Benchmarking in Islamic Finance: Issues and Challenges Essay

In Islam, mess the hurt of commodities is non allowed as the increase of the abide by is caused by act asout of gene govern and want in the marketplace. Hence in this case, bench marking for the products is not allowed. It is can be reflected from of the Hadith of seer Muhammad S. A. W. Nar reckond by Anas Ibn Malik, The batch verbalize Apostle of Allah, monetary values has shot up, so fix prices for us. at that placeupon the Apostle of Allah (PBUH) said Verily, Allah S. W. T. determines the climate of economic fullness and gloom.I do not want to expect any action to fix the prices because I do not want, later in hereafter, any among you to demand for the return of your property and blood from me because of my tyranny (in fixing the prices). In the above hadith, the practice of fixing price is clearly condemned by vaticinator Muhammad S. A. W. The vaticinator S. A. W declared the act of fixing price as injustice towards the seller if the price is fluctuated out-o f-pocket to the principle market forces. But the second school of taught dissent with not fixing the price.They argued that the fluctuation in the price of commodities at the prison term of Prophet Muhammad S.A. W was due the normal market forces i. e. supply and demand of the good in the market. But nowadays the prices fluctuate more(prenominal) due to sellers speculation preferably than supply and demand of the product. In this case the price of the commodities should be fixed by the authorities. Hence benchmarking in this case is allowable by the Scholars. In pecuniary industry, several antithetic methods of pricing business loans push rear end hold of appeared over the years including cost-plus loan pricing, price leadership loan pricing, below-prime loan pricing, and costumer utilityability analysis.Many business loans today are priced at present of money market interest positions, with narrow profit margins reflecting intense competition for the best business c ustomers. round of the profit/interest rates used in the market is as follows (1) Overnight Policy pace (OPR) (2) London Interbank Offered Rate (LIBOR) (3) Kuala Lumpur Interbank Offered Rate (KLIBOR) (4) Cost of neckcloth (COF) and (5) Base Financing/Lending Rate (BFR/BLR). Issues Moslem pay has been established to save Muslim field from the effects of Riba. But the problem that has been seen is the benchmarking scheme of customary Banking practiced by Moslem Banks. Muslim finance that has been mentioned by some authors as Ethical pay which is the administration of justice for the community and free from Riba, gharar and Mysir cannot practice the unoriginal benchmarking for its products. It has also been known that Muslim Finance deals in assets backed support rather than debt establish financing. Hence a proper Muslim found benchmarking corpse needs to be demonstrable and utilize to overcome the issue of using customary benchmarking for Islamic banking products. match to Sheikh Taqi Usmani, Islamic banks and financial institutions should get rid of much(prenominal) practice as curtly as assertable. He argued that using interest rate as a benchmark for halal products is not desirable and it does not reflect the basic philosophical system of Islamic economy and hence making no impact on the system of distri neverthelession. It is also been said that the authoritative benchmarking system does not make IFIs products haram. check to Taqi Usmani, If all the pillars of sale is valid from Shariah post of view, just mere use of interest rate as a benchmark cannot invalidate unharmed sale.According to Sheikh Yusuf DeLorenzo (2009) A benchmark is no more than a number, and on that pointfore non-objectionable from a Shariah perspective. If it is used to determine the rate of quittance on a loan, then it is the interest equipage loan that willing be haram. LIBOR as a mere benchmark has nothing to do with unfeigned effect or more specific ally with the world of revenue or return. Alternative Models for Islamic Benchmarking in that respect are different models being elicit by the scholars such as Rate of gather Mechanism Model proposed by Abd al Hamed al-Ghazalie According to him, this can be achieved by analyzing the rate of gelt in the money market.He proposes that it is a more rational way that promotes justice for all and fits the reputation of economics. According to Sheikh Muhammad Taqi Usmani, the purpose can be achieved by creating a common pool which invests in asset-backed instruments like musharakah, ijarah, etc. If the majority of the assets pool is in tangible form, like leased property or equipment and shares in business concerns etc, its units can be interchange and bribed on the basis of their net asset value determined on periodical basis. These units ay be transferable and whitethorn be used for overnight financing as well. Banks having surplus liquidity can purchase these units and when the y need liquidity, they can sell them. This arrangement may frame inter-bank market and the value of the units may run as an indicator for determining the profit in murabahah and leasing also. Another model is presented by Dr. Aznan Hassan. According to him there should be different OPR for Islamic Banks that should be developed by Bank Negara Malaysia. But it can create the problem of hedging.If the schematic market rate is more favourable people will go for it and if the market rate of Islamic market is better people will opt for it. In the end the conventional market will be on rock-steady side as the Islamic market is precise small and the rate will tend to be higher as compare to conventional market. There are few others model that were suggested by the scholars such as Tobins Q Theory and Rate of Dividend of Islamic Bank Deposits and Investment Accounts Model etc that also gives the alternating(a) ways of Islamic benchmarking.These models sounds good in guess but the pr oblems can only be recognise if such systems are implemented. Discussion/Conclusion about scholars argued that the conventional benchmarking is still allowed and it does not make the transaction haram. But IFIs still benchmark their products establish on conventional loans. Profit rates are then decided on the bases of this benchmarking. Hence it is considered as back door to riba. Copying non Muslims is prohibited by the Prophet Muhammad S. A. W. It can be reflected for the Hadith, Narrated by al-Bukhaari (1865) from Ibn Abbaas, who said ?The Prophet (saws) came to Madinah and saw the Jews closelying on the day of Ashoora. He said, What is this? They said, This is a good day, this is the day when Allah saved the Children of Israel from their foeman and Moosa fasted on this day. He (the Prophet Muhammad) said, We are adpressed to Moosa than you. Hence the Prophet S. A. W fasted on this day and told the people to fast. This is the Sunnah that is proven from the prophet S. A. W, as he said, If I am still liveborn next year, I will certainly fast the ninth (Narrated by Muslim, 1134). So to differentiate from jews, Prophet S. A. W recommended fasting on both 9th and tenth of Muharram. Similarly, riba is the practice of non Muslims hence it should not be benchmarked. all Islamic Financial transaction should be different than what is nowadays practiced in the market. Although different models suck up been proposed by the scholars but the problem lies in implementing it. much(prenominal) practices are going on from the long time but there is no one to smell forward for implementing such system.It is because such system cannot work under capitalistic economic system as dual benchmarking will give rise to hedging and IFIs will suffer from it. Secondly, Islamic economy is based on real economy hence the happen is higher which will lead to higher Islamic benchmark rate as compare to conventional counterparts. Hence borrowers will prefer conventional system for loaning as compare to IFIs because interest rate charged by the conventional financial institutes will be less as compare to IFIs.Islamic benchmarking system can be failed under current economic system because the current economic system principles are different than Islamic economics principles. There could be no other solution but to shift from current economic system to Islamic economic system. It can only be accomplishable if the entire Muslim countries unite and work on serious course for implementing Islamic economic system in Muslim community. After implementation of Islamic economic system, Islamic benchmarking will be possible and could be used by both conventional and Islamic financial institutes.