Separate Benchmark For Islamic Banks

Separate Benchmark for Islamic Banks
What is Banking System?

A Bank is a financial institution and a financial intermediary
that accepts deposits and channels those deposits into lending
activities,
either
directly
or
through
capital
deficits
markets. A bank connects customers that have capital deficits

to customers with capital surpluses.
Due to their critical status within the financial system and
the
economy generally,
countries.
Most
as fractional
banks
reserve
banks
are highly
operate
regulated in
under
banking where
they
system
hold
most
known
only
small reserve of the funds deposited and lend out the rest for
profit.
They
are
requirements which
generally
are
based
subject
on
an
to minimum
international
capital
set
of
capital standards, known as the Basel Accords.
Types of Banks:
Banks activities can be divided into
Retail Banking, dealing directly with individuals and small
businesses;
Business Banking, providing services to mid-market business;
corporate banking, directed at large business entities;
Private banking, providing wealth management services to high
net worth individuals and families;
Investment banking, relating to activities on the financial
markets.
Other Types of Banks:

Central Banks are normally government-owned and charged with
quasi-regulatory
responsibilities,
Essentials Of Islamic Finance
Page 1
such
as
supervising
commercial banks, or controlling the cash interest rate. They

generally provide liquidity to the banking system and act as
the lender of last resort in event of a crisis.
Islamic Banks adhere to the concepts of Islamic law. This form
of banking revolves around several well-established principles
based on Islamic canons. All banking activities must avoid
interest, a concept that is forbidden in Islam. Instead, the
bank
earns
profit
(markup)
and
fees
on
the
financing
facilities that it extends to customers.

Most banks are profit-making, private enterprises. However,
some are owned by government, or are non-profit organizations.
Islamic Banks in Pakistan

1) Dawood Islamic Bank Limited
2) Dubai Islamic Bank Pakistan limited
3) Meezan Bank Premier Islamic Bank In Pakistan
4) AlBaraka Islamic Bank
5) BankIslami Pakistan Limited
6) Emirates Global Islamic Bank
Page 2
What is Islamic Banking?

Islamic
banking
system
of
refers
banking
or
to
banking
activity that is consistent with

the
principles
(Islamic
of
the
rulings)
Shari'ah
and
its
practical application through the

development of Islamic economics.
The
principles
which
emphasize
moral and ethical values in all

dealings
have
wide
appeal.
Shari'ah
interest
charges
universal
prohibits
(riba)
the
for
payment
the
or
lending
and
acceptance
of
accepting
of
money, as well as carrying out trade and other activities that

provide
goods
or
services
considered
contrary
to
its
principles. While these principles were used as the basis for

a flourishing economy in earlier times, it is only in the late
20th century that a number of Islamic banks were formed to
provide
an
alternative
basis
to
Muslims
although
Islamic
banking is not restricted to Muslims.

Islamic banking has the same purpose as conventional banking
except
that
Shariah,
it
known
operates
as
in
Fiqh
accordance
al-Muamalat
with
the
(Islamic
rules
rules
of
on
transactions). Islamic banking activities must be practiced

consistent with the Shariah and its practical application
through the development of Islamic economics. Many of these
principles upon which Islamic banking is based are commonly
accepted
all
decades.
These
over
the
world,
principles
are
for
not
centuries
new
but
rather
arguably,
original state has been altered over the centuries.
Page 3
than
their
It is evident that Islamic finance was practiced predominantly

in
the
Muslim
world
throughout
the
middle
Ages,
fostering
trade and business activities. In Spain and the Mediterranean

and
Baltic
middlemen
States,
for
Islamic
trading
merchants
activities.
It
became
is
indispensable
claimed
that
many
concepts, techniques, and instruments of Islamic finance were

later adopted by European financiers and businessmen.
The revival of Islamic banking coincided with the world-wide
celebration
of
the
advent
of
the
15th
Century
of
Islamic
calendar (Hijra) in 1976. At the same time financial resources

of Muslims particularly those of the oil producing countries,
received a boost due to rationalization of the oil prices,
which
had
hitherto
been
under
the
control
of
foreign
oil
Corporations.
Disenchantment with the value neutral capitalist and socialist
financial systems led not only Muslims but also others to look
for ethical values in their financial dealings and in the West
some
financial
organizations
have
opted
for
ethical
operations.
Origin of Islamic Bank

The origin of the modern Islamic bank can be traced back to
the very birth of Islam when the Prophet himself acted as an
agent for his wife's trading operations. Islamic partnerships
(mudarabah) dominated the business world for centuries and the
concept of interest found very little application in day-today transactions.
Page 4
Such partnerships performed an important economic function.

They combined the three most important factors of production,
namely: capital, labour and entrepreneurship, the latter two
functions usually combined in one person. The capital-owner
contributed the money and the partner managed the business.
Each shared in a pre-determined share of the profits. If there
was
loss,
the
capital-provider
lost
his
money
and
the
manager lost his time and labour.
Islamic Banking Principles

The Shariah prohibits the payment of charges for the renting
of
money (riba,
which in
the
definition of Islamic scholars

covers any excess in financial
dealings, usury or interest) for
specific
terms,
investing
in
as
well
businesses
as
that
provide goods or services considered

contrary
to
its
forbidden).
principles
basis
for
principles
While
were
a
(Haram,
these
used
as
flourishing
the
economy
in
earlier times, it is only in the late

century
that
Islamic
banks
number
were
20th
of
formed
to
apply these principles to private or

private
commercial
semi-
institutions
within the Muslim community.

"While
basic
Islamic
banking
tenant
-
the
of
outlawing
of
riba,
term
that
encompasses not only the concept of usury, but also that of

interest - has seldom been recognized as applicable beyond the
Page 5
Islamic
world,
many
of
its
guiding
principles
have.
The
majority of these principles are based on simple morality and

common
sense,
which
form
the
of
these
bases
of
many
religions,
is
immediately
including Islam.
"The
universal
nature
principles
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.
"Although the western media frequently suggest that Islamic
banking in its present form is a recent phenomenon, in fact,
the basic practices and principles date back to the early part
of
the
seventh
century."
(Islamic
Finance:
system
has
Euromoney
Publication, 1997)
Basis of Islamic Banking

In
order
to
be
Islamic,
the
banking
to
avoid
interest. Consequently, much of the literature on the theory

of Islamic banking has grown out of a concern as to how the
monetary and banking system would function if interest were
abolished by law.
Another Islamic principle is that there should be no reward
without risk-bearing. This principle is applicable to both
labour and capital. As no payment is allowed to labour unless
it is applied to work, so no reward for capital should be
allowed unless it is exposed to business risks.
Page 6
Consider two persons, one of whom has capital but no special

skills in business, while the other has managerial skills but
possesses no capital. They can co-operate in either of two
ways:
1. Debt-financing (the western loan system). The businessman
borrows the capital from the capital-owner and invests it
in
his
trade.
The
capital-owner
is
to
get
back
his
principal and an additional amount on the basis of a

fixed rate, called the interest rate, as his compensation
for parting with liquidity for a fixed period. The claim
of the lender for repayment of the principal plus the
payment of the interest becomes viable only after the
expiry of this period. This payment is due irrespective
of whether the businessman has made a profit using the
borrowed money. In the event of a loss, the borrower has
to repay the principal amount of the loan, as well as the
accrued
interest,
capital-owner
from
loses
his
nothing.
own
resources,
Islam
views
while
this
as
the
an
unjust transaction.
2. Mudarabah (the Islamic way, or PLS). The two persons cooperate
where
with
the
each
other
capital-owner
on
the
provides
basis
the
of
partnership,
capital
and
the
other party puts his management skills into the business.

The capital-owner is not involved in the actual day-today operation of the business, but is free to stipulate
certain conditions that he may deem necessary to ensure
the
best
use
of
his
funds.
After
the
expiry
of
the
period, which may be the termination of the contract or

such time that returns are obtained from the business,
the capital-owner gets back his principal amount together
with a pre-agreed share of the profit.
Page 7
The ratio in which the total profits of the enterprise are

distributed between the capital-owner and the manager of the
enterprise is determined and mutually agreed at the time of
entering the contract, before the beginning of the project. In
the event of loss, the capital-owner bears all the loss and
the principal is reduced by the amount of the loss. It is the
risk of loss that entitles the capital-owner to a share in the
profits. The manager bears no financial loss, because he has
lost
his
time
and
his
work
has
been
wasted.
This
is,
in
essence, the principle of mudarabah.
Rules of Permissibility
Muslims believe that all things have been provided by God, and
the benefits derived from them, are essentially for mans use,
and so are permissible except what is expressly prohibited in
The Quran or Hadith. When guidance is not clearly given in
the
Quran
example,
there
are
several
guidance
can
be
understanding
and
is
the
other
sought
sources
from
science
of
Fiqh,
of
law.
which
For
means
jurisprudence:
the
science of human intelligence, debate and discussion
Financing Modes of Islamic Banks

Islamic
financing
in
its
first
stages
used
only
the
partnership modes of musharakah and mudarabah. Later it was

realized
that,
to
avoid
moral
hazards,
yet
compete
successfully with conventional banks, it was necessary to use

all permissible Islamic modes and so trade-based and leasing
techniques were developed.
The general rule is that all financial arrangements that the
contracting parties agree to use are lawful, as long as they
do
not
include
an
element
of
interest.
Page 8
Equity-holding
and
commodity and asset-trading are an integral part of Islamic

financing.
The two basic categories of financing are:
1) profit-and-loss-sharing (PLS), also called participatory
modes, i.e., musharakah and mudarabah and
2) Purchase and hire of goods or assets and services on a
fixed-return
basis,
i.e.,
murabaha,
istisna'a,
salam
and
leasing.
Legitimate modes include financing trade, industry or budget
deficits through domestic or foreign sources. Islamic banks
may design diversified investment portfolios and instruments
that generate profit with the required liquidity. To maximise
its profits, a bank needs to look for investments that yield
the
highest
return,
minimize
risks
and
provide
adequate
liquidity. At the same time, it is necessary for the bank's

liabilities and assets to be matched.
A pyramid of financial assets can be built based on liquidity
and profitability, which are the criteria of prudent banking.
At the top would be high-risk and less-liquid assets, such as
long-term investments out of its own equity or from deposits
of its risk-accepting account-holders. At the bottom of the
pyramid
would
be
assets,
based
on
the
least
murabaha
risky
and
(leasing)
most
or
highly
short-term
liquid
(even
overnight) Mudarabah Certificates (PLS).

Musharakah and mudarabah can be used for short, medium and
long-term
project-financing,
import-financing,
export
financing, working capital financing and financing of single

transactions. Diminishing musharakah can be used for large
Page 9
fixed
assets
such
as
houses,
transport,
machinery,
etc.
Murabaha can be used for purchases of goods needed by the

bank's clients. Salam is useful for financing farmers, trading
commodities
for
the
public
and
private
sectors
and
other
purchases of measurable and countable things. But it must be

kept in mind that buyback and rollover modes may not be used,
because they are seen as a back door to interest.
With
Islamic
financing,
the
need
to
assess
clients'
acceptability is more important than it is for conventional

banks.
The
bank
needs
to
be
vigilant
and
prudent
by
concentrating on the client's integrity as well as his status

regarding property and particularly his willingness to comply
with Shari'ah-compliant contracts.
Islamic
perform
banks,
the
while
functioning
crucial
task
of
within
resource
the
Shari'ah,
can
mobilization
and
efficient allocation on the basis of both PLS and non-PLS

modes. Sharing modes can be used for short, medium and longterm
financing,
import
financing,
pre-shipment
export
financing, working capital financing and financing of single

transactions. To ensure the maximum use of Islamic finance in
the development of the economy, it is necessary to create an
environment that can induce financiers to earmark more funds
for
musharakah-
or
mudarabah-based
financing
of
productive
units, particularly those of small enterprises.

The
non-PLS
complement
modes
the
PLS
acceptable
to
modes,
also
but
the
Shari'ah
provide
not
only
flexibility
of
choice to meet the needs of different sectors and economic

agents in the society. Trade-based modes, such as murabaha,
having less risk and better liquidity options, have several
advantages over other techniques, but may not be as fruitful
Page 10
in
reducing
income
inequalities
and
generation
of
capital
goods as participatory techniques are.

Ijarah-based
financing,
that
requires
Islamic
banks
to
purchase and maintain the assets and afterwards dispose of

them according to Shari'ah rules, requires the banks to engage
in activities beyond financial intermediation and are very
much conducive to the formation of fixed assets and mediumand long-term investments.
On the basis of the above, it can be said that supply and
demand of capital in an interest-free environment have the
additional benefit of providing a greater supply of risk-based
capital.
There
resources
and
is
an
also
active
more
efficient
role
for
banks
allocation
and
of
financial
institutions to play, as required in the asset-based Islamic

theory of finance.
Islamic banks can not only survive without interest, but are
also
helpful
justice
by
in
achieving
increasing
the
the
objective
supply
of
risk
of
distributive
capital
in
the
economy and facilitating capital formation and the growth of

fixed assets and real-sector business activities.
Salam (forward purchase with prepayment of price) has a vast
potential to finance productive activities in crucial sectors,
particularly agriculture, agro-based industries and the rural
economy as a whole. It also provides an incentive to enhance
production, as the seller will spare no effort to produce at
least the quantity needed for settlement of the loan taken by
him as the advance price of the goods.
Salam can also lead to creating a stable commodities market,
especially of seasonal commodities, and therefore to stability
Page 11
of their prices. It enables savers to direct their savings to

investment outlets, without waiting, for instance, until the
harvesting time of agricultural products or the time when they
actually need industrial goods and without being forced to
spend their savings on consumption.
Banks might engage in fund and portfolio management through a
number of asset-managing and leasing and trading companies.
Such companies can exist on their own or can be an integral
part of some big companies or subsidiaries, as in the case of
Universal
Banking
in
Europe.
They
would
manage
Investors
Schemes to mobilize resources on a mudarabah basis, and to

some extent on an agency basis, and use the funds so collected
on
murabaha,
leasing
or
equity-participation
basis.
Subsidiaries can be created for specific sectors or operations

and would enter into genuine trade and leasing transactions.
Low-risk
funds
based
on
short-term
murabaha
and
leasing
operations of the banks, in both local and foreign currencies,

would be best suited to risk-averse savers who cannot afford
the possible losses of PLS-based investments.
Under equity-based funds, banks can offer a type of equity
exposure
through
specified
investment
accounts
where
they
identify possible investment opportunities from existing or

new business clients and invite account-holders to subscribe.
Instead of sharing in the bank's profits, the investors share
in the profit of the enterprise in which the funds are placed
and the bank takes a management fee for its work. Banks can
also offer open-ended multiple-equity funds to be invested in
stocks.
The small and medium enterprises (SME) sector has a great
potential
for
expanding
production
Page 12
capacity
and
self-
employment
opportunities
in
developing
countries.
Islamic
banks may introduce SME-financing funds for various places.

Enhancing the role of the financial sector in the development
of the SME sub-sector can mitigate the serious problems of
unemployment and the low level of exports of such countries.
Problems faced by Islamic Banks in Pakistan:

There are many problems to Islamic banking in Pakistan as
compared to conventional banking system. There is no legal
framework,
lack
of
professionals,
no
central
bank,
Benchmarking for Islamic Banks, to educate the people about

Islamic banking to increase Islamic finance in the market,
innovation and new technology and experience. Fiqa problems
educated scholars are required to compete conventional banking
in Pakistan
Page 13
Benchmark
What Does Benchmark Mean?
A standard against which the performance of a security, mutual
fund, or investment manager can be measured. Generally, broad
market and market-segment stock and bond indexes are used for
this purpose.
Benchmark:
Robert Demilio (1995) defines
Benchmarking as an improvement process used to discover and
incorporate best practice into your operation. Benchmarking is
the
preferred
process
used
to
identify
and
understand
the
elements (causes) of a superior or world class performance in

a particular work process.
Xerox
Corporation,
which
is
the
pioneer
of
the
techniques
application in management practice, defines it as the search

for industry best practices which lead to superior performance
(Codling, S 1992).
From
above
two
definitions
key
points
identified
are
best
practice and superior performance.

For instance Allah says in the Quran, Indeed in the Messenger
of Allah you have an excellent example (best practice) to
follow
for
whoever
hopes
in
Allah
and
the
Last
Day
and
remembers Allah much (best performance).

So any Muslim wants to worship Allah in the best possible
manner should follow the sunnah of the prophet (pbuh). For
instance, if you want to be a best husband, you need to look
and follow the way prophet (pbuh) has behaved with his wife.
So a Muslim is expected to benchmark the sunnah of prophet
(pbuh)
in
each
and
every
sphere
of
life
to
performance in both worlds, here and hereafter.
Page 14
get
the
best
The Islamic Benchmark

Definition
The IIBR is defined as the profit rate that an individual
Contributor Panel bank would perceive to be reasonable for
Shariah compliant funding
were it to do so by asking for and
then accepting inter-bank offers in reasonable market size,

just prior to 11.00 am Makkah local time (GMT + 3). The value
dates for settlement are T+0 for Overnight funds and T+2 for
all other tenors.
Background
Since the establishment of the first Islamic commercial bank
in 1975, the Islamic finance industry has been searching for
an indigenous benchmark that can be applicable to transactions
compliant with Islamic law (Shariah compliant).
As
an
ethical
interest
and
financial
shuns
all
system,
Islamic
finance
interest-related
prohibits
transactions
and
instruments as these are contradictory to the core principles

of
Islam.
reliable
Despite
Islamic
this
prohibition,
interbank
in
benchmark,
the
absence
Islamic
of
banks
and
financial institutions have continued to utilize conventional

interest based benchmarks to calculate their cost of funding
with no reference to either their assets risk profile or the
regional particularities of Islamic banks.
The Islamic Interbank Benchmark Rate (IIBR) serves to address
some
of
these
concerns
by
developing
rate
that
is
contributed by and is indigenous to a global panel of Islamic

banks and Islamic Banking windows with fully segregated funds.
Page 15
Logic against Interest rate Benchmarking:

Prophet (pbuh) has forbidden copying non Muslims. He suggested
fasting for two days on Muharram while Jews fast for one day, only
to differentiate practice of Muslims from non Muslims. Riba is a
practice of non Muslims. So it should not be benchmarked. Every
kinds
of
transaction
in
Islamic
finance
should
be
able
to
differentiate from the practice of conventional finance.

Dr, Zakir Naik, the most famous Islamic scholar of time argued that
Profit rate of Islamic banking products cannot be same for
all the products. In a general day to day sale transaction we
can see that profit rate of sale of computer and vegetable is not
same. Therefore Islamic banks should have a price index or profit
index for different types of products. In a recent study by post
graduate students of International Islamic university Malaysia shows
that using rental rate is better than interest rate as because it is
stable and linked with real economy. They suggested that there
should be different rental index for different areas to fix rental
rate
to
implement
ijara
contract
for
home
financing
based
on
Musharakah Mutanaqisah Partnership (MMP).
Impact
of
interest
rate
benchmarking
on
Islamic
banking:
Benchmarking interest rate though does not invalidate sharia rulings
but it resembles like a conventional banking product from the
outfit. That is why some critics of Islamic banking say, Islamic
banking allows riba from the back door. Benchmarking interest
rate cannot completely differentiate between an Islamic products and
conventional
products.
Hence,
stakeholders
lose
confidence
on
Islamic branding. Mohammad Amin (2011) has shown how interest rate
benchmarking brings same result in fixed rate mortgage and property
finance using Murabaha (See Appendix A)
Page 16
The Islamic Interbank Benchmark Rate ('IIBR')

Definition
The
Islamic
Benchmark
Rate
Interbank
('IIBR')
is calculated by Thomson
Reuters based on a time
tested methodology agreed
upon in consultation with
the
Islamic
Benchmark
Committee and approved by

the Shariah Committee.
The IIBR is defined as the profit rate that an individual
Contributor Panel bank would perceive to be reasonable for
Shariah compliant funding
were it to do so by asking for and
then accepting inter-bank offers in reasonable market size,

just prior to 11.00 am Makkah local time (GMT + 3).
The value dates for settlement are T+0 for Overnight funds and
T+2 for all other tenors.
Methodology
A
poll
of
approximately
16
pre-selected
banks
contributed
rates are snapped by Thomson Reuters contributions technology

(Thomson Reuters Spreadsheet Publisher or TRSP) at 10.45 AM on
every business day (Sunday - Thursday).
Banks are asked to contribute rates between 9.00 AM - 10.44 AM
Makkah local time (GMT +3) as per the following question:
Page 17
What is the expected profit rate that you would distribute for
an interbank Shariah compliant funding transaction, were you
to do so by asking for and then accepting inter-bank offers
for a market amount of USD for the tenors specified below?
Over Night
3 Months
1 week
6 Months
1 Months
9 Months
2 Months
12 Months
Thomson Reuters undertakes both automated and manual audit and

review
procedures
at
this
stage
to
ensure
that
the
rates
contributed are genuine.

The rates are ranked from highest to lowest and the top and
bottom quartiles (25%) of the rates are excluded to ensure
that
outliers
contributed
do
rates,
not
8
influence
rates
are
the
distribution
excluded
(from
each
of
16
the
highest and lowest rates).

The arithmetic mean (average) of the remaining mid quartiles
values is then calculated to produce the IIBR, rounded to 5
decimal places.
Criteria:
In
order
to
publish
the
rate,
certain
conditions
fulfilled; which include:
A minimum of 8 banks contributing to each tenor
Page 18
must
be
Banks must supply rates to all points on the curve (all

tenors)
Banks must quote every day Sun-Thurs (although as a

fallback and to help reduce the incidence of non fixing
days a minimum number will be required (8)
contributor
will
be
permitted
rates for one additional day
Page 19
to
maintain
the
same
Timing of Publication
Official Reference Time:
The official reference time in relation to the IIBR is Makkah
time (GMT +3)
Makkah is regarded as the holiest city in Islam and is located
in
the
Hejaz
region
of
Saudi
Arabia,
approximately
73
km
11.00
AM
inland from Jeddah.
Publication Timings:
The
official
publication
time
for
the
IIBR
is
(Makkah)
The publication will follow the
1. Rate contributions for the IIBR will be accepted from
9.00 AM - 10.44 AM (Makkah)
2. The official snapping time will be 10.45 AM
3. An audit period will follow from 10.45 AM -10.59 AM
4. The
official
rate
for
that
particular
day
will
be
published at 11.00 AM.
Publication Days:
The IIBR is published every business day in the GCC: Sunday Thursday (provided minimum number of contributors is achieved
except for the two major Muslim festivals (Eid) and New Years
Day 1st of January. For certainty, the IIBR will not be
Page 20
published on the 1st Shawwal and 10th Dhul Hijjah, the exact
dates of which are determined by the official authorities in
Saudi Arabia.
Contributory Panel:
The
Contributory
coordination
Benchmark
their
with
Committee
rates
Reuters
Panel
to
in
is
the
to
order
calculate
the
banks
in
Islamic
contribute
for
Thomson
the
IIBR.
The official Contributory Panel for the

as of 22 November 2011 includes:
a) Abu Dhabi Islamic Bank
b) Ahli United Bank
c) Al Baraka Bank
d) Al Hilal Bank
e) Alinma Bank
f) Al Salam Bank
g) Bahrain Islamic Bank
h) Barwa Bank
i) Dubai Islamic Bank
j) Ithmaar Bank
selected
Page 21
IIBR
k) Kuwait Finance House

l) Masraf Al Rayan
m) National Commercial Bank (Al Ahli)
n) Noor Islamic Bank
o) National Bank of Kuwait
p) Qatar Islamic Bank
q) Sharjah Islamic Bank
Unless
advised
otherwise,
this
Contributor
panel
remains
current at the time of viewing.

A stringent and transparent governance framework advised by
the Islamic Benchmark Committee and approved by the Shariah
Committee regulates the selection, admission and exclusion of
Contributor panel banks.
Governance:
The IIBR is governed by a stringent and transparent governance
framework,
which
includes
the
appointment
body, the Islamic Benchmark Committee and

appointment
of
Shariah
Committee
to
ensure that the benchmark is in compliance

with principles and laws of Islam.
Islamic Benchmark Committee
Shariah Committee
Islamic Benchmark Committee:
Page 22
of
an
oversight
the
The IIBR is advised by the Islamic Benchmark Committee which

meets at least once annually for an Annual Review and under
extraordinary circumstances, can meet as called, to remove or
include contributors.
The
Committee
members
are
appointed
by
quorum
(quorate
defined as at least 2 representative banks, Thomson Reuters,

AAOIFI and the Chairperson or the Vice Chairperson (where the
Chairperson
is
unable
to
attend)).
New
members
may
be
nominated by any of the existing members, Thomson Reuters or

by the applicant itself.
The current members of the Islamic Benchmark Committee are:
1)Independent Members
2) Representative Bank Members
Page 23
1)Independent Members
a) Professor Abbas Mirakhor
b) Mr. Ismail Dadabhoy
c) Accounting
and
Auditing
Organisation
for
Islamic
Financial Institutions (AAOIFI)

d) Association of Islamic Banking Institutions Malaysia
e) Bahrain Association of Banks
f) Hawkamah Institute for Corporate Governance
g) Islamic Development Bank
h) Statistical, Economic and Social Research and Training
Centre for Islamic Countries (SESRIC)
i) Thomson Reuters
2)Representative bank members

a) Abu Dhabi Islamic Bank
b) Ahli United Bank
c) Al Baraka Bank
d) Al Hilal Bank
e) Alinma Bank
f) Al Salam Bank
g) Bahrain Islamic Bank
Page 24
h) Bank Muamalat Malaysia Berhad

i) Barwa Bank
j) CIMB Islamic Bank
k) Dubai Islamic Bank
l) Ithmaar Bank
m) Kuwait Finance House
n) Masraf Al Rayan
o) National Commercial Bank (Al Ahli)
p) Noor Islamic Bank
q) Qatar Islamic Bank
r) RHB Islamic Bank
s)
Sharjah Islamic Bank
Shariah Committee:
A Sharia Board certificates the Islamic financial products as
being
Sharia-compliants.
contracts
and
provides
It
thereby
reviews
an
opinion
about
the
whether
related
those
agreements would be permissible under Islamic Law.
Duties of Sharia Committee:

The duties of a Shariah Supervisory Board or Shariah Committee
are to advise and certify in form of a legal opinion (fatwa)
certain financial products of a financial institution.
Page 25
A decision of a Shariah Board is made binding by internal

decision to the Islamic financial institution. Between the
institution and the client contracts are typically governed by
non
Islamic
law
which
raises
enforcement.
Page 26
the
question
of
legal
Proposed Alternative Islamic benchmarks:

However
some
efforts
have
been
made
to
develop
Islamic
financial benchmark. The best effort has been made by a group

of the prominent academicians from Islamic university Malaysia
under supervision of ISRA (Islamic Sharia Research Academy for
Islamic
Finance).
In
that
research
paper
named
Islamic
Pricing Benchmarking; authors have composed all the previous

proposals
on
Islamic
benchmark.
They
found
mainly
five
proposals:
1
21.
Rate of Profit Mechanism Model
3Proposed by Abd al Hamed al-Ghazalie (1414 AH): According

to him, this can be achieved by analyzing the rate of
profits in the money market. He proposes that it is a
more rational way that promotes justice for all and fits
the nature of economics.
1
22. Rate of Dividend of Islamic Bank Deposits and

Investment Accounts Model
3Suggestion by Muhammad Abdul Halim Umar (2000): According
to him, a benchmark can be created from the dividends
distributed by Islamic banks to their depositors. It will
remove uncertainty and doubt by replacing the interest
rate
with
mathematical
rate
index
of
as
profit.
It
will
compared
to
its
provide
conventional
counterpart.
1
23. The Creation of an Inter Islamic Banks Market
Based on Islamic
According to Shaykh Muhammad Taqi Usmani, the purpose can be
achieved by creating a common pool which invests in asset-
Page 27
backed
instruments
like
musharakah,
ijarah,
etc.
If
the
majority of the asset pool is in tangible form, like leased

property or equipment, shares in business concerns etc. its
units can be sold and purchased on the basis of their net
asset value determined on a periodic basis. These units may be
negotiable and may be used for overnight financing as well.
Banks having surplus liquidity can purchase these units, and
when they need liquidity they can sell them. This arrangement
may create an inter-bank market, and the value of the units
may
serve
as
an
indicator
for
determining
the
profit
in
murabaha and leasing also.
1
24.
Tobins Q
Theory proposed
by Abbas
Mirakhor
(1996).
3He proposes a method by which, the cost of capital can be
measured
without
resort
to
fixed
and
predetermined
interest rate. The suggested procedure is simple. It is

based on the well known Tobins q, and can be used in the
private
as
well
as
the
public
sector
to
obtain
benchmark in reference to which investment decisions can

be made.
1
25.
Benchmark
That
Fits
both
Islamic
and
Conventional Banks by Aznan Hasan.

According
to
him,
in
Malaysia
there
are
various
ways
to
determine the interest rate based on different sectors; for

instance,
KLIBOR,
Interbank
Money
Market,
BLR,
BFR
and
Overnight Policy Rate (OPR). It is possible to use the rate of

OPR in line with Shariah principles which suit both Islamic
banks as well as conventional banks. It is usually determined
by BNM in order to strengthen the monetary policy as well as
Page 28
to control the supply and demand and fair circulation of funds

in the money market. Then, based on that rate, the banks will
determine their own respective interest rates that will be
used
to
price
all
loans
and
financing.
Indeed,
all
the
previously mentioned pricing rates are affected directly by

OPR, which is determined by BNM.
After
analyzing
all
previously
offered
model
for
Islamic
benchmark, ISRA research team have tested two models based on

CAPM
(Capital
Asset
Pricing
Model)
and
APT
(The
Arbitrage
Pricing Theory). After examining both models with different

theory of economics, they found some limitation of CAPM model.
With the objective of linking benchmark with real economic
performances, they proposed APT model for Islamic benchmark.
Their study recognized four macroeconomic variables as having
good
return
predictability
for
all
the
sectors:
industry
production growth, to capture the overall economic growth; the

money supply changes (M2), to capture the monetary liquidity;
the
ringgit
exchange
rate,
to
reflect
the
relative
global
competitiveness; and the Kuala Lumpur Composite Index returns,

to reflect the overall market condition. A weighted average of
the sectors returns determined through the APT is suggested
here as a viable Islamic pricing benchmark rate for the market
as a whole.
From the above discussion, it is seen that criticizing Islamic
finance
for
practice,
benchmarking
there
are
interest
many
rate
is
limitations
in
easy
but
in
findings
an
alternative of it. Many researchers have been done on this

issue,
but
still
Islamic
finance
is
waiting
for
viable
solution. There is no do doubt that Islamic finance should get

rid of this criticism as early as possible. Hopefully, with
the maturity of Islamic finance better suggestions will come
in future.
Page 29

Separate Benchmark For Islamic Banks

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Separate Benchmark for Islamic Banks

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