Recommendations for Islamic Bank Development

Recommendations for Islamic Banking System Development.

Some anecdotal recommendation to enhance the service of the Islamic bank, and development the operation all over the world.

Recommendations:

1.    Islamic bank immediately need to develop financial instruments that will enhance liquidity preference; to develop secondary, money, and inter-Islamic bank markets; and to perform asset-liability and risk management. It well known that Future growth and development will depend largely on the nature of innovations, efficiency, variety of product introduce in the market.

 2.    Developed special liquidity management instruments that will include commodity murabahah, this instrument have spread rapidly based on its reliance on existing financial infrastructure and is being used in about 45 percent of jurisdictions with Islamic Bank presence. In contrast, its practicality will likely be limited by transaction costs, administrative process, the non-tradability of the contract, and Shariah concerns.

 3.    Developing liquidity facilities, the legal and operational frameworks of central banks need to be improved by permitting the development and use of Islamic liquidity management instruments. It would help to ensure the banking financial stability and increase the effectiveness of monetary policy.

4. Sometimes, lack of understanding of the correct environment of Islamic financing techniques may also be partially responsible for rather inappropriate policies often central banks towards Islamic banks; this is particularly true of musharakah and mudarabah. There may have important implications for reporting activities as well as control and regulation of Islamic banks by the central banks.

5. Central bank may interfere in the banks’ decisions with regard to monetary policy tools such as reserve requirements, open market operations and so on. This attempt would be desirable to determine the exact role of the Shari'ah council and take the central bankers into confidence.

7. Profession teaching, training and research is the necessity for the development of any discipline. As mentioned above, there is a serious shortage of scholars who possess even a working knowledge of both Islamic fiqh and modern economics and finance . Professionally, many managers of Islamic banks are not very well trained on the Islamic terms and implication of regulations.

8. The Islamic banks can encourage providing more profit-sharing finance, if arrangements are made to reduce the costs of appropriate arrangements as well as financial engineering consistent with the preferences of fund users. The benefits of direct investment in terms of economic development may not always be fully reflected in the rate of return of the fund supplier.

The Theory of Interest rate and Profit sharing

The Theory of Interest rate and Profit sharing_Money and Banking 

Liquidity Preference Theory:

According to liquidity preference theory lender lends money to borrow for the interest, and the interest is assumed to be a reward for parting with liquidity. On the other hand, if a person does not an important part with his savings, but uses them in his own productive activity, interest will arise. However, Keynesian theory is advanced to the classical theory of interest as the former is concerned with equilibrium points in the real economy sector. Thus, in the real world, the Keynesian theory is more realistic than the classical theory of interest than others.

Productivity Theory:

Productivity theory of interest is a reward for the profitable services in the capital of the production purpose. For example, a farmer having tractor to plow the field produces more as compared to the farmer who does not have it. Hence, interest is the payment for the productivity of capital.

The theory is criticized on the following:

• The theory only focuses on the causes for what the interest is paid but not on the determination of interest rates.
• It emphasizes on the demand of interest, but ignores the supply side of capital.
• It completely ignores how the interest is paid for the loan borrowed for consumption purposes.

Abstinence or Waiting Theory:

In the abstinence theory, interest is a reward for abstinence. During, people less consumes and save more income, and they lend this saving amount to others that is sacrifice of current consumption. Senior the expert advocated that abstaining from consumption is unpleasant. Abstinence theory was also criticized by some of the economists. According to the theory, an individual can feel unhappy if they save as it reduces consumption. However, rich people do not feel unpleasant while saving because they are financially capable to meet their requirements.

Austrian or Agio Theory:

Austrian theory is also called as a psychological theory of interest. John Rae and Bohm Bawerk in an Austrian school  advocated this theory. Therefore, future satisfaction has a kind of discount if compared with present satisfaction. The interest is the discounted amount that is required to be paid for inspiring people to invest or transfer their present requirements to the future.

However, the theory has been criticized by various economists:

• It arranges too much importance on the supply aspect and ignores the demand aspect
• It does not focus on the determination of rate of interest

Classical or Real Theory:

Classical theory is one of the most realistic in the economic development, it helps to measure rate of interest with the help of demand and supply factors. Demand refers to the demand of investment and supply refers to the supply of savings. According to this theory, the rate of interest refers to the amount paid for saving. Therefore, the rate of interest can be determined with the help of demand of saving needed to invest in the capital goods and the supply of savings.