underway to convert the PAB into a full-fledged Islamic bank (Mastura 1988).
Islamic banking made its debut in Malaysia in 1983, but not without antecedents. The first Islamic financial institution in Malaysia was the Muslim Pilgrims Savings Corporation set up in 1963 to help people save for performing hajj (pilgrimage to Mecca and Medina). In 1969, this body evolved into the Pilgrims Management and Fund Board or the Tabung Haji as it is now popularly known. The Tabung Haji has been acting as a finance company that invests the savings of would-be pilgrims in accordance with Shariah, but its role is rather limited, as it is a non-bank financial institution. The success of the Tabung Haji, however, provided the main impetus for establishing Bank Islam Malaysia Berhad (BIMB), which represents a full, fledged Islamic commercial bank in Malaysia. The Tabung Haji also contributed l2.5 percent of BIMB’s initial capital of M$80 million. BIMB has a complement of fourteen branches in several parts of the country. Plans are afoot to open six new branches a year so that by 1990 the branch network of BIMB will total thirty-three (Man 1988).
Reference should also be made to some Islamic financial institutions established in countries where Muslims are a minority. There was a proliferation of interest-free savings and loan societies in India during the seventies (Siddiqi 1988). The Islamic Banking System (now called Islamic Finance House), established in Luxembourg in 1978, represents the first attempt at Islamic banking in the Western world. There is also an Islamic Bank International of Denmark, in Copenhagen, and the Islamic Investment Company has been set up in Melbourne, Australia. (Courtesy of Mohamed Ariff, University of Malaya)
Rationale
The essential feature of Islamic banking is that it is interest-free. Although it is often claimed that there is more to Islamic banking, such as contributions towards a more equitable distribution of income and wealth, and increased equity participation in the economy (Chapra 1982), it nevertheless derives its specific rationale from the fact that there is no place for the institution of interest in the Islamic order.
Islam prohibits Muslims from taking or giving interest (riba) regardless of the purpose for which such loans are made and regardless of the rates at which interest is charged. To be sure, there have been attempts to distinguish between usury and interest and between loans for consumption and for production. It has also been argued that riba refers to usury practiced by petty moneylenders and not to interest charged by modern banks and that no riba is involved when interest is imposed on productive loans, but these arguments have not won acceptance. Apart from a few dissenting opinions, his general consensus among Muslim scholars clearly is that there is no difference between riba and interest. In what follows, these two terms are used interchangeably.
The prohibition of riba is mentioned in four different revelations in the Qur’an (1) . The first revelation emphasizes that interest deprives wealth of God’s blessings. The second revelation condemns it, placing interest in juxtaposition with wrongful appropriation of property belonging to others. The third revelation enjoins Muslims to stay clear of interest for the sake of their own welfare. The fourth revelation establishes a clear distinction between interest and trade, urging Muslims to take only the principal sum and to forgo even this sum if the borrower is unable to repay. It is further declared in the Qur’an that those who disregard the prohibition of interest are at war with God and His Prophet. The prohibition of interest is also cited in no uncertain terms in the Hadith (sayings of the Prophet). The Prophet condemned not only those who take interest but also those who give interest and those who record or witness the transaction, saying that they are all alike in guilt (2).
It may be mentioned in passing that similar prohibitions are to be found in the preQur’anic scriptures, although the ‘People of the Book’, as the Qur’an refers to them, had chosen to rationalize them. It is amazing that Islam has successfully warded off various subsequent rationalization attempts aimed at legitimizing the institution of interest.
Some scholars have put forward economic reasons to explain why interest is banned in Islam. It has been argued, for instance, that interest, being a pre determined cost of production, tends to prevent full employment (Khan 1968; Ahmad n.d.; Mannan 1970). In the same vein, it has been contended that international monetary crises are largely due to the institution of interest (Khan, n.d), and that trade cycles are in no small measure attributable to the phenomenon of interest (Ahmad 1952; Su’udn.d.). None of these studies, however, has really succeeded in establishing a causal link between interest, on the one hand, and employment and trade cycles, on the other. Others, anxious to vindicate the Islamic position on interest, have argued that interest is not very effective as a monetary policy instrument even in capitalist economies and have questioned the efficacy of the rate of interest as a determinant of saving and investment (Ariff 1982).
A common thread running through all these discussions is the exploitative character of the institution of interest, although some have pointed out that profit (which is lawful in Islam) can also be exploitative. One response to this is that one must distinguish between profit and profiteering, and Islam has prohibited the latter as well.
Some writings have alluded to the ‘unearned income’ aspect of interest payments as a possible explanation for the Islamic doctrine. The objection that rent on property is considered halal (lawful) is then answered by rejecting the analogy between rent on property and interest on loans, since the benefit to the tenant is certain, while the productivity of the borrowed capital is uncertain. Besides, property rented out is subject to physical wear and tear, while money lent out is not. The question of erosion in the value of money and hence the need for indexation is an interesting one. But the Islamic jurists have ruled out compensation for erosion in the value of money, or, according to Hadith, a fungible good must be returned by its like (mithl): ‘gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, equal for equal, and hand to hand…’ (3).
The bottom line is that Muslims need no ‘proofs’ before they reject the institution of interest: no human explanation for a divine injunction is necessary for them to accept a dictum, as they recognize the limits to human reasoning. No human mind can fathom a divine order; therefore it is a matter of faith (iman).
The Islamic ban on interest does not mean that capital is costless in an Islamic system. Islam recognizes capital as a factor of production but it does not allow the factor to make a prior or predetermined claim on the productive surplus in the form of interest. This obviously poses the question as to what will then replace the interest rate mechanism in an Islamic framework. There have been suggestions that profit-sharing can be a viable alternative (Kahf 1982a and 1982b). In Islam, the owner of capital can legitimately share the profits made by the entrepreneur. What makes profit sharing permissible in Islam, while interest is not, is that in the case of the former it is only the profit-sharing ratio, not the rate of return itself that is predetermined.
It has been argued that profit-sharing can help allocate resources efficiently, as the profit-sharing ratio can be influenced by market forces so that capital will flow into those sectors which offer the highest profit sharing ratio to the investor, other things being equal. One dissenting view is that the substitution of profit sharing for interest as a resource allocating mechanism is crude and imperfect and that the institution of interest should therefore be retained as a necessary evil (Naqvi 1982). However, mainstream Islamic thinking on this subject clearly points to the need to replace interest with something else, although there is no clear consensus on what form the alternative to the interest rate mechanism should take. The issue is not resolved and the search for an alternative continues, but it has not detracted from efforts to experiment with Islamic banking without interest.
Recent Trends: ®
In countries where Islamic banking is operating, its coverage and extent vary significantly from situations where the sector is entirely Islamic (Iran & Sudan), to others where the conventional and Islamic systems coexist (Indonesia, Malaysia, Pakistan and the United Arab Emirates), to countries where there are one or two Islamic Banks. The current trend seems to be toward separation between Islamic and conventional banks. Some countries have opted for a clear separation between these banks, while others have allowed conventional banks to set up Islamic windows, opening the way for some of the largest multinational banks to participate. Even large conventional banks in United States and Europe have opened Islamic financing windows.
® Mohammed EI Qorchi, Islamic Finance Gears up, Finance & Development, December-2005, IMF
CHAPTER-3
METHODOLOGY
Study Area:
The study area is Jimma, which is one of the oldest towns in the country. And this town, which is dominated by Muslim Population, has been chosen by the researchers as the study area.
Sources of Data:
The study consists of both primary and secondary data. The sources of primary data are the target population, i.e., the Muslim society of the town. The secondary data are also used to describe the conceptual aspects of the Islamic banking. The main sources of secondary data are the Internet Websites, IMF’s Finance & Development, Indian Banks’ Association Bulletins, newspapers, etc.
Methods of Data Collection:
The primary data was collected from the Islamic people of the town. Thus, in order to obtain the reliable and sufficient information, structured questionnaires were used as data collecting instruments. Besides, the researchers also had some informal discussions with some Islamic businessmen in the town in order to have clear picture about the situation.
Methods of sampling:
The researchers have applied stratified random sampling. Thus, accordingly the researchers have grouped the target population according to their profession, such as businessmen, farmers, students, government employees, private employees, etc. From each of them, respondents were chosen randomly. The sample size of 50 respondents was considered for this study.
Method of Data Analysis:
The collected data were sorted and screened for any errors and then they were tallied to prepare tables for making analysis. Besides, the researcherss also attempted to analyse the various issues that are involved in the introduction of Islamic banking in the country, such as legal frame work, regulatory frame work, etc.
CHAPTER – 4
ANALYSIS & DISCUSSION
Respondents’ Age Group & Sex:
A majority of the respondents (44%) belong to the age group of 20-35, followed by 36-50 (28%). 18% of the respondents belong to the age 50 & above and only 10% of the respondents are from age 20 and below. Thus, the middle age group has dominated the sample, which is considered to be a reliable source of information. 66% of the total respondents were male and 34% were female. The female were given due share in the sample chosen by the researchers, thus makes the sample more representative of the target population.
Occupation & Income of the sample population:
The sample population is distributed across businessmen (40%), government employees (14%), private employees (10%), unemployed (10%) & others (26%). Businessmen dominate the sample population and Jimma is one of the important business centers in the south-west Ethiopia. Thus, the sample is representative of the whole population. The sample classification “others” is dominated by students and to some extent represented by agriculturists.
As for as income distribution of the respondents is concerned, majority of them (28%) are earning between Br.500 & Br.1500, and 24% earns less than Br.200. Another 20% earn between Br.1500 & Br.2500 and 16% of the respondents earn above Br.2500. Thus, the lowest percentage of (12%) respondents is earning only Br.200 – Br.500. Besides, the income-wise classification of respondents shows that the overall income of the respondents is high. This is because of the domination of businessmen among the Muslim community in Jimma.
Banking Habits among the Muslim Population in Jimma:
Savings depends not only on thrift but also the potentiality or capacity to save money. In this regard, the researchers found that 82% of the total respondents have the capacity to save money (Table-3). Thus one can infer that the Islamic people in Jimma are overwhelmingly interested in saving money for their future contingencies and requirements.
The current study also examined the banking habits of the respondents in specific. It is evident that 58% of the total respondents are using deposit services of commercial banks in Jimma, whereas the remaining (42%) are not having a deposit account (Table-4). This fact has to be compared with the above inference on potentiality to save money. Though 82% of the people have the capacity to save money, only 58% are saving in commercial banks. This implies that 24% of the respondents are not using the conventional banking system for deposits. This is because; these commercial banks do deal in the payment and receipt of interest (Riba) which is prohibited in Islam. As for as loans are concerned, only 28% of the respondents are using commercial banks and thus vast majority is not getting loans from commercial banks. The contradiction in the usage of commercial banks for deposit and loan services by the Islamic people is because of the following reason;
Those who maintain deposit accounts are receiving interest and using for themselves (59%), but at least 41% of them are not using the interest rather they donate it to poor people (Table-5). Thus there is a chance to avoid Riba (Interest) for the depositors, however the borrowers cannot avoid Riba (interest) and have to pay it with principal to the bank. That is the reason why 58% of the respondents have deposit accounts and only 28% have loan accounts with commercial banks in Jimma.
Bank Preference among Jimma Muslims:
In this section, the researchers have analyzed which banks are mostly preferred by Muslim community living in Jimma. As for as deposit services are concerned, Commercial Bank of Ethiopia and Dashen Bank (in fact, these are the banks considered to be the 1st and 2nd bank in performance & size in Ethiopia) are equally preferred by the Muslim community in Jimma. However, Bank of Abyssinia is the most preferred bank for credit (loan) services. (Table-6)
Level of Awareness on Islamic Banking Concept & its Sources:
This part of the study is the core area for the entire study. Here, the researchers have asked certain questions to ascertain the level of awareness about the Islamic banking concept. Besides, an attempt has been made by the researchers to identify the sources through which they came to know about Islamic banking concept. The awareness level is 48% and thus a slightly higher percentage (52%) of the respondents is not aware of Islamic banking concept. (Table-8)
Though a vast majority of the Islamic community knows that Riba (interest) is prohibited in Islam, they don’t know that there is an option to have banking facilities through Islamic Banks. Among those who know about the Islamic banking concept, 35% came to know about it through Islamic literature, which includes religious publications. 29% of the respondents are aware about Islamic banking concept through some international television channels (of course, those who mentioned this, are rich people who have satellite dish), another 24% through friends & relatives and 12% from print media (Table-9). Thus, the researchers observe that Islamic people devote more time to know about their religion either through print media, visual media or by having dialogue with their friends and relatives. This facilitates them to know about Islamic banking concept also.
Need for an Islamic Bank:
Table-10 shows that an awesome majority of the sample respondents are in favour of an Islamic Bank (90%) They also felt that establishment of an Islamic bank will bring more people (of course Islamic people) into the formal banking sector.
When asked the type of Islamic banking they prefer, 66% of the sample Muslim population is of the opinion that there must be a separate Islamic bank for Ethiopia. However, 12% of them have said that there can be Islamic branches of cooperative institutions. Islamic branches of conventional banks and Islamic branches of Micro-Finance Institutions are preferred by 6% of the respondents each (Table-11). Thus, the Islamic people in Jimma are really enthusiastic about the establishment of a separate Islamic Bank for Ethiopian Muslims.
Optimism about Islamic Banking in Ethiopia:
The sample Muslim population in Jimma is really optimistic about the existence and successful operation of an Islamic Bank in Ethiopia. They are also mature enough to say that an Islamic bank can coexist with the conventional banks that are already in operation in the country. 80% of the respondents endorse the above point (Table-12).
Regarding viability of an Islamic bank in Ethiopia, a majority of the sample population (88%) is hopeful and only 12% are of negative opinion (Table-13). Thus, the optimism on the part of the Muslim population exhibit that an Islamic bank (if established) in Ethiopia will be a successful venture with the irresistible support of the Muslim community in Ethiopia.
Direct Support to the prospective Islamic Bank:
In this section of the study, the researchers have attempted to scrutinize the level and type of support that would be extended by the Muslim community to the establishment of an Islamic bank in Ethiopia. 86% of the respondents have promised that they will open a deposit account (interest free) with the Islamic bank, though 8% have responded negatively (Table-14).
Again most of the sample population (51%) has told that the initiative for the establishment of an Islamic bank should be taken or will be taken by Jemad, the official association of Islamic Community (Table-15).
When asked the type of participation in the establishment of an Islamic bank, 48% of the respondents have told that they will become the customer of the bank, another 35% have promised to actively engage in popularizing the bank through the Jemad and 17% have expressed their willingness to be the shareholder of the bank (Table-16). Thus, an Islamic bank, if established, will receive support from different sections of the Islamic people. There are people to contribute to its share capital, there are people to take up the marketing efforts for the bank, and there are people who are ready to become customers of the Islamic Bank.
The sample Muslim population (51% of the respondents) also points out that the Jemad should be the responsible authority in initiating the Islamic banking concept. However, 24% of them have told that the entire Muslim population must take up the responsibility for initiating an Islamic bank in Ethiopia. Some people (22%) have pointed out the role of the government in the formation of an Islamic bank.
CHAPTER-5
FINDINGS, SUGGESTIONS & CONCLUSION
Findings:
1) The Muslim community is dominating in business as for as Jimma is concerned and thus 36% of the sample population earns more than Br.1500 a month, which is higher than the national average.
2) The savings potential is high among Jimma Muslims as told by 82% of the respondents.
3) Using Commercial banks for deposit services (58% of the respondents) is high when compared to loan services (28% of sample population). This is because, in case of deposits there is a chance for the Muslims to avoid interest, but in loans they can’t.
4) 59% of those who have bank accounts make use of the interest by themselves, which is against the Islamic principle. (Prohibition of Riba)
5) Commercial Bank of Ethiopia & Dashen Bank are the most preferred by the Jimma Muslims for opening deposit accounts, however they prefer Bank of Abyssinia for credit services.
6) The awareness level on why Muslims are not using commercial banks and awareness about the Islamic banking concept is not impressive as only 42% of the total respondents know why Muslims are not using commercial banks and only 48% are aware about Islamic banking concept.
7) Islamic literature plays a vital role in creating awareness about Islamic banking concept among the Jimma Muslim society (35% of the respondents are of the view)
8) 90% of the sample Muslim population has given a positive response with regard to the need for an Islamic bank for Ethiopian Muslims.
9) A majority of the sample respondents (66%) are of the view that there should be a separate Islamic bank, which should not be mingled or in anyway connected to the traditional commercial bank, which deals with interest.
10) A vast majority of the total respondents (80%) have outlined the possibility of co-existence of Islamic bank and the traditional commercial banks which are operating in the country as of now. They see no problems in the functioning of the financial sector in the country even after the formation of Islamic bank in the country.
11) An overwhelming 86% of the respondents are willing to open a deposit account with an Islamic bank, if established, however only 58% have deposit accounts in banks currently.
12) According to 88% of the sample respondents, Islamic banks are highly viable in Ethiopia. The researchers also observed this point to have some value since the country has a sizeable Muslim population spread across the country. The researchers are also of the view that Ethiopian Muslims are as religious as Arabs and thus more attached to religious faiths and beliefs.
13) Jemad has the lead role to play in taking initiatives for the establishment of an Islamic bank in Ethiopia, according to 82% of the respondents.
14) 17% of the respondents have volunteered to contribute to the share capital of the Islamic bank, if established.
Suggestions:
From the above discussions and from his own personal judgment, the researchers felt the need for an Islamic Bank for Ethiopian Muslims. In the light of above, the researchers would like to pinpoint suggestions to different sections of the society, i.e. the government, the National Bank of Ethiopia and the Muslim community. They are as follows:
To the Govt. of Ethiopia & National Bank of Ethiopia:
1) Even developing countries like India is still discussing about the concept “Financial Inclusion”. Financial Inclusion is the delivery of banking services at an affordable cost to the vast sections of the disadvantaged and low income groups. In simple words, it is taking banking services to the common man. One of the major hindrances for the achievement of Financial Inclusion in Ethiopia is the religious faith of Muslim community regarding Riba (interest). They are not using banking services since the banks are functioning with the payment and receipt of interest. So, the Government of Ethiopia should constitute a study group in consultation with the National Bank of Ethiopia to study the potentiality of Islamic banking in Ethiopia as a whole. The group can be organized with representation from the Muslim community since it involves religion.
2) Islamic banking is steadily moving into an increasing number of conventional financial systems. It is expanding not only in nations with majority Muslim populations, but also in other countries where Muslims are a minority, such as the United Kingdom and Japan. Similarly, countries such as India, the Kyrgyz Republic, and Syria have recently granted, or are considering granting, licenses for Islamic banking activities. So, the National Bank of Ethiopia should study the experiences of other non-Muslim countries which have Islamic banks, for instance Britain, United States, etc. It is observed that there are 1.8 Million Muslims in England, and there were Islamic funds and Islamic financial institutions. Ethiopia has definitely more than 10 times higher than England’s Muslim population. So it is justified that Ethiopian Muslims should have an Islamic Bank.
3) The National Bank of Ethiopia should also examine the different Islamic banking products and services available and its suitability to Ethiopian conditions.
4) The Government should also prepare itself to amend the Commercial Code of Ethiopia 1960 to allow Islamic banking in the country.
5) The Government of Ethiopia should make use of its diplomatic relations with the Middle East countries for importing the idea and concepts of Islamic Banking. If possible Islamic funds and share capital from those rich Middle East countries like Saudi Arabia, United Arab Emirates, etc. can be brought in.
6) Islamic banking products can be allowed by the Government through Micro Finance Institutions, if the MFI is promoted voluntarily through the Islamic society.
7) It is the duty of the National Bank of Ethiopia to advise the government the importance of financial inclusion, which can be achieved by introducing Islamic banking in the country. Because there is none other than the central bank is aware about the importance of bringing more people into banking, which results in higher capital formation in the country.
8) In recent days there are number of multilateral institutions that have been created to provide assistance to governments and supervisory agencies to help them understand Islamic banking and to issue standards and best-practice guidelines for this industry. These organizations are the best places for governments to turn to initially for advice. They include the International Monetary Fund (IMF), Islamic Financial Services Board (IFSB) which is based in Kuala Lumpur, Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI) which is in Bahrain, and the Islamic Development Bank (IDB) based in Jeddah, the Kingdom of Saudi Arabia. In addition, the authorities should engage in dialogue with the local interlocutors of this industry, to promote an open and fluid exchange of information and ideas. Thus, the Ethiopian Government and the National Bank of Ethiopia should make use of these multilateral institutions that are created with the sole purpose of helping the governments which initiate Islamic Banking practices in their respective countries.
To the Islamic Society
1) The Islamic society should generate awareness about Islamic banking by different modes among the Muslims, especially rural Muslims, since they don’t have much awareness about the Islamic banking concept. This lack of awareness is due to several reasons. And one such reason is the illiteracy of Islamic people. The authors suggest that Islamic Organizations and groups can organize some educational institutions to promote education in general and Islamic education in specific.
2) The Islamic society should also work for bringing suitable conditions for the establishment of an Islamic bank in Ethiopia. For this they need to convince the government first. If they want to convince the government, they should approach the government with suitable proposals or study reports which show the contribution of Islamic products in the wealth creation of Ethiopian banking system. In the absence of effective steps by the government, the Islamic society can fund or arrange fund from Islamic agencies abroad to finance such studies. Because what we, the authors feel is that if the Islamic society is able to convince the government with suitable project reports, the government will definitely hear to their words and take necessary actions for amendment of Commercial Code of Ethiopia to allow Islamic banking.
3) Ethiopian Islamic Society can try to promote a Micro Finance Institution (MFI) which deals with Islamic products and which operates on the principles of Islamic Banking. This is possible as per the latest directives (Directive No: MFI/13/2002) of National Bank of Ethiopia with regard to Micro Finance Institutions. The only hindrance factor is the minimum interest rate prescription of 3% for savings and term deposits. And for demand deposits, the MFIs have the freedom to fix their own interest rate. And there is total deregulation of interest rates for the loans extended by the Micro Finance Institutions. All the other guidelines prescribed by the National Bank of Ethiopia can be easily met by the Islamic Banking set up as Micro Finance Institution in Ethiopia.
Conclusion:
From the above deliberations, one could understand the need for the establishment of an Islamic bank for Ethiopian Muslims. The authors of this paper are from India, and they observe that Indian Muslims are some what moderate in their approach with regard to Riba since they bank with commercial banks. They do enjoy the interest paid to them and pay interest for the loans taken by them from commercial banks. Their Islam culture is influenced by the dominant Hindu population. However Ethiopian Muslims are vibrant and they establish their identity in spite of that fact that Ethiopia is a Christian dominated country. Ethiopian Christians have no way affected or influenced the Ethiopian Muslims. Of course, this is good from society’s point of view, since both the communities (Christians and Muslims) live in peace and harmony.
Thus, the Government of Ethiopia has to make use of this smooth relationship between the Christians and Muslims in the establishment of Islamic banks in Ethiopia. If Islamic banking is introduced, the country is going to be benefited in the followings ways;
1) The financial sector will expand with new type of financial institution, namely Islamic Banks, which is always good from the point of view of economic growth and development.
2) The financial sector will also receive new products and services, which may result in product proliferation. Product proliferation in a developing economy can be seen as effective functioning of the financial sector.
3) Banks in specific will get new business and their balance sheets will grow in an enormous way.
4) Ethiopia will achieve better Financial Inclusion, since the country is small and the population is also very small (around 80 Million) when compared to India (1.2 Billion).
——–
REFERENCES:
Ready, R.K., 198l. ‘The march toward self-determination’, paper presented at the First Advanced Course on Islamic Banks, International Institute of Islamic Banking and Economics, Cairo, 28 August l7 September.
Siddiqi, M.N., 1988. ‘Islamic banking: theory and practice’, in M. Ariff (ed.), above.
Mastura, Michael O., 1988. ‘Islamic banking: the Philippine experience’, in M. Ariff (ed.), above.
Man, Zakariya, 1988. ‘Islamic banking: the Malaysian experience’, in M. Ariff (ed.), above.
Chapra, M. Umer, 1982. ‘Money and banking in an Islamic economy’ in M Ariff (ed.)
Mannan, M.A., 1970. Islamic Economics, Lahore.
Ahmad, Sheikh Mahmud, 1952. Economics of Islam, Lahore.
Ariff, M. 1982. ‘Monetary policy in an interest free Islamic economy nature and scope’ in M. Ariff, (ed.), Monetary and Fiscal Economics of Islam, International Centre for Research in Islamic Economics, Jeddah.
Kahf, Monzer, 1982a. ‘Saving and investment functions in a two sector Islamic economy’, in M. Ariff (ed.), above. 1982b. ‘Fiscal and monetary policies in an Islamic economy’, in M. Ariff (ed.), above.
Naqvi, S.N.H., 198l. Ethics and Economics: An Islamic Synthesis, The Islamic Foundation, Leicester. 1982. ‘Interest rate and inter-temporal allocative efficiency in an Islamic economy’, in M. Ariff (ed.), above.
Michael Foot Managing Director of the UK Financial Services Authority, The Future of Islamic Banking in Europe, Second International Islamic Finance Conference Dubai Sept 22 2003.
Launching Regional and International Islamic banking operations through Malaysia, Faisal Alshowaikh, Chief Executive Officer, Asian Finance Bank.
APPENDIX – I
TABLES
Table -1
Age & Sex-wise classification of Respondents:
|
Age → Sex ↓ |
Less than 20 |
20-35 |
36-50 |
50 & above |
Total |
|
Male |
3 |
17 |
6 |
7 |
33 (66%) |
|
Female |
2 |
5 |
8 |
2 |
17 (34%) |
|
Total |
5 (10%) |
22 (44%) |
14 (28%) |
9 (18%) |
50 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages.
Table – 2
Occupation & Income-wise classification of respondents:
|
Income→
Occupation↓ |
Less than Br.200 |
Br.200-500 |
Br.500-1500 |
Br.1500-2500 |
Br.2500 & above |
Total |
|
Business |
— |
1 |
5 |
6 |
8 |
20 (40%) |
|
Govt. Employees |
— |
— |
6 |
1 |
— |
7 (14%) |
|
Private Employees |
— |
— |
2 |
3 |
— |
5 (10%) |
|
Unemployed |
5 |
— |
— |
— |
— |
5 (10%) |
|
Others |
7 |
5 |
1 |
— |
— |
13 (26%) |
|
Total |
12 (24%) |
6 (12%) |
14 (28%) |
10 (20%) |
8 (16%) |
50 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages.
Table – 3
Potentiality to Save Money
|
Potentiality to Save |
No. of Respondents |
|
Positive Response (Yes) |
41 (82%) |
|
Negative Response (No) |
9 (18%) |
|
Total |
50 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages.
Table – 4
Banking Habits of the respondents
|
Type of Banking Service |
Positive Response (Yes) |
Negative Response (No) |
Total |
|
Deposits |
29 (58%) |
21 (42%) |
50 (100%) |
|
Loans |
14 (28%) |
36 (72%) |
50 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages
Table – 5
Dealing with Interest
|
Dealing with Interest |
No. of Respondents |
|
Make use of the Interest Money |
17 (59%) |
|
Give Interest to the poor people |
12 (41%) |
|
Total |
29 |
Source: Primary Data
Note: i) Figures in Parentheses are percentages
ii) The Number of respondents is only 29 since these are the account holders.
Table – 6
Bank Preference among Jimma Muslims
|
Name of the Bank |
For Deposits |
For Loans |
|
Commercial Bank of Ethiopia |
12 (35%) |
3 (21.5%) |
|
Dashen Bank |
12 (35%) |
3 (21.5%) |
|
Awash International Bank |
5 (15%) |
2 (14%) |
|
Bank of Abyssinia |
5 (15%) |
6 (43%) |
|
Total |
34 (100%) |
14 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages
Table – 7
Awareness on why Muslims are not using Commercial Banks
|
Awareness |
No. of Respondents |
|
Positive Response (Yes) |
21 (42%) |
|
Negative Response (No) |
29 (58%) |
|
Total |
50 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages
Table – 8
Awareness about Islamic Banking Concept
|
Awareness on Islamic Banking Concept |
No. of Respondents |
|
Positive Response (Yes) |
24 (48%) |
|
Negative Response (No) |
26 (52%) |
|
Total |
50 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages
Table – 9
Sources of awareness about Islamic Banking Concept
|
Type of Source |
No. of Respondents |
|
Islamic Literature |
12 (35%) |
|
Newspapers, Magazines |
4 (12%) |
|
Friends & Relatives |
8 (24%) |
|
Others (Television) |
10 (29%) |
|
Total |
34 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages
Table – 10
Need for Islamic Bank for Ethiopian Muslims
|
Need for an Islamic Bank |
No. of Respondents |
|
Needed (Positive Response) |
45 (90%) |
|
Not Needed (Negative Response) |
5 (10%) |
|
Total |
50 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages
Table – 11
Type of Islamic Banking System Needed
|
Type of Islamic Banking System |
No. of Respondents |
|
A Separate Islamic Bank |
33 (66%) |
|
Islamic Branches of Conventional Banks |
3 (6%) |
|
Islamic Branches of Cooperative Banks |
6 (12%) |
|
Islamic Branches of Micro-Finance Institutions |
3 (6%) |
|
No Response |
5 (10%) |
|
Total |
50 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages
Table – 12
Possibilities of co-existence of Islamic Banking & Interest Based Banking
|
Possibilities of Coexistence |
No. of Respondents |
|
Positive Response (Yes) |
40 (80%) |
|
Negative Response (No) |
7 (14%) |
|
Cannot say |
3 (6%) |
|
Total |
50 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages
Table – 13
Viability of Islamic Banks in Ethiopia
|
Response |
No. of Respondents |
|
Positive (Yes) |
44 (88%) |
|
Negative (No) |
6 (12%) |
|
Total |
50 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages
Table – 14
Willingness to open Deposit Account in Islamic Bank
|
Willingness to open a Deposit A/C |
No. of Respondents |
|
Positive Response (Yes) |
43 (86%) |
|
Negative Response (No) |
4 (8%) |
|
Cannot say |
3 (6%) |
|
Total |
50 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages
Table – 15
Initiative taken or will be taken by Jemad
|
Response |
No. of Respondents |
|
Positive (Yes) |
41 (82%) |
|
Negative (No) |
9 (18%) |
|
Total |
50 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages
Table – 16
Type of Participation in Islamic Bank Proposal
|
Type of Participation |
No. of Respondents |
|
Becoming a customer |
28 (48%) |
|
By contributing to the share capital of the bank |
10 (17%) |
|
By taking efforts in popularizing the bank through the Jemad |
20 (35%) |
|
Total |
58 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages
Table – 17
Responsible Authority for initiating the Islamic Banking Proposal
|
Type of Authority |
No. of Respondents |
|
Jemad |
42 (51.2%) |
|
Government |
18 (22.0%) |
|
National Bank of Ethiopia |
2 (2.4%) |
|
Islamic People |
20 (24.4%) |
|
Total |
82 (100%) |
Source: Primary Data
Note: Figures in Parentheses are percentages
APPENDIX – II
ISLAMIC BANKING PRODUCTS:
Bai Bithaman Ajil – A contract of sale and purchase for the financing of an asset on a deferred payment and installment basis with a pre agreed payment period. The sales price includes a profit margin.
Bai Inah – A financing facility involving two separate contracts. In the first contract a financier sells an asset to a customer on deferred payment terms. Immediately after, the financier repurchases the same asset from the customer on cash terms at a price lower than that of the deferred payment sale.
It can also be applied vise versa where a financier buys an asset from a customer on cash terms. Immediately after, the financier sells back the same asset to the customer on deferred payment terms at a price higher than that of the cash sale.
Bai Dayn – Refers to the buying and selling in the secondary market of debt certificates, securities, trade documents and papers that conform with the Syariah. The trade documents are issued by debtors to creditors as evidence of indebtedness. Only documents evidencing real debts arising from bona fide merchant transactions can be traded.
Bai Istijrar – A contract between a supplier and a client whereby the supplier supplies a particular item on an ongoing basis on an agreed mode of payment until they terminate the contract. It is also applied between a wholesaler and a retailer for the supply of a number of agreed items.
Bai Muzayadah – A sale of an asset in public through the process of bidding among potential buyers and the asset is sold to highest bidder.
Bai Wafa’ – A contract with the condition that when the seller pays back the price of the property sold, the buyer returns the property to the seller. It is a Bai inform but a pledge in substance.
Bai Salam – A purchase contract for the delivery of an item on a certain future date with the full payment of the purchase price in cash at the point of contract.
Bai Istisna’ – A purchase order contract where a buyer orders a seller or contractor to manufacture an item according to specification in the purchase contract to be delivered on a certain future date. The settlement of the purchase price is according to the agreement between the two parties.
Dhaman or Kafalah – A contract of guarantee where a person underwrites any claims or obligations that should be fulfilled by a debtor, supplier or contractor in the event that the debtor, supplier or contractor fails to fulfill his obligation
Gharar – An unknown fact or condition. In a commercial transaction, the fact or condition of either of the contracting parties or the item in the contract or the price of the item is not known giving rise to an uncertain status or result of the contract, i.e. whether it is valid or void. An excessive graham makes a contract null and void.
Ghish, ghurur – Cheating, fraud, deception. Both are prohibited by the Shariah.
Haq Maliy – A right on a financial asset. Examples of rights are haq dayn (right to the claim of a debt) and haq tamalluk (right of ownership).
Hibah – Gift, something given to a person without exchange.
Hiwalah – A contract of transferring a debt obligation from the debtor to a third person.
Ibra’ – Giving up of a right. In a commercial transaction a creditor gives up part or all of his right to a debtor usually for early settlement of the debt.
Ijarah – A sale or purchase of usufruct. A sale or purchase of the use of another person’s property. The ownership of the property remains with the lessor while the lessee only owns the right of the use of the property.
Ijarah Thumma Bai – Refers to an Ijarah (leasing/renting) contract to be followed by a Bai (purchase) contract. Under the first contract, the hirer leases the property from the owner at an agreed rental over a specified period. Upon expiry of the leasing period, the hirer enters into a second contract to purchase the property from the owner at an agreed price.
Ittifaq Dhimni – S An agreement between parties concerned on the sale price and repurchase price of an asset prior to the execution of the sale and repurchase contracts for the purpose of bidding process in Bai’ Muzayadah (bidding or auction).
Ju’alah – A unilateral contract promising a reward for the accomplishment of a specified task.
Khilabah – A form of fraud, either in words or deed by a party to a trading contract with the intention of inducing the other party to make a contract. This is prohibited by the Shariah.
Khiyanah – A breach of trust, betrayal or treachery. It is prohibited by the Shariah.
Maisir – Gambling. Any activity that involves betting money or an item on the outcome of an unpredictable event. The bet is forfeited if the outcome is not as predicted by the bettor and the person against whom the bet is made takes the bet. This activity is prohibited by the Shariah.
Mal – A thing which is naturally desired by man, and can be stored for times of necessity; it has use and it is permissible by the Shariah to enjoy its benefit.
Mudharabah (trustee financing) An agreement between a provider of fund who provides 100% capital for the financing and an entrepreneur who manages the business applying his expertise; profit is to be shared between them according to an agreed ratio, while loss is to be borne solely by the provider of capital.
Muqasah – Debt settlement by a contra transaction; setting off.
Bai Murababah (cost plus)
A sale based on cost price where the cost price, the profit margin and other costs to the seller are stated at the time of the contract. The settlement of the price is normally made on deferred lump sum payment terms.
Musharakah (joint venture)
An agreement between two or more parties whereby all parties contribute capital either in the form of cash or in kind to form a company to carry on commercial activities. The profit is shared based on equity participation or as agreed between the parties; loss is shared according to equity participation.
Qabadh
Qabadh means taking possession. Generally qabadh follows urf, viz. the common practices of the local community where it varies from one kind of good to another recognizing the way the possession of a good takes place.
Qardh Hasan
It is a benevolent loan, i.e. a loan contract between two parties with no extra payment over and above the loan. Any extra payment imposed by the lender or promised by the borrower is prohibited. However the borrower is permitted to pay extra on payment at his absolute discretion as a token of appreciation.
Rahnu
Making a property a security for a debt or a right of claim, the payment in full of which is permitted from the sale of the property in the event of default by the debtor. It is also used as a name for a kind of borrowing with collateral.
Riba
In lending, it is the extra payment imposed by the lender or promised by the borrower over and above the loan. In trading it is mostly the difference in weight in the exchange of gold of different measures of purity, e.g. 10g. of 750 gold with the 8g. of 835 gold; or the difference in time between payment and delivery in foreign currency exchange, e.g. payment of RM10,000 at 10.00 a.m. and delivery of USD3,800 at 3.00 p.m on the same date.
Sarf
A contract of exchange between two currencies.
Shariah
Shariah means fiqh or Islamic Law comprising the whole body of rulings pertaining to human conduct derived from the rulings’ respective particular evidences. The respective particular evidences are the sources of the Shariah, the primary sources being the Quran, the Sunnah, ijma’ and qiyas, the secondary sources being the method of reasoning applied by Muslim jurist in their ijtihad (personal reasoning)
Shariah requirement
It is a general phrase or expression, which generally means abstinence from prohibition and fulfillment of essential elements and necessary conditions in performing a human act.
Suftajah
Bill of Exchange
Sukuk
Plural of sok. It is being used as singular. It is a document or certificate evidencing an undivided pro rata ownership of an underlying asset; a capital market financial instrument tradable in the secondary market.
Ta’widh
A compensation agreed upon by the contracting parties as a payment that can be claimed by the creditor when the debtor defaults in the payment of his debt.
Tadlis al-‘aib
An act of a seller intentionally hiding the defects of goods; it is prohibited by the Shariah.
Takaful
It is a protection plan based on Shariah principles. It is Islamic insurance. A person becomes a participant by undertaking a contract of tabarru’ and paying a participative contribution (tabarru’) to a common takaful fund whereby he allows his contributions to be used to help other participants whenever they suffer defined losses. The commercial contracts of Mudharabah and Wakalah are incorporated into tabarru’ contracts to increase the size of the takaful fund.
Tanajush
A conspiracy between a seller and a buyer wherein a buyer purchases an item from the seller at a price higher than that of the market thereby enticing other buyers to buy the items at a price higher than the market price. The seller thus makes a big profit. This act is prohibited by the Shariah.
Ujrah
A payment for manfaah, usufruct on the use of another’s property. Another term related to ujrah is ajr (plural ujur), which is a payment for a service. It is also applied to salary, wage, pay, fee(s), charge, enrolment, honorarium, remuneration, reward, etc.
Uqud Ishtirak
Contracts of participation or partnership
Uqud Mu’awadat
Contracts of exchange
Uqud Tabarru’at
Contracts of gift or donation
Urbun
A deposit or earnest money paid as an installment to confirm contract. If the contract continues to its conclusion the seller realizes it as part of the selling price. If the contract fails the seller forfeits it as penalty for the breach of the contract.
Wadi’ah
Safe custody. Originally safe custody is Wadiah Yad Amanah, i.e. trustee custody where according to the Shariah the trustee custodian has the duty to safeguard the property held in trust. Wadiah Yad Amanah changes to Wadiah Yad Dhamanah (guaranteed custody) when the trustee custodian violates the conditions to safeguard the property. He then has to guarantee the property.
Wakalah
A contract of appointment of an agent where a person appoints another as his agent to act on his behalf.
Zakat
A religious obligation of alms-giving on a Muslim to pay 2.5% of certain kinds of his wealth annually to one of the eight categories of needy Muslims.
