Nivel de simulación

During the 1940s – 1970, the conceptual and political foundations for Islamic banking were laid down. The Islamisation movement which gained momentum in the post- colonial era encouraged research into the concept of an Islamic financial system and theoretical models of Islamic banking were developed throughout the 1950s and 60s (Siddiqi, 2006; Billah, 2007). In the 1960s, pan-Islamism29, the defining political movement for Islamic banking began and gained substantial support by the end of the decade (Warde, 2000).

The earliest literature on Islamic banking highlighted the conceptual struggle with several incoherent proposals and inconsistencies (Visser, 2013). The idea of partnership between the bank and its clients was constant but the exact conditions of this

partnership were not. Qureshi (1946) for example mentioned loss sharing, but not profit sharing while Ahmad (1952) left the nature of partnership undefined. Uzair (1955) however, systematically invoked the mudarabah contract as the basis for interest-free banking and his work is widely considered as the first reference to the structure of two- tier mudarabah model (El-Gamal, 2006). Al-Arabi (1966) advanced the idea of two-tier mudarabah, adding that an Islamic bank could not only invest depositors’ but also its shareholders’ funds in this manner. He emphasised the distribution of profit-and-loss sharing between parties to be in strict accordance with the sharia (i.e. the traditional mudarabah contract, described in section 3.3.1). Irshad (1964) however, suggested a 50- 50 profit-and-loss share between the parties, contradicting the sharia principles. Finally, a detailed outline was produced in 1968 by Siddiqi (1968, 1983a) which elaborated on the two-tier mudarabah model to include the use of both mudarabah and musharakah. Siddiqi argued that such a PLS banking system would become a viable alternative to conventional interest-based banking. The issue of consumption loans however was underplayed and not adequately addressed (Ariff, 2001).

29

Pan-Islamism is the political movement which propagated unifying the world’s Muslim as a single nation, based on the idea of solidarity amongst the Islamic ‘ummah (community) bounded by common religious beliefs. It was sponsored by King Faisal of Saudi Arabia in opposition to the pan-Arabism movement promoted by the Egyptian president Gamal Abdel Nasser. The latter was a movement against western colonialism which promoted Arab and Third World solidarity as well as the ideas of nationalism, socialism and secularism. This position was at odds with Saudi Arabia which has always been a

conservative monarchy with strong links to the West (Warde, 2000; Haniffa and Hudaib, 2010).

38

Independently of these developments, a number of private initiatives applying Islamic finance principles appeared in Pakistan, Egypt and Malaysia, although not all were successful (Warde, 2000; Rehman, 2010). Chronologically, the Pakistan initiative came first with a local interest-free credit network founded in the late 1950s. Set in a rural location, the institution was financially supported by a few pious landlords willing to deposit funds without a return to advance credit in form of qard hasan to other much poorer landowners for agricultural development. A fixed administrative fee was charged to cover the institutions’ operating expenses. The institution quickly grew popular with no shortage of borrowers. However, with a shortage of loanable funds and staff and lack of autonomy over lending decisions, it did not survive beyond the early 1960s30 (Wilson, 1983; Warde, 2000).

As the Pakistan initiative came to an end, a similar institution was founded in the rural area of the Nile Delta in Egypt. Founded by Dr Ahmed el-Naggar31 who was highly influenced by German mutual savings and loan associations, the Mit Ghamr Savings Bank began operations in 1963 The bank focused on addressing the financial needs of rural Egyptians underserved by the conventional banking system by offering interest- free loans, on which a small administrative fee was charged. Unlike the Pakistan initiative, however, the depositors and borrowers in Mit Ghamr belonged to the same group. To receive an interest-free loan, borrowers had to place a minimum amount with the bank for at least a year, which ensured the bank did not face a shortage of loanable funds. Loans were given for a variety of economically productive activities32 and were primarily short-term (1 to 3 years). In line with Islamic teachings, which condemn hoarding, emphasis was placed on the circulation of funds and thus no grace period was permitted on repayments. The bank primarily earned a return by engaging in industry and trade directly or via partnerships and financing businesses on PLS basis (Wilson, 1983, 1995; Warde, 2000; Tripp, 2006; Billah, 2007; Rehman, 2010).

30

On the one hand, depositors viewed their payments in the bank as a one-time initiative which led to a shortage of loanable funds. On the other hand, depositors took significant interest in how the bank loaned out the funds, leaving the bank officials with very little autonomy over lending decisions. Recruitment problems with potential employees unwilling to work in an uncertain countryside initiative resulted in shortage of staff. Together, these problems led to a loss of enthusiasm and finally the closure of the institution. Outstanding loans were treated as bilateral arrangements between landlords which were mostly paid off during the early 1960s (Wilson, 1983).

31

Ahmed al-Naggar later became the Secretary of the International Association of Islamic Banks (IAIB) (Warde, 2000).

32 _{These included agricultural improvements including irrigation systems, the purchase of farm animals}

and machinery, sewing machines and even housebuilding (Wilson, 1983).

39

Mit Ghamr was a success. Unlike the conventional commercial banks, Mit Ghamr was highly regarded and trusted by the local rural population33. It effectively harnessed funds from farmers, small-scale traders and landowners who, as devout Muslims concerned about dealings in riba, had abstained from using the conventional banking sector (Wilson, 1995). At its peak, the bank operated via nine branches, had 250,000 depositors with deposits amounting to almost 2 million Egyptian pounds (Warde, 2000). The bank also contributed significantly towards socio-economic development particularly the reduction in rural indebtedness as it gave countryside borrowers an alternative to local moneylenders who charged excessively high interest rates (Wilson, 1983). Despite its success, the bank came to a controversial end. Although not

completely shut down, the bank was nationalised by the government, taken over by the Nasser Social Bank with its base moved to Cairo and its original countryside operations hampered34 (Wilson, 1995; Warde, 2000).

Another prominent initiative, Tabung Haji (Pilgrims Fund Board), a Malaysian savings and investment institution, began operations in 1963. It was created to help Malaysian Muslims save and build their wealth for the annual Islamic pilgrimage to Makkah (the Hajj). With its purpose linked to an act of worship, all investments made by Tabung Haji were naturally required to be sharia compliant. The institution operated on the PLS model. Focused on the mass retail market, it pooled small savings, invested in a variety of projects and shared the profits with its customers. The underlying approach adopted was consistent with Islamic ethos, favouring savings and growth of wealth through investment in productive activities and discouraging debt, in contrast to the

conventional banking system which promotes personal debt. With its strong roots in the community, a clear business structure and government support, Tabung Haji continues its operations to this day (Siddiqi, 2006; Rehman, 2010, Haniffa and Hudaib, 2010). 33 _{The rural population was quite suspicious of all outsiders, particularly educated urbanites. Very few}

individuals had any experience of commercial banks which were seen as “alien institutions”. Mit Ghamr on the other hand, achieved significant personal support from the locals who considered it their own. The bank’s staff which comprised of educated Muslim enthusiasts with previous banking experience, gained confidence of the conservative countryside community as they were seen to be devout Muslims

worshipping alongside the locals and sharing similar moral values (Wilson, 1983, p. 76).

34

The exact reasons for the bank's nationalisation are unclear. Some suggest the bank faced financial challenges and struggled to cover administrative expenses, increase salaries and therefore was unable to recruit additional staff. Others however argue that the bank was commercially viable but unpopular with the government, seen as a potential political threat and was also unpopular with the Central Bank of Egypt and state-owned banks who had concerns over how the bank was regulated. Given Mit Ghamr’s popularity, its closure would have led to widespread discontent and thus the Egyptian government decided, after much debate and delay, to nationalise it in 1972 (Wilson, 1983, 1995; Warde, 2000).

40

These institutions are important precursors to modern Islamic banks and although some attribute the roots of contemporary Islamic banking to these institutions and particularly Mit Ghamr (Billah, 2007); it is important to note that none of these institutions were actual formal banks. Commercial banking activities including transactional services and short-term placements were never considered a part of these institutions’ aims (Warde, 2010; Haniffa and Hudaib, 2010). Instead, these were nonbanking financial institutions (NBFIs) which were established to address very specific needs of the local Muslim community in line with Islamic principles (Rehman, 2010). Independently-led and geographically distant, these initiatives did share a number of characteristics. First, despite their adherence to Islamic principles, none of these institutions made explicit reference to the religion to claim an Islamic identity. Second, as demand-driven

initiatives, they focused on a genuine financial need. Finally, religiously inspired, these initiatives made significant contribution to socio-economic development. Accordingly, these are recognised as some of the earliest modern-day initiatives, which led by “sacred intentions”, embodied the true spirit of sharia and Islamic finance (Warde, 2000; Rehman, 2010; Haniffa and Hudaib, 2010, p.87).