ISLAMIC BANKING IN THE INFORMAL SECOTR Interest Free Solutions in the Non Muslim Societies AUSAF AHMAD Paper for Presentation at the International Conference on Banking 2003, From Money Lenders to Bankers: Evolutions of Islamic Banking in Relation to Judo, Christian and Oriental Banking TraditionsFrom Money Lenders to Bankers: Evolutions of Islamic Banking in Relation to Judo, Christian and Oriental Banking Traditions Monash University, Prato, Italy September 9-10,2003

Islamic Banking in the Informal Sector by Ausaf Ahmad2 THIS PRESENTATION Is divided into three parts: I.INTRODUCTION II.MAIN ISSUES ABOUT ISLAMIC BANKING IN THE INFORMAL SECTOR III.A BRIEF SURVEY OF SOME ISLAMIC FINANCIAL INSTITUTIONS IN THE INFORMAL SECTOR AND SOME SUGGESTIONS.

Islamic Banking in the Informal Sector by Ausaf Ahmad3 INTRODUCTION Significant Progress made by Islamic Banking during the last 25 years:Significant Progress made by Islamic Banking during the last 25 years: As a Theoretical ModelAs a Theoretical Model As a financial institution.As a financial institution. Most of the progress remained confined in the Muslim countries.Most of the progress remained confined in the Muslim countries.

Islamic Banking in the Informal Sector by Ausaf Ahmad4 MAIN ASSUMPTION The Current literature on Islamic Banking and finance assumes that Muslims have majority and political power to control (or can control) and / or change monetary and fiscal policies and institutions.The Current literature on Islamic Banking and finance assumes that Muslims have majority and political power to control (or can control) and / or change monetary and fiscal policies and institutions. It has little relevance for Muslim minorities and non-Muslims.It has little relevance for Muslim minorities and non-Muslims.

Islamic Banking in the Informal Sector by Ausaf Ahmad5 ISLAMIC BANKING AND MINORITIES Main raison dêtre of Islamic Banking is Divine Prohibition against Ribā.Main raison dêtre of Islamic Banking is Divine Prohibition against Ribā. The prohibition is equally applicable to Muslim majorities and minoritiesThe prohibition is equally applicable to Muslim majorities and minorities The minorities are also desirous of organizing their financial activities in accordance with Shariah but lack effective institutions.The minorities are also desirous of organizing their financial activities in accordance with Shariah but lack effective institutions.

Islamic Banking in the Informal Sector by Ausaf Ahmad6 Dār al Islām and Dār al Harb Classical Jurists divided the world into Dār al Islām and Dār al HarbClassical Jurists divided the world into Dār al Islām and Dār al Harb Some Jurists (Abu Hanifa, Ibne Taimiyah, Mohammad) allowed Ribā based transactions between Muslims and non-Muslims in Dār al Harb.Some Jurists (Abu Hanifa, Ibne Taimiyah, Mohammad) allowed Ribā based transactions between Muslims and non-Muslims in Dār al Harb. Some equally prominent jurists opposed it.[Abu Yousuf, Shafei, and scholars from Hanbali School]Some equally prominent jurists opposed it.[Abu Yousuf, Shafei, and scholars from Hanbali School]

Islamic Banking in the Informal Sector by Ausaf Ahmad7 Present Day Muslim Minority Countries are not Dar al Harb The Classical distinction is not relevant for the following reasons:The Classical distinction is not relevant for the following reasons: 1.Single Political Entity vs. 54 independent states 2.Not adjacent to each other 3.Migration is in the reverse order 4.Visa Restrictions 5.Muslim countries could not be described as Dar al Islam because of non application of Shariah

Islamic Banking in the Informal Sector by Ausaf Ahmad8 FINANCIAL NEEDS OF MUSLIM MINORITY HOUSEHOLD

Islamic Banking in the Informal Sector by Ausaf Ahmad9 ISLAMIC BANKING IN THE CORPORATE SECTOR Much of the Development of Islamic Banking that has taken place in the eighties and nineties has been in the organized Corporate Sector.

Islamic Banking in the Informal Sector by Ausaf Ahmad10 LIMITATIONS OF THE CORPORATE SECTOR REQUIRES: 1.Large Capital 2.Large size of Market 3.Favorable Political Climate 4.Institutional and Legal Framework Negative Mental block against Islamic banking is a big barrier against it in the Muslim Minority countries.

Islamic Banking in the Informal Sector by Ausaf Ahmad11 ISLAMIC BANKING IN THE COOPERATIVE SECTOR Cooperative Sector Requires: 1.Open Membership 2.Cooperative Education 3.Cooperative Cooperation 4.Democratic Participation

Islamic Banking in the Informal Sector by Ausaf Ahmad12 ADVANTAGES OF THE COOPERATIVE SECTOR Insulates from unhealthy competition from the Corporate SectorInsulates from unhealthy competition from the Corporate Sector Requires much less capital and is much less regulated.Requires much less capital and is much less regulated. Institutions in the Cooperative Sector are offered many incentivesInstitutions in the Cooperative Sector are offered many incentives Cooperative institutions are quite elastic with respect to size.Cooperative institutions are quite elastic with respect to size. Cooperative System is amenable to different purposes.Cooperative System is amenable to different purposes.

Islamic Banking in the Informal Sector by Ausaf Ahmad13 COOPERATIVE INSTITUTIONS OF ISLAMIC FINANCE INTEREST FREE COOPERATIVE SOCIETIESINTEREST FREE COOPERATIVE SOCIETIES INTEREST FREE COOPETIVE HOUSING SOCIETIESINTEREST FREE COOPETIVE HOUSING SOCIETIES COOPERATIVE INVESTMENT FUNDSCOOPERATIVE INVESTMENT FUNDS COOPERAITIVE ISLAMIC BANKSCOOPERAITIVE ISLAMIC BANKS

Islamic Banking in the Informal Sector by Ausaf Ahmad14 ISLAMIC FINANCIAL INSTITUTIONS IN INDIA : A CASE STUDY Islamic Banking movement concentrated in the Gulf, India remained at outer fringe.Islamic Banking movement concentrated in the Gulf, India remained at outer fringe. Introduction of Islamic banks in the corporate sector can give a boost to private commercial banking in IndiaIntroduction of Islamic banks in the corporate sector can give a boost to private commercial banking in India India could invite foreign capital through Islamic banksIndia could invite foreign capital through Islamic banks Islamic banks have special relevance for micro credit schemes.Islamic banks have special relevance for micro credit schemes.

Islamic Banking in the Informal Sector by Ausaf Ahmad15 INTEREST FREE FINANCIAL INSTITUTIONS IN INDIA More than 200 institutions, mostly loan societies and investment companies.More than 200 institutions, mostly loan societies and investment companies. Operating in the unorganized sectorOperating in the unorganized sector Misnomer to describe them as Islamic BanksMisnomer to describe them as Islamic Banks Societies registered under Societies Act. Many remain unregistered.Societies registered under Societies Act. Many remain unregistered. Different sources of fundsDifferent sources of funds Lack control and regulation due to absence of legal framework.Lack control and regulation due to absence of legal framework. Non Banking Financial Companies and Islamic Investment Companies.Non Banking Financial Companies and Islamic Investment Companies.

Islamic Banking in the Informal Sector by Ausaf Ahmad16 CONCLUSIONS Require Legal FrameworkRequire Legal Framework ProfessionalismProfessionalism TransparencyTransparency Productivity and Efficiency.Productivity and Efficiency. Needs to be organized.Needs to be organized.

Islamic Banking in the Informal Sector by Ausaf Ahmad17 THANK YOUTHANK YOU