Comments on Current Islamic Banking
Faisal Islamic Bank (Sudan) (FIBS) was established on August 18th, 1977 under the F.I.B.S. Act of the National People’s Council. It commenced operations officially on May 10th, 1978.
The objective of the Bank was defined by the Act as being to “strive to consolidate community development through performing all banking, financial, commercial and investment business.”
The authorised capital of the Bank is LS. 10,000,000 of which LS. 3,656,246 was paid up up to 31.12.1979. This sum is expected to reach 5 million by the end of 1980. The capital of the Bank is divided between Sudanese (40%), Saudi (40%) and other Muslim share-holders (20%), mainly in the private sector.
c. Exceptions and Exemptions
Under the F.I.B.S. Act, the Bank is excepted from the applications of:
- the laws regulating service and post-service benefits; provided that the salaries, wages and post-service benefits which may be determined by the Bank shall not be less than the minimum provided for in such laws;
- the laws regulating insurance;
- the Auditor General Act, 1970 or any other enactment thereof;
- Sections 42, 44 and 45 of the Bank of Sudan (Central Bank) Act, 1959; provided that the same shall not curtail the powers of the Bank of Sudan to supervise and direct the credit policy of the Bank.
The said sections concern the determination of bank rates, reserve requirements and the restriction of credit activities by the Bank of Sudan.
Under the same Act, F.I.B.S. enjoys the following exemptions:—
- The property and profits of the Bank shall be exempted from all types of taxation.
- The funds deposited with the Bank for the purpose of investment shall be exempted from taxation. However, the Bank pays out Zakah calculated as 2Vi per cent of all profits, capital and reserve, for the duration of the deposit period.
- The salaries, wages, gratuities and pensions of all employees of the Bank, the Chairman and members of its Board of Directors and the Shari'ah Supervisory Board shall be exempted from taxation.
- In addition, the Bank may enjoy any exemption or concession provided for in any other law.
- The Governor of the Bank of Sudan may exempt the F.I.B.S. from the provisions of the laws regulating exchange control within such limits as he may think appropriate. The Governor has, actually, exempted all dealing and movements of capital funds of F.I.B.S. and its deposits originating in foreign currencies from the Exchange Control Regulations.
Furthermore, the Act provides that:—
- the property of the Bank shall not be subject to confiscation, nationalisation, sequestration or forfeiture;
- the funds deposited with the Bank shall not be sequestered or forfeited except in accordance with a judicial order.
The above exceptions, exemptions and guarantees reflect the interest of the legislature in fostering the success of the Bank as the first experience in Islamic Banking in Sudan which may and is to be extended to other banks in the country.
The Board of Directors of the Bank is composed of Sudanese, Saudi and other Arab nationals in order to represent the distribution of the capital. All the staff of the Bank are Sudanese. The Shari'ah Supervisory Board (S.S.B) is established under the Bank’s Articles of Association in order to make sure that the Bank’s transactions conform to Islamic Shari'ah (law). The Bank has established two subsidiary companies: The Islamic Insurance Company and the Islamic Trade and Services Company.
1. Operational Methods
The Bank has three types of accounts: —
- Current Accounts. These are interest-free and usually against charges.
- Savings Accounts. These are interest and dividend-free and free of charge, with no restriction on amounts deposited, with ensured instantaneous withdrawal of funds on handing the pass-book.
- Investment Accounts. The minimum for an investment deposit is LS.100 or equivalent. Drawing is unrestricted and instantaneous. But funds drawn before completing a period of 6 months forfeit their share in profits. Balances remaining for 6 months or more are eligible to receive a share of profits, proportionally to their quantity and duration, at the end of the financial year. The resulting profits are distributed between the depositor and the Bank in the ratio of 75 per cent to the depositor and 25 per cent to the Bank.
Technically, current and savings accounts are considered by the S.S.B. to be loans, while investment accounts are considered as being unconditional Mudarabah or Qiradh capital, as will be explained below.
The Bank utilizes its own funds and part of the clients’ deposits to finance investments in any of the following major methods:—
- Independent Investments. As shown above, the Act enables the Bank to make its own direct investment. So far, this has been restricted to the establishment of the two subsidiary companies, one a trading company and the other an insurance company.
- Musharakah (Partnership). Under this method, the Bank and the would-be customer agree to join in a partnership for effecting certain operations within an agreed period of time. Both parties contribute to the capital of the project and agree to divide the net profits in proportions determined in advance. There is no fixed formula for profit-sharing and each case is dealt with in its own merit. Such operations in practice vary in duration from a few weeks to a few months, or if need be, can go for years. In the case of medium- and long-term operations a “decreasing” form of participation is usually agreed on, whereby the ownership of the whole project passes to the client after an agreed period of time during which the Bank is expected to have retrieved its principal plus a suitable share of profits. The Bank screens the client, appraises the project, monitors implementation and, if necessary, takes part in actual management in order to make sure that the anticipated results are achieved. It is the Bank’s policy, however, to entrust management to its partners in the different joint-ventures. A percentage of the net profit is left to the partner in consideration of his role as manager. The rest of the profits are distributed between the Bank and partner according to their respective shares in the capital of the venture. The value of the fixed assets owned by the partner is estimated in money terms and included in his share of capital.
- Mudarabah or Qiradh. Under this method, the Bank provides all the capital of the operation and the client is fully responsible for management. In consideration, the partner gets an agreed proportion of the net profits. In case of loss resulting from normal business activities, the Bank bears all the losses and the client loses only the profit that would have been the reward of his effort.
The Mudarabah is of the “restricted” type whereby all the conditions of the operation are written into the contract.
- Murabaha Selling. In this case, the Bank sells a commodity to the client for a pre-determined amount or rate of profit over and above total costs. Usually the commodity is provided to the order of the client according to definite specifications, but, following the ruling of the S.S.B., the client is not obliged to accept the commodity even if it is provided according to the given specifications.
- Collateral Policy. The Bank requires the client to provide collateral to cover the Bank against the risks of neglect or wilful act of the partner but not against normal business risks. This conforms to Islamic Shari'ah.
A higher rate of profits is usually asked (in the contract) if the payment is to be by instalments, again in accordance with the ruling of the Shari'ah Supervisory Board. This rate has to be fixed in advance as an absolute sum. It cannot be increased if payment is not made in time.
e. Other Banking Services
The Bank provides most of other types of banking services like dealing in foreign exchange, effecting domestic and international transfers, collection of bills, opening letters of credit and issuing letters of guarantee, availing safe custody etc., for fixed charges. Significantly, no facility for discounting of bills is provided. But the Bank gives qard-hasanah, though very sparingly and on humanitarian basis. However, some over-drafts are allowed, free of charge, to reliable customers as a gesture of goodwill when a customer’s account becomes temporarily negative.
The Bank has, so far, five operating branches and two under establishment.
- Performance up to 31.12.1979
g. Investment Activities
The number of investment operations that the bank has entered into since commencement of operation on (10.5.1978) up to 31.12.1979 was 208. The total commitment of the Bank in these projects was LS. 27.6 million. 82 per cent of this amount went into trade and 17 per cent went into industry in the form of working capital.
During the said period, 68 of these operations were completed and liquidated. The Bank’s total contribution to these operations was LS. 6.52 million, of which 63 per cent was for trade and 37 per cent for industry.
The total profits realized from liquidated operations was over LS. 879,000, showing an average rate of profit of 13.5 per cent. This represented 30 per cent of the Bank’s gross revenues for the period.
h. Total Profits
Gross income for the same period was about LS. 2.3 million, while current and capital expenditures added-up to about LS. 1.3 million, thus giving total net profits of about LS. 1 million. This gives a rate of return of 17.1 per cent on total resources actually utilized.
Profits were distributed to the shareholders at the rate of 15 per cent of the paid-up value of shares and 14.7 per cent of deposits of holders of investment accounts. Zakah amounting to LS. 125,097 was paid-out on the Bank’s capital and net profits.
1. Comments on Performance
From the above it can be seen that business-wise the Bank has done well.
As an Ialamic institution, operating in a businesslike fashion, it has managed to tryout successfully most of the major forms of banking and investment activities permissible by the Shari'ah. As such it deserves to be considered a promising experience in practising comprehensive Islamic banking.
The provision of ordinary banking services has proved to be a profitable operation in itself and a good way to attract customers and to collect investible funds, both in local and foreign currencies. The Bank has proved to be successful with Sudanese expatriates working in other Arab countries.
The quality of the personnel of the Bank has proved to be major asset. The meticulous care with which most of them have been selected and the attractive terms of service provided by the Bank were not wasted.
Internally the Bank’s branches attracted more than enough customers. In addition it must be admitted that some keen businessmen saw the Bank as a useful addition to their list of financiers.
The modes of finance provided by the Bank were not easily understood by most clients and were subject (in the beginning) to the wildest misinterpretations, e.g.
- Some thought that partnership always meant a 50 : 50 sharing of profits.
- Some thought that, under mudarabah, the Bank was entitled to profits only after the client has pocketed his own predetermined share of profits.
The usurious environment in which the Bank operated was inevitably partly biased against the Bank’s mode of finance, for instance:—
- Interest paid by the client to other banks is included in “costs” and, therefore, legal sale-prices are inflated under the formula which allows profits to be calculated as a percentage over and above the costs for most goods.
- Interest is again deducted from taxable profits as an item of “costs”.
- Most import licences are not granted except for goods enjoying credit facilities from the suppliers; and interest- rates for the facilities have to be specified explicitly.
Some of the difficulties encountered by the Bank in the field of investment were related to the clients themselves. To begin with, it took the Bank some time to establish a “list” of reliable clients who should also be competent businessmen and to set going a workable system of client screening which also means a market surveying system.
Some of the clients were unruly and tended to ignore the terms of the contracts defining the operations. Others were secretive about the real extent of their operations and their sale prices which were in many cases above the legal (though usually hypothetical) limits. Yet others were sluggish and prone to hoarding, reluctant to liquidate the operations in the agreed time and preferring to wait for “golden chances” to sell at “appropriate” periods, which meant a drag on the Bank’s resources.
Most of these difficulties are notably related to the present inflationary and stringency economic conditions in the country and to the perhaps prevalent lack of control of the market. Reliable audited accounts are a rarity.
Other problems were related to the management side of the operations : an adequate and prompt system for project evaluation, processing, documentation, execution, follow-up and criteria for profit- sharing had to be created under great pressure of working conditions. This is particularly a very tricky question since there were no guidlines to go by.
It is my personal view, ex-post, that this could have been mitigated somewhat if more projects and market studies were made before the commencement of operation of the Bank. All this added up to some period of bewilderment and some losses at the beginning, which sheds an even more favourable light on the achievements just mentioned. In fact, tentative estimates for profits for the present year are even brighter, probably much better.
- On the one hand, it is essential to expand as far as possible the (limited) framework of operational methods within which Faisal Islamic Bank (Sudan) and other Islamic banks now operate in fields of both resource accumulation and utilization. New types of accounts and deposits and new types of formulae for project financing have to be found. Recourse must be made to traditional and modern Islamic literature, and altogether new ideas must be derived from original Islamic sources (the Quran and Hadith).
On the other hand, greater clarity and simplicity must be derived from the available relevant SharVah literature, preferably in the form of fairly readable hand-books for the guidance of bank personnel and clients.
No Bank can do this single-handed. The holding of this Seminar is a very encouraging landmark. It is, therefore, hoped that enough emphasis shall be laid on the practical problems of Islamic Financial Institutions.
- F.I.B.S. activities have so far been deliberately limited to shortterm ventures. For long-term considerations more long-term operations are necessary. The availability of medium- and long-term resources must be explored.
It is pertinent to contemplate the possibility that some medium- and long-term capital can be channelled through Islamic Banks from rich to poor Islamic countries. The Islamic Development Bank should play the major role. This is already accepted by the authorities of the I.D.B. but has not proved to be very practical due to the inter-governmental constitution of the I.D.B. and its methods of operation.
I am, therefore, of the opinion that an International Islamic Bank is the logical next step in the cooperation of Islamic Banks. The capital of such a bank should be provided exclusively by the I.D.B. and the national Islamic banks, and its activity should be mainly the finance of bankable projects submitted by the national Islamic Banks. It should also act as a bank of last resort to the Islamic banks. The I.D.B. should take the initiative in this step.
- The network of Islamic banks should be extended as soon as possible to cover all Islamic and other countries, so that no Islamic bank shall feel compelled to do business with a usurious bank. The existing Islamic banks should exchange their experience which should be made available to new Islamic banks.
- Islamic insurance companies are a necessary adjunct to the operation of proper Islamic banking activities: since the practices of the existing insurance companies are not Islamic, and since insurance itself is a major financial business such Islamic insurance companies should cover the investments of the Islamic Banks and their clients and also the general public. The successful experience of the Islamic Insurance Company of F.I.B.S. should be very useful. Furthermore, an Islamic re-insurance company is urgently needed to cater for the re-insurance needs of the existing and forthcoming Islamic insurance companies.
Mr. Fuoad Agabani
Source: Money and Banking in Islam, Ziauddin Ahmed; Munawar Iqabal; M. Fahim Khan. Republished with permission.