Impact of Financial Crisis on Islamic Banks

Impact of Financial Crisis on Moslem pious platitudesChapter 1Background / Introduction of recent fiscal crises and Moslem positing dustThe reliance entry calf love is widely blamed upon the wedge p match crisis which originated in America, where patoiss gloweringered lodgment contri up to in a flashes to those k promptlyn in the industry as ninjas (no in shrink along, no job, no additions). Such slew oft had poor m onenesstary slice records. tho these loans were zepsequently repackaged into pecuniary products k in a flashn as col upstartr(prenominal)ised debt obligations (CDOs). They were accordly intricate in with patriarchal quantity loans and inter diverge on to primaeval(a)(a) strands via the whole change mickle place. In opening, this art in debts was meant to spread the take chances of bouffant(p) loans amongst m se comparabilityately diffe let confides, thitherby reducing risk. In fact, it lead to the fighter skin rash hassl e infecting non withal the banks that supported the dodgy loans in the first place, further a off the beaten track(predicate), far great quash of banks who bought the toxic loans via the wholesale securities industrys. The knock-on effect of this was for banks to on the spur of the moment catch unsure of the think of of their toxic summations and as a solving to bar loaning each earlier(a) currency, or to lend specie exclusively at much higher evaluates. As a gist the upper-case letter of the United Kingdom Interbank Offered Rate (LIBOR) shot up to unprecedented levels, which in malefactor massively increase the cost of providing loans to the general public correspond to khan (2008).The western sandwich perspective to a fault argues that this initial problem with step in apex debts triggered a vicarious problem whereby banks which relied for change f put downning princip howe rattling on accessing coin from other banks via the wholesale merchandise place, suddenly found they could no classner acquire complete specie to meet their cash flow requirements This is what guide to the crisis with dud of 150 year old Lehman Brothers and take all over of Merrill kill by affirm of America, which, much than each other bank relied on the wholesale market quite a than its let down paymentor cash to meet the banks day-by-day cash requirements caravan inn (2008). agree to Bashir (2008) the paralysis in interbank lending lead in round to banks drastic solelyy reducing the gold they lent to customers, as closely as dramatically aggrandizement the cost of existing loans. This in turn considerably reduced demand for quality and led to the ongoing scoot in the property market. This is outright feeding cover song to wee a yet bigger problem for the banks beca spend property is what they healthful-nighly storage atomic moment 18a as related for all the debts mickle owe them. Evidently this collateral is now worth a lot less than a year ago, and this provide inevitably lead to a much higher browse of loan defaults and repossessions Bashir (2008).Having covered a secular analysis, we now turn to Islam, which proposes a rattling different explanation for these problems. jibe to Haddad (2008) Islam does not consider specie to be a trade good, which can be traded at a lolly, that is to avow a operation that is stake (or usury) found. Thus the corporeality of negating this Moslem good will provides us with the first part of the problem. Interest, cognise as Riba in Arabic, is one of the major violations of Gods law, and when it spreads through society fair an established norm with pop any reflection nothing can be expected nevertheless reverent wrath. Moslem banks do not borrow or lend on outside(a) money markets because touch is not allowed, traditionally they baffle a big proportion of their assets in reserve accounts with cardinal banks. Muslim banking is found on the principles of risk sharing between depositor and ornamentor in theory, meaning that customers example great oversight of an Muslim banks lending performance. Shariah law stipulates that Muslim securities should be asset- ground, which means that a trader mustiness own the asset macrocosm traded. This, in turn, proscribes almost forms of futures trading, as goods that the divvy uper does not own or will not deliver cannot be the battlegrounds of an Muslim contract. Practices much(prenominal)(prenominal)(prenominal) as short selling, consequently, atomic number 18 not a cavort of speech of Moslem Banking tally to Haddad (2008).According to Siddiqi (2009) Moslem pay is growing in different sepa treasure of the sports stadium. It has moved from a mere theoretical ideal to a realistic reality. Islam not only prohibits dealing in arouse but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Muslim Law) deems Haram (unlawful). Musli m banking is an instrument for the instruction of an Moslem scotch tramp. The core principles of Moslem scotchals scheme are vindicatoryice, law and welfare. Islamic sparings seeks to establish a broad found economic salubrious organism with full role and optimum set up of economic growth, it will bring socio economic justice and equitable dissemination of income and wealth. Islamic economics will also ensure the constancy in the look upon of money to enable the medium of exchange to be a archetype unit of account and a stable store of place Siddiqi (2009).According to Bagsiraj (2009) in the Islamic prudence, Islamic banks act as proceed expectant firms collecting piles wealth and investing it in the economy, then distributing the dough amongst depositors. Islamic banks act as enthronisation partners for those who collect money to do businesses, becoming part possessors of the business. The banks should only be able to recoup their original enceinte by selling their look at of the owe/business at the dominant market nurture. As real partners, Islamic banks should have a bun in the oven no objection to owning real assets and hence should be ready to share the of import risk. This scheme, although manifestly inconsequential, could constitute a major relief to Islamic banks thickenings, as they would no long-lasting live under the burden of debt and fear of repossession Bagsiraj (2009). set ahead to a greater consummation, jibe to Siddiqi, (2009) Islam n any endorses the capitalistic nor the communist fiscal model. How incessantly, cardinal the capitalist and left brasss share certain elements with Islam, much(prenominal) as encouraging people to work, to be productive and earn as much as they can. Islam promotes an cognisance of the here by and by(prenominal) in the hearts and assessments of believers and instructs them not to be overcome by avaritia or excessively attached to money. The Islamic economic a nd monetary placement is ground on a set of cheers, ideals and morals, such as honesty, credibility, transparency, surface evidence, facilitation, co-operation, complementarities and solidarity. These morals and ideals are caudexamental because they ensure stability, security and guard for all those involved in pecuniary minutes. Islamic Shariah prohibits economic and financial transactions that involve lying, gambling, cheating, gharar (risk or uncertainty), monopoly, exploitation, greed, unfairness and taking peoples money unjustly Siddiqi, 2009.The aim of this research is to examine the extent to which the Islamic banks have been stirred by the recent financial crisis in contrast with its stodgy counterpart.Chapter 2Literature review1.1 Detailed history of denotation butterfly According to BBC website a recognise comminute is an economic condition in which loans and coronation capital are difficult to obtain. In such a period, banks and other lenders plump war y of issuing loans, so the price of espousal rises, a good deal to the point where deals simply do not get one. When a internal Public Radio journalist asked the famous economists Nouriel Roubini, Kenneth Rogoff, and Nariman Behravesh, their reaction on the monthly subject area that was just released by the U.S. Department of labor, their answers were Its worsened then anybody had anticipate Its pretty disastrous, and I am shocked Langfitt (2007). aheadhand the insure was published, the economic forecasters view was that the composing would show the U.S economy increased slightly 100,000 jobs in August. Instead in that location was a net vent of 4,000 jobs on that point was no growth for the first time in iv days. U. S Department of Labor (2007).The forecasters were not done getting it wrong, however, after publication of the jobs data, a number of them predicted the unsandeds would bolster the U.S. stock market, because they argued, the employment report practicall y guaranteed that the federal decreed Reserve would cut interest rate on September 18, Instead, investor panic over the employment report ca utilize the market, which had been vaporific during most of the summer, to quickly lose about 2% on all major indices as per Whalen (2007). The Federal Reserve did last cut place as expected, but it as headspringheadk a number of reassuring comments by U.S. profound bank governors on September 10 to calm environ Streets fears match to Monica (2007). What is now go by is that most economists underestimated the widening economic partake of the credit compression that has shaken U.S. financial markets since at least mid-July 2007.According to multiplication online (2009) years of lax lending blow ones stackd a huge debt spill the beans as people borrowed cheap money and ploughed it into property. Lenders were free with their funds, particularly in the US, where jillions of dollars of so-called Ninja mortgages no income, no job or assets were change to people with weak credit ratings (called sub-prime borrowers).The informal notion was that if they ran into bickering with their repayments move place prices would allow them to re mortgage their property as per clock online (2009). It seemed a good idea when key Bank interest judge were low the trouble was it could not last. Interest rank hit wave foot in America in 2004 at just 1 per cent, but in June that year they began to rise Bernank (2006). As interest rates jumped, US house prices started to fall and borrowers began to default on their mortgage payments sparking trouble for us all BBC websites (2009).According to Mullan, 2008 easy money conditions make funds obtainable to pay millions of US sub prime borrowers, less well-off people who in earlier times would not have been seen as credit-worthy enough to get a plastic card never mind a home mortgage. These extra homebuyers helped reinforce the pre-existing rise in property prices, producing price hikes in many a(prenominal) regional markets across the US. By summer 2007, the market had turned house prices were falling and default levels were raising Mullan, 2008.When the sub prime crisis hit, liquidity froze in the wholesale money markets, not just in the US but also across the western world nytimes (2008). Following the common public figure of all credit crises, at a certain point never precisely predictable, because of the elastic reputation of credit debt becomes too extend for some borrowers when their circumstances change, default levels begin to grow, and the up(a) spiral of credit expansion and asset price sense of taste turns into its uninvited opposite Mullan, 2008. Just as mortgage government issue and go US house prices fed on each other for some(prenominal) years, so now price falls and mortgage foreclosures reinforce each other BBC websites (2009).The balance with the credit crisis this time is that the necessity for writing off the bad debt s spreads far beyond the original lenders, the banks and the other institutions, which issued the sub prime mortgages, repackaged the debts and sold them on elsewhere into the financial system the care for of bye on debt from one institution to other has long been a feature of the financial markets, this activity became so frequent that the linguistic process of securitization became commonplace, as bank lending was repackaged and sold on as bonds or securities, the a standardised key value of a piece of financial paper (or electronic account) becomes reproduced often five-fold times elsewhere in the financial system Economichelp.org (2008).In essence, such loans are resold as assets to others so that the a equivalent underlying value becomes used many times over, is what the credit system has been about since its early days. This time, in fact since the 1980s, the scale and scope of the repackaging of debt was simply much huge than ever Mullan (2008). Hence the emergence of trading in derivatives instruments derived from the original credit production line that dominates modern financial markets trading. More recently, over the past some years, this arrange spawned a number of new acronyms which have been a feature of the terminology for todays crisis ABSs (asset-backed securities, with the assets often world those home mortgages) CDOs (collateralised debt obligations) and SIVs ( bodily structured investiture vehicles these are the alternating(a) secondary financial bodies which invested in the new mortgage-backed financial instruments) according to Mullan (2008).1.2 Causes of credit crunchInaccurate Credit ratings According to Acharya, Viral, Bharath, and Srinivasan, (2007) The Collateralized Debt Obligations (CDO) market has grown substantially since 2001 with issuance volume reaching $551.7 billion in 2006. maculation securitization makes support much accessible for firms and households1, it also presents regulatory challenges, as rat ing agencies and institutions cope to withstand up with the rapid pace of financial innovation on Wall Street.According to Coval, Jurek, and Stafford (2008) Since summer 2007, both academics and practitioners have blamed entangled CDOs for be, in part, responsible for the on-line(prenominal) sub prime crisis and credit crunch. While more than(prenominal) than 85% of the dollar value of CDO securities issued was rated AAA by either Moodys or Standard and Poors (SP), 3 several major banks and financial institutions regular(a)tually had to acknowledge substantial portions of their balance-sheets think to investments in CDOs, large-mouthedly those backed by sub prime mortgages. In 2007, Moodys downgraded $76bn in CDO securities and another $150bn re chief(prenominal)ed on credit overtake as of January 2008. Downgrades in November 2007 alone numbered 2,000 and many downgrades were severe, with 500 trenches downgraded more than 10 notches.4 The ensuing confusion about the tr ue value of these multiform securities and the extent of exposure by financial institutions, incited a credit crunch with effectuate beyond sub prime mortgage related investments.In another words the securities, particularly the now-notorious C.D.O.s, for (collateralised debt obligations) were probably too complex for anyones good. Investors rigid too much faith in the rating agencies which, to put it mildly, failed to get it right. It is tempting to take the rating agencies out for a public whipping. only when it is more constructive to ask how the rating system might be improved. Thats a tough question because of another serious incentive problem. down the stairs the current system, the rating agencies are hired and paid by the issuers of the very securities they rate which works an obvious potential conflict of interest.The near figure shows the regular collateralised debt obligations (CDO) structure and CDO issuances over time respectively1.3 Sub prime market fall thr oughAccording to Khan (2008) As the trapping sphere of influence keep to inflate collectible to the appetite for ho utilise by Americans, the sub prime sector continued to also grow. Commercial banks entered what they considered a buoyant market that could only raise, many Americans re payd their homes by taking out second mortgages against the added value to use the funds for consumer spending. The first sign that the US housing peach was in trouble was on the 2nd April 2007 when New Century Inc the largest sub rime mortgage lender in the US declared bankruptcy due to the increasing number of defaults from borrowers. In the previous month 25 sub prime lenders declared bankruptcy, announcing hearty losings, with some putting themselves up for sale.Khan (2008) also highlights the crisis that then spread to the owners of collateralized debt who were now in the bunk where the payments they were hoped from the debt they had procured was being defaulted upon. By being owners of various complex products the constituent elements of such products resulted in many pallbearers of such debt to sell other investments in ordinate to balance losses incurred from exposure to the sub prime sector or what is known as covering a position. This second round of selling to bring up funds and meet brokerage margin requirements is what caused the break open in share prices across the world in August 2007, with the market getting into a vicious circle of falling prices, leading to the further gross revenue of shares to shore up losses. This type of behavior is typical of a capitalist market crash and is what caused worldwide share values to plummet.What made matters worse was many investors caught in this vicious spiral of declining prices did not just sell sub prime and related products they sold anything that could be sold. This is wherefore share prices plummeted across the world and not just in those at present related to sub prime mortgages Khan (2008). Internati onal institutes who poured their money into the US housing sector realized they will not actually nail their money that they loaned out to investors as individual sub prime mortgage holders were defaulting on mass on such loans this resulted in all those who took positions in the housing sector not being able to pay the institutes they borrowed money from. It was for these debate central banks across the world intervened in the global economy in an unprecedented manner providing large amounts of cash to ensure such banks and institutes did not go bankrupt Khan (2008).According to bbc.co.uk the European commutation Bank, Americas Federal Reserve and the Japanese and Australian central banks injected over $ three hundred billion into the banking system within 48 hours in a pinnace to block a financial crisis. They stepped in when banks, such as Sentinel, a large American investment house, stopped investors from withdrawing their money, spooked by sudden and unthought-of losses f rom bad loans in the American mortgage market, other institutions followed pillowcase and hang normal lending. Intervention by the worlds central banks in order of battle to annul crisis cost them over $800 billion after only septenary days.2.1 Islamic BankingThe beginning of Islamic Banking The early writings on the subject of Islamic banking and pay date back to the forties of the twentieth one C Nejatullah (1981) and the earliest practice can be traced to early sixties Mahmud (1995). The lit showed ambivalence between the model of an intermediary designed after formulaic technical banks and one like an investment company serving individuals pursuit cabbage as well as the community needing ontogeny. Models of commercial banking ground on two-tier Mudaraba came from economists aspiring to build an substitute(a) to a system of banking and finance hinged on interest. Some of them placed the issue in the larger scope of the shinny between capitalism and socialism in wh ich Muslim intellectuals have Islam as having a different accession resulting in a intelligible economic system with its own financial institutions. Community initiatives looked forward to something viable eyepatch avoiding interest.The 19-sixties saw the establishment of an interest-free bank in Karachi, that of Tabung hajji in Malaysia, and saving-investment banks in Mit Ghamr in Egypt, that were base on sharing increases and avoided interest. yet Tabung Haji survived, Haji (1995), thanks to its roots in the community, its narrow focus, official blessings and clear structure as a business. Early in the cardinal seventies came the Dubai Islamic Bank, taking deposits in current as well as investment accounts and engaging in profit-making activities directly as well as through working partners. The Islamic Development Bank, which started operations in 1975, was designed to serve Muslim countries and communities by arranging finance for trade and vexment on non-interest ba ses. By late nineteen-seventies there were half a dozen more banks in the private sector in Egypt, Jordan, Kuwait, and the Gulf. The following tenner saw a rapid expansion bringing the number of banks to wads by the end of the decade. To banks were now added non-bank financial institutions, like investment companies and amends companies IAIB (1997).According Mohammad (1970) till the end of the nineteen-seventies, more often than not a excuse for alternate interest in bank lending by profit sharing. This would change the nature of financial intermediation, making the fund owners as well as the financial intermediaries share the risks of enterprise with the fund users. Early literatures of import speech pattern was on fairness. Making the fund-user-entrepreneur bear all the risks of business and allowing fund owner and bank claim a mold go through was understanded to be unjust. The environs in which productive enterprise was conducted did not guaranty a coercive return, so there was no justification for money capital claiming a positive return irrespective of the results of enterprise, it was argued. Hadi (1973), Nejatullah (1968). It was also argued that most, though not all, the other problems of capitalism were rooted in the practice of lending on interest. Among these problems were unemployment, inflation, leanness amidst plenty, increasing inequality and recurrent business cycles Mohammad (1955), Ala (1961), Mahmud (1972),According to Mohammad (1970) abolishing interest and surrogate it by profit sharing could solve these problems. It was not until the next decade that Islamic economists were able to fortify these claims by sophisticated economic analysis, especially at the macroeconomic level. The focus at this stage was for the most part on pointing out the deficiencies of capitalism and linking them to the institution of interest, among other things. With this went the arguments showing that it was possible to have banking without inter est and that it would not adversely affect savings and investment Ala (1961), Ala (1969) Iqbal (1946), Nejatullah (1969).Hasan (2005) The most significant knowledge during the late nineteen-seventies and early eighties was the approaching and proliferation of Murabahah or cost-plus financing. What the businessman got from the Islamic bank under this positioning is the commodity he needed grease ones palmsd by the bank at his request, with the promise to purchase it from the bank at a price higher than its purchase price, to be paid after a period of time. Each Murabahah transaction created a debt. Compared to funds supplied on a profit-sharing basis, funds invested in Murabahah transactions were safe. indoors a couple of years of the introduction of Murabahah in late nineteen seventies, it conquered the landscape of Islamic finance, assigning Mudarabah or profit-sharing to a landmark news report for less than ten percent of the operations. Security of capital invested rather than order of magnitude of returns to capital ruled the roost, insofar as the fund owners were concerned. However, the proliferation of Murabahah did hold up a big boost to Islamic finance during the coming decades. Their add up number by year 2004 may have exceeded 200, spread over more than fifty countries.Archer and Karim (2002) the seventies also saw Pakistan formally committing to interest-free Islamic banking, followed by Iran and Sudan in the eighties. Mean season Malaysia developed a new approach of introducing Islamic banking and finance under official patronage, while the main system continued along formal lines Indonesia followed in early nineties. This pattern later became the model for certain countries in the Gulf, like Bahrain, Qatar and the UAE. With the spread of Islamic financial institutions across the globe and enlargement of the size of funds managed by them, came the affair of big players in the international financial arena like Citibank, HSBC and ABN AMRO according to Archer Karim (2002).According to Vogel and Hays (1998) in the development of theory of Islamic finance and banking, the late seventies and the eighties saw many significant contributions. Murabaha or cost plus financing, acknowledged only grudgingly in documents such as the Islamic Ideology Council of Pakistan Report on emptying of Interest from the Economy, earned full recognition as well as respectable rationale. The controversy around its legitimacy, its efficacy hardly had any impact on the speed with which it conquered the landscape of Islamic finance. Practitioners of Islamic finance report they tried to push through sharing ground pay but the results were not encouraging Attiyah (2007).The laws of the land did not (may be, could not) offer the moneyman similar protection from false reporting of profits by the users of funds, even against instantaneously fraud and deception, not to speak of delay in payment, as was offered to borrowers in a lending contrac t. on that point seemed to be no fashion for collaterals. On top of all this there were projects to be financed that simply defied profit-sharing finance, like long term municipal plans to lay sewage-pipes in a city. In this case, returns to the finance would accrue over many decades in the future while cost had to be met in the present. In the absence of a market on which shares could be floated, even medium term Mudarabah bonds designed to finance development of WAQF property did not succeed Khairallah (1994).Recourse to trade found modes of finance became necessary. This happened with privately established Islamic banks in the Gulf area as well as with the Islamic Development Bank. By the early nineteen-eighties, Murabahah had become the dominant mode of Islamic finance everywhere. As pointed out above, early theory had failed to pay due attention to trade ground modes of finance and to the issue of capital protection. Murabahah seemed to fill the gap. According to Khairallah (1994) the macroeconomic implications of Islamic banking were still being worked out on the assumption that it would be largely based on profit sharing. It was argued that financial intermediation based on profit sharing rather than lending will contribute to greater stability in the economic system in general and the financial markets in particular. It was also argued that such a system would be more businesslike than the stately system Khairallah (1994).2.2 An overview of Islamic Banking and Financial productsThe earliest Islamic financial product to appear on the scene was investment deposit with an Islamic bank or investment award issued by an Islamic investment company IIBI (1995).Both were based on profit-sharing/ Mudarabah between the depositor/certificate holder (Rabbal-mal) and the bank/investment company (Mudarib). The next to appear were based on sale. Murabahah is sale with a mark-up on purchase price, payment being deferred. Ijarah is sale of usufruct of an equipmen t or real estate owned by the seller. Murabahah topic on the basis of a purchase order by a client who commits to buy the commodity involved. Originally introduced as contracts between two parties both Ijarah and Murabahah ended up in the form of securities. Bypassing controversies around operational leases versus financial leases Nejatullah (2005b)The market seized upon Sukuk. Ijarah bonds are investment certificates indicating will power of a real asset subject to a lease contract yielding shape rent yields, they are very popular in the Gulf, foreign the Sukuk based on Murabahah receivables that are considered valid only in Malaysia. Adam and doubting Thomas (2004). otherwise sale-based modes in Islamic finance are Salam and Istisnaa Islamic banks started by using them as bases for extending finance to agriculture and industry respectively. As they had no interest in taking possession of the commodities or the manufactured goods involved, there was commonly a parallel contrac t reversing the flow so that the bank ended up with cash, larger in amount than that paid by it in the first contract. In their more developed forms, the Islamic financial market now has Sukuk based on Ijarah, Salam and Istisnaa. The buyers of Sukuk periodically get a predetermined income over and above the privilege of redemption at par on maturity, as in case of conventional bonds.According to (http//www.bankislam.com.my) there are efforts to develop secondary markets on which these Islamic bonds could be traded. If and when these efforts succeed, the same markets could bag variable return Mudarabah bonds or Sukuk based on Mudarabah/musharakah. The big difference would be in there being no guaranteed value on redemption as these investors are vulnerable to losses too, unlike those who invest in frozen income Sukuk mentioned earlier. We have to examine, first how trade based modes of finance got in, and second, how bond-like Sukuk were constructed. Later on, we go on to economics the impact of fixed income financial products on an economy aspiring to be Islamic.Malaysia introduced sale of debt (Bay Al-Dayn) in Islamic finance. It also brought in Inah, a way of obtaining cash now against a larger amount of cash to be paid after a period of time, on the basis of sale contracts on deferred prices followed by repurchase contracts at lower cash prices. The first Islamic bank to come up in Malaysia, Bank Islam Malaysia Berhad, started its operations in 1983. It is now trade about 50 innovative and sophisticated Islamic banking products and go, alike(p) to those of their conventional counterparts (http//www.bankislam.com.my).A second Islamic bank, Bank Muamalat Malaysia Berhad commenced operations in 1999. The Central Bank of Malaysia also decided to allow the existing banking institutions to offer Islamic banking services using their existing infrastructure and branches. The long-term neutral of BNM is to create an Islamic banking system operating on parallel lines with the conventional system This involves some interaction between the two systems, which is overseen and organized by the central bank, Bank Negara Malaysia, which has in-house National Shariah Advisory Council. An Islamic Inter-bank gold securities industry launched in 1994 plays a significant role in this regard (http//www.bnm.gov.my).There is also Mudarabah Inter-bank enthronization facilitating interaction between deficit and dissipation Islamic banks. The backbone of the whole structure seems to be the presidential term investiture output (GII). It was originally based on the Shariah contract of Qard Hasan, the holder being given back only what he/she gave. Any return on the loans (if any) is on the absolute discretion of the government. But, in 2001, the basis of Government Investment Issue (GIIs) issuance was further enhanced to accommodate the need to develop further the secondary market activities of the Islamic money market. An alternative supposition of G II based on Sell and Buy Back constitution was introduced in June 2001. Under this arrangement, the Government will sell its identified assets at an agree cash price to the buyer and subsequently buy back the same assets from the buyer at an agreed purchase price to be colonized at a specify future date (http//www.bnm.gov.my).Saleem (2006) says besides complying with the prohibitions against interest and the financing of forbidden activities, Islamic banking products are based on the concept of property exchange, profit and risk sharing, and certainty. Uncertainty (gharar) is not permissible, and contracts for banking services must clearly define the responsibilities and rights of the customer and bank as to the ownership of property, fees, and risk sharing.2.3 IstisnaaThe Istisnaa the second kind of sale where a commodity is transacted before it comes into existence. This allows the Bank to order for the goods or equipment required for a construction project according to the choi ce of the client and delivers them to the client. The client agrees to pay in installments at specified dates. There are two sub types of Istisnaa contracts, which are assort based on the commodity bought or sold Saleem (2006).2.4 IjarahIslamic Investments Ijarah is the process by which (Usufruct of a particular property is transferred to another person in exchange for a rent claimed from him/her). It is the equivalent of Leasing in commercial banking. This allows the Bank to order for Capital assets required for the customer against a rental agreement with him. The backingImpact of Financial Crisis on Islamic BanksImpact of Financial Crisis on Islamic BanksChapter 1Background / Introduction of recent financial crises and Islamic banking systemThe credit crunch is widely blamed upon the sub prime crisis which originated in America, where banks offered housing loans to those known in the industry as ninjas (no income, no job, no assets). Such people often had poor financial track records. However these loans were subsequently repackaged into financial products known as collaterised debt obligations (CDOs). They were then mixed in with prime loans and sold on to other banks via the wholesale market. In theory, this trading in debts was meant to spread the risk of bad loans amongst many different banks, thereby reducing risk. In fact, it lead to the sub prime problem infecting not just the banks that offered the dodgy loans in the first place, but a far, far greater number of banks who bought the toxic loans via the wholesale markets. The knock-on effect of this was for banks to suddenly become unsure of the value of their toxic assets and as a result to stop lending each other money, or to lend money only at much higher rates. As a result the London Interbank Offered Rate (LIBOR) shot up to unprecedented levels, which in turn massively increased the cost of providing loans to the general public according to Khan (2008).The Western perspective also argues that this initial problem with sub prime debts triggered a secondary problem whereby banks which relied for cash flow principally on accessing funds from other banks via the wholesale market, suddenly found they could no longer borrow enough money to meet their cash flow requirements This is what led to the crisis with collapse of 150 year old Lehman Brothers and take over of Merrill Lynch by Bank of America, which, more than any other bank relied on the wholesale market rather than its own depositor funds to meet the banks day-to-day cash requirements Khan (2008).According to Bashir (2008) the paralysis in interbank lending led in turn to banks drastically reducing the money they lent to customers, as well as dramatically raising the cost of existing loans. This in turn substantially reduced demand for property and led to the ongoing crash in the property market. This is now feeding back to create a yet bigger problem for the banks because property is what they mostly hold as collatera l for all the debts people owe them. Evidently this collateral is now worth a lot less than a year ago, and this will inevitably lead to a much higher rate of loan defaults and repossessions Bashir (2008).Having covered a secular analysis, we now turn to Islam, which proposes a very different explanation for these problems.According to Haddad (2008) Islam does not consider money to be a commodity, which can be traded at a profit, that is to say a transaction that is interest (or usury) based. Thus the reality of negating this Islamic consideration provides us with the first part of the problem. Interest, known as Riba in Arabic, is one of the major violations of Gods law, and when it spreads through society becoming an established norm without any condemnation nothing can be expected but divine wrath.Islamic banks do not borrow or lend on international money markets because interest is not allowed, traditionally they have a larger proportion of their assets in reserve accounts with central banks. Islamic banking is based on the principles of risk sharing between depositor and investor in theory, meaning that customers practice greater oversight of an Islamic banks lending performance. Shariah law stipulates that Islamic securities should be asset-based, which means that a trader must own the asset being traded. This, in turn, proscribes most forms of futures trading, as goods that the seller does not own or will not deliver cannot be the subjects of an Islamic contract. Practices such as short selling, consequently, are not a feature of Islamic Banking according to Haddad (2008).According to Siddiqi (2009) Islamic finance is growing in various parts of the world. It has moved from a mere theoretical concept to a practical reality. Islam not only prohibits dealing in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems Haram (unlawful). Islamic banking is an instrument for the development of an Islami c economic order. The core principles of Islamic economics system are justice, equity and welfare. Islamic economics seeks to establish a broad based economic well being with full employment and optimum rate of economic growth, it will bring socio economic justice and equitable distribution of income and wealth. Islamic economics will also ensure the stability in the value of money to enable the medium of exchange to be a reliable unit of account and a stable store of value Siddiqi (2009).According to Bagsiraj (2009) in the Islamic economy, Islamic banks act as venture capital firms collecting peoples wealth and investing it in the economy, then distributing the profits amongst depositors. Islamic banks act as investment partners for those who need money to do businesses, becoming part owners of the business. The banks should only be able to recoup their original capital by selling their share of the mortgage/business at the prevailing market value. As real partners, Islamic banks s hould have no objection to owning real assets and hence should be ready to share the consequential risk. This scheme, although seemingly inconsequential, could constitute a major relief to Islamic banks clients, as they would no longer live under the burden of debt and fear of repossession Bagsiraj (2009).Further more, according to Siddiqi, (2009) Islam neither endorses the capitalist nor the communist financial model. However, both the capitalist and socialist systems share certain elements with Islam, such as encouraging people to work, to be productive and earn as much as they can. Islam promotes an awareness of the hereafter in the hearts and minds of believers and instructs them not to be overcome by greed or excessively attached to money. The Islamic economic and financial system is based on a set of values, ideals and morals, such as honesty, credibility, transparency, clear evidence, facilitation, co-operation, complementarities and solidarity. These morals and ideals are fu ndamental because they ensure stability, security and safety for all those involved in financial transactions. Islamic Shariah prohibits economic and financial transactions that involve lying, gambling, cheating, gharar (risk or uncertainty), monopoly, exploitation, greed, unfairness and taking peoples money unjustly Siddiqi, 2009.The aim of this research is to examine the extent to which the Islamic banks have been affected by the recent financial crisis in contrast with its conventional counterpart.Chapter 2Literature review1.1 Detailed history of credit crunch According to BBC website a credit crunch is an economic condition in which loans and investment capital are difficult to obtain. In such a period, banks and other lenders become wary of issuing loans, so the price of borrowing rises, often to the point where deals simply do not get one. When a National Public Radio journalist asked the famous economists Nouriel Roubini, Kenneth Rogoff, and Nariman Behravesh, their reaction on the monthly report that was just released by the U.S. Department of labor, their answers were Its worse then anybody had anticipated Its pretty disastrous, and I am shocked Langfitt (2007). Before the report was published, the economic forecasters view was that the report would show the U.S economy increased about 100,000 jobs in August. Instead there was a net loss of 4,000 jobs there was no growth for the first time in four years. U. S Department of Labor (2007).The forecasters were not done getting it wrong, however, after publication of the jobs data, a number of them predicted the news would bolster the U.S. stock market, because they argued, the employment report practically guaranteed that the Federal Reserve would cut interest rate on September 18, Instead, investor panic over the employment report caused the market, which had been volatile during most of the summer, to quickly lose about 2% on all major indices as per Whalen (2007). The Federal Reserve did eventually cu t rates as expected, but it took a number of reassuring comments by U.S. central bank governors on September 10 to calm Wall Streets fears according to Monica (2007). What is now clear is that most economists underestimated the widening economic impact of the credit crunch that has shaken U.S. financial markets since at least mid-July 2007.According to Times online (2009) years of lax lending inflated a huge debt bubble as people borrowed cheap money and ploughed it into property. Lenders were free with their funds, especially in the US, where billions of dollars of so-called Ninja mortgages no income, no job or assets were sold to people with weak credit ratings (called sub-prime borrowers).The informal notion was that if they ran into trouble with their repayments rising house prices would allow them to re mortgage their property as per times online (2009). It seemed a good idea when Central Bank interest rates were low the trouble was it could not last. Interest rates hit rock bottom in America in 2004 at just 1 per cent, but in June that year they began to rise Bernank (2006). As interest rates jumped, US house prices started to fall and borrowers began to default on their mortgage payments sparking trouble for us all BBC websites (2009).According to Mullan, 2008 easy money conditions made funds available to finance millions of US sub prime borrowers, less well-off people who in earlier times would not have been seen as credit-worthy enough to get a plastic card never mind a home mortgage. These extra homebuyers helped reinforce the pre-existing rise in property prices, producing price hikes in many regional markets across the US. By summer 2007, the market had turned house prices were falling and default levels were raising Mullan, 2008.When the sub prime crisis hit, liquidity froze in the wholesale money markets, not just in the US but also across the Western world nytimes (2008). Following the common pattern of all credit crises, at a certain point never precisely predictable, because of the elastic nature of credit debt becomes too extended for some borrowers when their circumstances change, default levels begin to grow, and the upward spiral of credit expansion and asset price appreciation turns into its unwelcome opposite Mullan, 2008. Just as mortgage issuance and rising US house prices fed on each other for several years, so now price falls and mortgage foreclosures reinforce each other BBC websites (2009).The difference with the credit crisis this time is that the necessity for writing off the bad debts spreads far beyond the original lenders, the banks and the other institutions, which issued the sub prime mortgages, repackaged the debts and sold them on elsewhere into the financial system the process of passing on debt from one institution to another has long been a feature of the financial markets, this activity became so frequent that the terminology of securitization became commonplace, as bank lending was repackag ed and sold on as bonds or securities, the same underlying value of a piece of financial paper (or electronic account) becomes reproduced often multiple times elsewhere in the financial system Economichelp.org (2008).In essence, such loans are resold as assets to others so that the same underlying value becomes used many times over, is what the credit system has been about since its early days. This time, in fact since the 1980s, the scale and scope of the repackaging of debt was simply more extensive than ever Mullan (2008). Hence the emergence of trading in derivatives instruments derived from the original credit note that dominates modern financial markets trading. More recently, over the past few years, this practice spawned a number of new acronyms which have been a feature of the terminology for todays crisis ABSs (asset-backed securities, with the assets often being those home mortgages) CDOs (collateralised debt obligations) and SIVs (structured investment vehicles these are the alternative secondary financial bodies which invested in the new mortgage-backed financial instruments) according to Mullan (2008).1.2 Causes of credit crunchInaccurate Credit ratings According to Acharya, Viral, Bharath, and Srinivasan, (2007) The Collateralized Debt Obligations (CDO) market has grown substantially since 2001 with issuance volume reaching $551.7 billion in 2006. While securitization makes financing more accessible for firms and households1, it also presents regulatory challenges, as rating agencies and institutions struggle to keep up with the rapid pace of financial innovation on Wall Street.According to Coval, Jurek, and Stafford (2008) Since summer 2007, both academics and practitioners have blamed complex CDOs for being, in part, responsible for the current sub prime crisis and credit crunch. While more than 85% of the dollar value of CDO securities issued was rated AAA by either Moodys or Standard and Poors (SP), 3 several major banks and financial ins titutions eventually had to write-off substantial portions of their balance-sheets related to investments in CDOs, largely those backed by sub prime mortgages. In 2007, Moodys downgraded $76bn in CDO securities and another $150bn remained on credit watch as of January 2008. Downgrades in November 2007 alone numbered 2,000 and many downgrades were severe, with 500 trenches downgraded more than 10 notches.4 The ensuing confusion about the true value of these complicated securities and the extent of exposure by financial institutions, incited a credit crunch with effects beyond sub prime mortgage related investments.In another words the securities, especially the now-notorious C.D.O.s, for (collateralised debt obligations) were probably too complex for anyones good. Investors placed too much faith in the rating agencies which, to put it mildly, failed to get it right. It is tempting to take the rating agencies out for a public whipping. But it is more constructive to ask how the rating system might be improved. Thats a tough question because of another serious incentive problem. Under the current system, the rating agencies are hired and paid by the issuers of the very securities they rate which creates an obvious potential conflict of interest.The following figure shows the typical collateralised debt obligations (CDO) structure and CDO issuances over time respectively1.3 Sub prime market collapseAccording to Khan (2008) As the housing sector continued to inflate due to the appetite for housing by Americans, the sub prime sector continued to also grow. Commercial banks entered what they considered a buoyant market that could only raise, many Americans refinanced their homes by taking out second mortgages against the added value to use the funds for consumer spending. The first sign that the US housing bubble was in trouble was on the 2nd April 2007 when New Century Inc the largest sub rime mortgage lender in the US declared bankruptcy due to the increasing numbe r of defaults from borrowers. In the previous month 25 sub prime lenders declared bankruptcy, announcing significant losses, with some putting themselves up for sale.Khan (2008) also highlights the crisis that then spread to the owners of collateralized debt who were now in the position where the payments they were promised from the debt they had purchased was being defaulted upon. By being owners of various complex products the constituent elements of such products resulted in many holders of such debt to sell other investments in order to balance losses incurred from exposure to the sub prime sector or what is known as covering a position. This second round of selling to shore up funds and meet brokerage margin requirements is what caused the collapse in share prices across the world in August 2007, with the market getting into a vicious circle of falling prices, leading to the further sales of shares to shore up losses. This type of behavior is typical of a Capitalist market cras h and is what caused worldwide share values to plummet.What made matters worse was many investors caught in this vicious spiral of declining prices did not just sell sub prime and related products they sold anything that could be sold. This is why share prices plummeted across the world and not just in those directly related to sub prime mortgages Khan (2008). International institutes who poured their money into the US housing sector realized they will not actually receive their money that they loaned out to investors as individual sub prime mortgage holders were defaulting on mass on such loans this resulted in all those who took positions in the housing sector not being able to pay the institutes they borrowed money from. It was for these reason central banks across the world intervened in the global economy in an unprecedented manner providing large amounts of cash to ensure such banks and institutes did not go bankrupt Khan (2008).According to bbc.co.uk the European Central Bank , Americas Federal Reserve and the Japanese and Australian central banks injected over $300 billion into the banking system within 48 hours in a bid to avert a financial crisis. They stepped in when banks, such as Sentinel, a large American investment house, stopped investors from withdrawing their money, spooked by sudden and unexpected losses from bad loans in the American mortgage market, other institutions followed suit and suspended normal lending. Intervention by the worlds central banks in order to avert crisis cost them over $800 billion after only seven days.2.1 Islamic BankingThe beginning of Islamic Banking The earliest writings on the subject of Islamic banking and finance date back to the forties of the twentieth century Nejatullah (1981) and the earliest practice can be traced to early sixties Mahmud (1995). The literature showed ambivalence between the model of an intermediary designed after conventional commercial banks and one like an investment company serving indi viduals seeking profits as well as the community needing development. Models of commercial banking based on two-tier Mudaraba came from economists aspiring to build an alternative to a system of banking and finance hinged on interest. Some of them placed the issue in the larger context of the struggle between capitalism and socialism in which Muslim intellectuals projected Islam as having a different approach resulting in a distinct economic system with its own financial institutions. Community initiatives looked forward to something workable while avoiding interest.The nineteen-sixties saw the establishment of an interest-free bank in Karachi, that of Tabung Haji in Malaysia, and saving-investment banks in Mit Ghamr in Egypt, that were based on sharing profits and avoided interest. Only Tabung Haji survived, Haji (1995), thanks to its roots in the community, its narrow focus, official blessings and clear structure as a business. Early in the nineteen seventies came the Dubai Islami c Bank, taking deposits in current as well as investment accounts and engaging in profit-making activities directly as well as through working partners. The Islamic Development Bank, which started operations in 1975, was designed to serve Muslim countries and communities by arranging finance for trade and development on non-interest bases. By late nineteen-seventies there were half a dozen more banks in the private sector in Egypt, Jordan, Kuwait, and the Gulf. The following decade saw a rapid expansion bringing the number of banks to dozens by the end of the decade. To banks were now added non-bank financial institutions, like investment companies and insurance companies IAIB (1997).According Mohammad (1970) till the end of the nineteen-seventies, largely a plea for replacing interest in bank lending by profit sharing. This would change the nature of financial intermediation, making the fund owners as well as the financial intermediaries share the risks of enterprise with the fund users. Early literatures main emphasis was on fairness. Making the fund-user-entrepreneur bear all the risks of business and allowing fund owner and bank claim a predetermined return was regarded to be unjust. The environment in which productive enterprise was conducted did not guaranty a positive return, so there was no justification for money capital claiming a positive return irrespective of the results of enterprise, it was argued. Hadi (1973), Nejatullah (1968). It was also argued that most, though not all, the other problems of capitalism were rooted in the practice of lending on interest. Among these problems were unemployment, inflation, poverty amidst plenty, increasing inequality and recurrent business cycles Mohammad (1955), Ala (1961), Mahmud (1972),According to Mohammad (1970) abolishing interest and replacing it by profit sharing could solve these problems. It was not until the next decade that Islamic economists were able to fortify these claims by sophisticated econo mic analysis, especially at the macroeconomic level. The focus at this stage was largely on pointing out the deficiencies of capitalism and linking them to the institution of interest, among other things. With this went the arguments showing that it was possible to have banking without interest and that it would not adversely affect savings and investment Ala (1961), Ala (1969) Iqbal (1946), Nejatullah (1969).Hasan (2005) The most significant development during the late nineteen-seventies and early eighties was the advent and proliferation of Murabahah or cost-plus financing. What the businessman got from the Islamic bank under this arrangement is the commodity he needed purchased by the bank at his request, with the promise to purchase it from the bank at a price higher than its purchase price, to be paid after a period of time. Each Murabahah transaction created a debt. Compared to funds supplied on a profit-sharing basis, funds invested in Murabahah transactions were safe. Within a couple of years of the introduction of Murabahah in late nineteen seventies, it conquered the landscape of Islamic finance, assigning Mudarabah or profit-sharing to a corner accounting for less than ten percent of the operations. Security of capital invested rather than magnitude of returns to capital ruled the roost, insofar as the fund owners were concerned. However, the proliferation of Murabahah did give a big boost to Islamic finance during the coming decades. Their total number by year 2004 may have exceeded 200, spread over more than fifty countries.Archer and Karim (2002) the seventies also saw Pakistan officially committing to interest-free Islamic banking, followed by Iran and Sudan in the eighties. Meanwhile Malaysia developed a new approach of introducing Islamic banking and finance under official patronage, while the main system continued along conventional lines Indonesia followed in early nineties. This pattern later became the model for certain countries in the Gu lf, like Bahrain, Qatar and the UAE. With the spread of Islamic financial institutions across the globe and enlargement of the size of funds managed by them, came the involvement of big players in the international financial arena like Citibank, HSBC and ABN AMRO according to Archer Karim (2002).According to Vogel and Hays (1998) in the development of theory of Islamic finance and banking, the late seventies and the eighties saw many significant contributions. Murabaha or cost plus financing, acknowledged only grudgingly in documents such as the Islamic Ideology Council of Pakistan Report on Elimination of Interest from the Economy, earned full recognition as well as respectable rationale. The controversy around its legitimacy, its efficacy hardly had any impact on the speed with which it conquered the landscape of Islamic finance. Practitioners of Islamic finance report they tried to push through sharing based Finance but the results were not encouraging Attiyah (2007).The laws of the land did not (may be, could not) offer the financier same protection from false reporting of profits by the users of funds, even against outright fraud and deception, not to speak of delay in payment, as was offered to borrowers in a lending contract. There seemed to be no room for collaterals. On top of all this there were projects to be financed that simply defied profit-sharing finance, like long term municipal plans to lay sewage-pipes in a city. In this case, returns to the finance would accrue over many decades in the future while costs had to be met in the present. In the absence of a market on which shares could be floated, even medium term Mudarabah bonds designed to finance development of WAQF property did not succeed Khairallah (1994).Recourse to trade based modes of finance became necessary. This happened with privately established Islamic banks in the Gulf area as well as with the Islamic Development Bank. By the early nineteen-eighties, Murabahah had become the do minant mode of Islamic finance everywhere. As pointed out above, early theory had failed to pay due attention to trade based modes of finance and to the issue of capital protection. Murabahah seemed to fill the gap. According to Khairallah (1994) the macroeconomic implications of Islamic banking were still being worked out on the assumption that it would be largely based on profit sharing. It was argued that financial intermediation based on profit sharing rather than lending will contribute to greater stability in the economic system in general and the financial markets in particular. It was also argued that such a system would be more efficient than the conventional system Khairallah (1994).2.2 An overview of Islamic Banking and Financial productsThe earliest Islamic financial product to appear on the scene was investment deposit with an Islamic bank or investment certificate issued by an Islamic investment company IIBI (1995).Both were based on profit-sharing/ Mudarabah between t he depositor/certificate holder (Rabbal-mal) and the bank/investment company (Mudarib). The next to appear were based on sale. Murabahah is sale with a mark-up on purchase price, payment being deferred. Ijarah is sale of usufruct of an equipment or real estate owned by the seller. Murabahah proceeds on the basis of a purchase order by a client who commits to buy the commodity involved. Originally introduced as contracts between two parties both Ijarah and Murabahah ended up in the form of securities. Bypassing controversies around operating leases versus financial leases Nejatullah (2005b)The market seized upon Sukuk. Ijarah bonds are investment certificates indicating ownership of a real asset subject to a lease contract yielding predetermined rent yields, they are very popular in the Gulf, unlike the Sukuk based on Murabahah receivables that are considered valid only in Malaysia. Adam and Thomas (2004).Other sale-based modes in Islamic finance are Salam and Istisnaa Islamic banks started by using them as bases for extending finance to agriculture and industry respectively. As they had no interest in taking possession of the commodities or the manufactured goods involved, there was usually a parallel contract reversing the flow so that the bank ended up with cash, larger in amount than that paid by it in the first contract. In their more developed forms, the Islamic financial market now has Sukuk based on Ijarah, Salam and Istisnaa. The buyers of Sukuk periodically get a predetermined income over and above the privilege of redemption at par on maturity, as in case of conventional bonds.According to (http//www.bankislam.com.my) there are efforts to develop secondary markets on which these Islamic bonds could be traded. If and when these efforts succeed, the same markets could handle variable return Mudarabah bonds or Sukuk based on Mudarabah/musharakah. The big difference would be in there being no guaranteed value on redemption as these investors are vulnerab le to losses too, unlike those who invest in fixed income Sukuk mentioned earlier. We have to examine, first how trade based modes of finance got in, and second, how bond-like Sukuk were constructed. Later on, we go on to economics the impact of fixed income financial products on an economy aspiring to be Islamic.Malaysia introduced sale of debt (Bay Al-Dayn) in Islamic finance. It also brought in Inah, a way of obtaining cash now against a larger amount of cash to be paid after a period of time, on the basis of sale contracts on deferred prices followed by buyback contracts at lower cash prices. The first Islamic bank to come up in Malaysia, Bank Islam Malaysia Berhad, started its operations in 1983. It is now marketing about 50 innovative and sophisticated Islamic banking products and services, comparable to those of their conventional counterparts (http//www.bankislam.com.my).A second Islamic bank, Bank Muamalat Malaysia Berhad commenced operations in 1999. The Central Bank of Ma laysia also decided to allow the existing banking institutions to offer Islamic banking services using their existing infrastructure and branches. The long-term objective of BNM is to create an Islamic banking system operating on parallel lines with the conventional system This involves some interaction between the two systems, which is overseen and organized by the central bank, Bank Negara Malaysia, which has in-house National Shariah Advisory Council. An Islamic Inter-bank Money Market launched in 1994 plays a significant role in this regard (http//www.bnm.gov.my).There is also Mudarabah Inter-bank Investment facilitating interaction between deficit and surplus Islamic banks. The backbone of the whole structure seems to be the Government Investment Issue (GII). It was originally based on the Shariah contract of Qard Hasan, the holder being given back only what he/she gave. Any return on the loans (if any) is on the absolute discretion of the government. But, in 2001, the basis of Government Investment Issue (GIIs) issuance was further enhanced to accommodate the need to develop further the secondary market activities of the Islamic money market. An alternative concept of GII based on Sell and Buy Back Arrangement was introduced in June 2001. Under this arrangement, the Government will sell its identified assets at an agreed cash price to the buyer and subsequently buy back the same assets from the buyer at an agreed purchase price to be settled at a specified future date (http//www.bnm.gov.my).Saleem (2006) says besides complying with the prohibitions against interest and the financing of forbidden activities, Islamic banking products are based on the concept of property exchange, profit and risk sharing, and certainty. Uncertainty (gharar) is not permissible, and contracts for banking services must clearly define the responsibilities and rights of the customer and bank as to the ownership of property, fees, and risk sharing.2.3 IstisnaaThe Istisnaa the sec ond kind of sale where a commodity is transacted before it comes into existence. This allows the Bank to order for the goods or equipment required for a construction project according to the choice of the client and delivers them to the client. The client agrees to pay in installments at specified dates. There are two sub types of Istisnaa contracts, which are classified based on the commodity bought or sold Saleem (2006).2.4 IjarahIslamic Investments Ijarah is the process by which (Usufruct of a particular property is transferred to another person in exchange for a rent claimed from him/her). It is the equivalent of Leasing in commercial banking. This allows the Bank to order for Capital assets required for the customer against a rental agreement with him. The title