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BIODATA - NIK ZAFRI
Kelantanese, Alumni of Sultan Ismail College Kelantan (SICA), IT Competency Cert, Certified Written English Professional US. Has participated in many seminars/conferences (local/ international) in the capacity of trainer/lecturer and participant.
Affiliations :- Network Member of Gerson Lehrman Group, Institute of Quality Malaysia, Auditor ISO 9000 IRCAUK, Auditor OHSMS (SIRIM and STS) /EMS ISO 14000 and Construction Quality Assessment System CONQUAS, CIDB (Now BCA) Singapore),
* Possesses almost 30 years of experience/hands-on in the multi-modern management & technical disciplines (systems & methodologies) such as Knowledge Management (Hi-Impact Management/ICT Solutions), Quality (TQM/ISO), Safety Health Environment, Civil & Building (Construction), Manufacturing, Motivation & Team Building, HR, Marketing/Branding, Business Process Reengineering, Economy/Stock Market, Contracts/Project Management, Finance & Banking, etc. He was employed to international bluechips involving in national/international megaprojects such as Balfour Beatty Construction/Knight Piesold & Partners UK, MMI Insurance Group Australia, Hazama Corporation (Hazamagumi) Japan (with Mitsubishi Corporation, JA Jones US, MMCE and Ho-Hup) and Sunway Construction Berhad (The Sunway Group of Companies). Among major projects undertaken : Pergau Hydro Electric Project, KLCC Petronas Twin Towers, LRT Tunnelling, KLIA, Petronas Refineries Melaka, Putrajaya Government Complex, Sistem Lingkaran Lebuhraya Kajang (SILK), Mex Highway, KLIA1, KLIA2 etc. Once serviced SMPD Management Consultants as Associate Consultant cum Lecturer for Diploma in Management, Institute of Supervisory Management UK/SMPD JV. Currently – Associate/Visiting Consultants/Facilitators, Advisors for leading consulting firms (local and international) including project management. To name a few – Noma SWO Consult, Amiosh Resources, Timur West Consultant Sdn. Bhd., TIJ Consultants Group (Malaysia and Singapore) and many others.
* Ex-Resident Weekly Columnist of Utusan Malaysia (1995-1998) and have produced more than 100 articles related to ISO-9000– Management System and Documentation Models, TQM Strategic Management, Occupational Safety and Health (now OHSAS 18000) and Environmental Management Systems ISO 14000. His write-ups/experience has assisted many students/researchers alike in module developments based on competency or academics and completion of many theses. Once commended by the then Chief Secretary to the Government of Malaysia for his diligence in promoting and training the civil services (government sector) based on “Total Quality Management and Quality Management System ISO-9000 in Malaysian Civil Service – Paradigm Shift Scalar for Assessment System”
Among Nik Zafri’s clients : Adabi Consumer Industries Sdn. Bhd, (MRP II, Accounts/Credit Control) The HQ of Royal Customs and Excise Malaysia (ISO 9000), Veterinary Services Dept. Negeri Sembilan (ISO 9000), The Institution of Engineers Malaysia (Aspects of Project Management – KLCC construction), Corporate HQ of RHB (Peter Drucker's MBO/KRA), NEC Semiconductor - Klang Selangor (Productivity Management), Prime Minister’s Department Malaysia (ISO 9000), State Secretarial Office Negeri Sembilan (ISO 9000), Hidrological Department KL (ISO 9000), Asahi Kluang Johor(System Audit, Management/Supervisory Development), Tunku Mahmood (2) Primary School Kluang Johor (ISO 9000), Consortium PANZANA (HSSE 3rd Party Audit), Lecturer for Information Technology Training Centre (ITTC) – Authorised Training Center (ATC) – University of Technology Malaysia (UTM) Kluang Branch Johor, Kluang General Hospital Johor (Management/Supervision Development, Office Technology/Administration, ISO 9000 & Construction Management), Kahang Timur Secondary School Johor (ISO 9000), Sultan Abdul Jalil Secondary School Kluang Johor (Islamic Motivation and Team Building), Guocera Tiles Industries Kluang Johor (EMS ISO 14000), MNE Construction (M) Sdn. Bhd. Kota Tinggi Johor (ISO 9000 – Construction), UITM Shah Alam Selangor (Knowledge Management/Knowledge Based Economy /TQM), Telesystem Electronics/Digico Cable(ODM/OEM for Astro – ISO 9000), Sungai Long Industries Sdn. Bhd. (Bina Puri Group) - ISO 9000 Construction), Secura Security Printing Sdn. Bhd,(ISO 9000 – Security Printing) ROTOL AMS Bumi Sdn. Bhd & ROTOL Architectural Services Sdn. Bhd. (ROTOL Group) – ISO 9000 –Architecture, Bond M & E (KL) Sdn. Bhd. (ISO 9000 – Construction/M & E), Skyline Telco (M) Sdn. Bhd. (Knowledge Management),Technochase Sdn. Bhd JB (ISO 9000 – Construction), Institut Kefahaman Islam Malaysia (IKIM – ISO 9000 & Internal Audit Refresher), Shinryo/Steamline Consortium (Petronas/OGP Power Co-Generation Plant Melaka – Construction Management and Safety, Health, Environment), Hospital Universiti Kebangsaan Malaysia (Negotiation Skills), Association for Retired Intelligence Operatives of Malaysia (Cyber Security – Arpa/NSFUsenet, Cobit, Till, ISO/IEC ISMS 27000 for Law/Enforcement/Military), T.Yamaichi Corp. (M) Sdn. Bhd. (EMS ISO 14000) LSB Manufacturing Solutions Sdn. Bhd., (Lean Scoreboard (including a full development of System-Software-Application - MSC Malaysia & Six Sigma) PJZ Marine Services Sdn. Bhd., (Safety Management Systems and Internal Audit based on International Marine Organization Standards) UNITAR/UNTEC (Degree in Accountacy – Career Path/Roadmap) Cobrain Holdings Sdn. Bhd.(Managing Construction Safety & Health), Speaker for International Finance & Management Strategy (Closed Conference), Pembinaan Jaya Zira Sdn. Bhd. (ISO 9001:2008-Internal Audit for Construction Industry & Overview of version 2015), Straits Consulting Engineers Sdn. Bhd. (Full Integrated Management System – ISO 9000, OHSAS 18000 (ISO 45000) and EMS ISO 14000 for Civil/Structural/Geotechnical Consulting), Malaysia Management & Science University (MSU – (Managing Business in an Organization), Innoseven Sdn. Bhd. (KVMRT Line 1 MSPR8 – Awareness and Internal Audit (Construction), ISO 9001:2008 and 2015 overview for the Construction Industry), Kemakmuran Sdn. Bhd. (KVMRT Line 1 - Signages/Wayfinding - Project Quality Plan and Construction Method Statement ), Lembaga Tabung Haji - Flood ERP, WNA Consultants - DID/JPS -Flood Risk Assessment and Management Plan - Prelim, Conceptual Design, Interim and Final Report etc., Tunnel Fire Safety - Fire Risk Assessment Report - Design Fire Scenario), Safety, Health and Environmental Management Plans leading construction/property companies/corporations in Malaysia, Timur West Consultant : Business Methodology and System, Information Security Management Systems (ISMS) ISO/IEC 27001:2013 for Majlis Bandaraya Petaling Jaya ISMS/Audit/Risk/ITP Technical Team, MPDT Capital Berhad - ISO 9001: 2015 - Consultancy, Construction, Project Rehabilitation, Desalination (first one in Malaysia to receive certification on trades such as Reverse Osmosis Seawater Desalination and Project Recovery/Rehabilitation)
* Has appeared for 10 consecutive series in “Good Morning Malaysia RTM TV1’ Corporate Talk Segment discussing on ISO 9000/14000 in various industries. For ICT, his inputs garnered from his expertise have successfully led to development of work-process e-enabling systems in the environments of intranet, portal and interactive web design especially for the construction and manufacturing. Some of the end products have won various competitions of innovativeness, quality, continual-improvements and construction industry award at national level. He has also in advisory capacity – involved in development and moderation of websites, portals and e-profiles for mainly corporate and private sectors, public figures etc. He is also one of the recipients for MOSTE Innovation for RFID use in Electronic Toll Collection in Malaysia.
Note :
Friday, April 05, 2024
PREDICTING THE STOCK MARKET? HERE'S SOME TIPS (NIK ZAFRI)
Wednesday, February 03, 2021
CAN TRADE SECRETS BE PROTECTED TODAY? - Overview by Nik Zafri
Nowadays, any organization with full infrastructure of ICT network and systems practicing 'data sharing' using the B2B and B2C platforms, painstakingly since early 2000 are now expanding their business.
However, when we talk about 'data transparency', the challenge is safeguarding 'sensitive data' (such as trade-secrets) and at the same time, not to intervene with the flow of information.
But today, should such secrets are not properly safeguarded, the sensitive data can suddenly become obsolete tomorrow due to "information explosion" on the net. Today, one organization introduced the latest technology, (no-hush-hush) - the next day, you'll see that the 'so-called new technology' ended up with similar but more improvised technology at the cheaper price - surprisingly from another country that thousands of miles away.
To avoid leaking problems, the plumbers are usually ICT and Human Resource Management - but what about the losses due to leaking information. Although the two departments are the right ones to deal with personnel revealing confidential information but it is still deemed as 'fire-fighting'. True enough, it happens again and again.
Humbly, let me share my own experience when I was employed to one organization to make a 'turnaround' under consultancy capability.
Without going into too much details, all I can conclude is that I managed to convince top management and other units/departments to return to the basics (looking back into the Core Business Process profusely written in their very own Company Manual - (chuckle they will find)
1) Research and Development,
2) Design,
3) Innovation,
4) Advertising and Promotion,
5) Market Survey,
6) Marketing and Sales.
Despite the hiccups I had with the 'Executive Management' team, I have succesfully managed to 'rehighlight' the aforesaid '6 profit centre' units to ALWAYS be in the lead to entice prospects, new customers and returning customers.
The 'data sharing' practices (what to share with the customers even on the company's website) must FIRST come and being reviewed by these units as they are the ones who knows better than any other units/departments which data is deemed as confidential or otherwise.
The root cause of failure is always linked to another department or unit coming in 'too early' into the picture and doing 'someone's else job'.
Sometimes, rewarding scheme for people achieving targets and definitely punishing those who did not can be BOTH FATAL.
People will start cutting corners, stabbing one another, stepping on other "cats tails" and God knows what.
What if rewarding and punishing are being applied to Occupational Safety and Health matters, then there may be dangerous risks and hazards even leading to incidents and accidents - when workers start to cut corners either to achieve the objectives OR the fear of not achieving it.
Mind you, I'm neither implying that other departments/units are of less significance nor rewarding system should not be practiced.
I'm really talking about :
a) 'Who to do What and When' and also
b) effective monitoring must first be in place before considering to reward or to punish.
Friday, July 04, 2014
New tools to fight tuberculosis and other chronic infections
© sudok1 - Fotolia.com |
Monday, June 09, 2008
corpbabes wrote: |
Greetings! I stumbled across this website and thought it's really fantastic that people can discuss and get information here. I'm a newbie and I'm just wondering if anyone can help me. My question is : is there any statutory prescriptions in relation to warranty periods for construction works buildings, designs etc for theme park related works. Also what if personal injury and death, can warranty period and exclusion of liability help reduce liability ? I would be glad if someone can explain these issues to me. Thank you in anticipation. |
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Ahvincent's Response
The statutory limit is normally six years. However, it can sometimes be extended to 12 years.
In the construction business some defects are latent i.e. it cannot be readily identified by a competent engineer for example concrete cancer which can take years to become evident.
In such cases the six years may start from the date that circumstances that could lead to a claim was first identified.
Exclusions can sometimes help but remember you cannot contract out of the law. You may exclude certain things but you definitely cannot exclude death or injury due to you negligence, error or omission.
In simple words you can have a sign on the front door to say "Enter at your own risk - no liability accepted." But if I was killed because you did not install the sign properly and it fell down and bang me on the head, you will be liable for damages. Or if your roller coaster ride fell off it's tracks due to poor maintenance or neglect than you can be sued for damages under the law of tort.
But having say all that - Yes, a limitation clause is good to have. It is better than nothing and gives your lawyers something to work with in the event of a claim.
However, the difficult thing in design and construction is "how to get the other party to agree and sign the contract that contains clauses that potentially decreases your liability. Unless that other fellow's lawyer cannot read.
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Nik Zafri's Response
corpbabes wrote: |
Greetings! I stumbled across this website and thought it's really fantastic that people can discuss and get information here. I'm a newbie and I'm just wondering if anyone can help me. |
Welcome corpbabes...that is why GMN is my first choice!
corpbabes wrote: |
My question is : is there any statutory prescriptions in relation to warranty periods for construction works buildings, designs etc . |
Depending on which stage that you're referring to - pre-construction, during construction and post construction? You see, different countries may adopt different practices, terminologies and timeframe. (which will affect the contract)
If you care to delve further in this very same topic, you will see that we've been discussing 'heavily' about Defect Liability Period, Warranty Period, Developer's Warranty etc. Try to have a look, probably it would help you and us further to understand the issue. (I'm sure you've heard the Govt is planning to revise and standardize these practices - but I'm unsure when)
corpbabes wrote: |
for theme park related works |
Or perhaps you may be referring to 'during the theme park already in operation - if so, which target group? 'the theme park workers?'? The theme park visitors? The 'entertainment machines'? (roller coaster, merry-go-round etc.)
corpbabes wrote: |
Also what if personal injury and death, can warranty period and exclusion of liability help reduce liability ? |
Again, depending on which stage...and as ahvincent said - something like- this case should be mentioned in the contract to avoid future ambiguity and 'conflict'.
corpbabes wrote: |
I would be glad if someone can explain these issues to me. Thank you in anticipation. |
Don't worry, GMN has a handful of helpful hands (3H)...ahvincent is definitely one of them...
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Response from corpbabes - 26/10/2007
Hello again!
Thanks so much for such prompt reply! Really appreciate it. I know my questions were not really specific and vague, hence Im trying to get more information regarding that before enquiring further.
Sorry for being so ignorant, coz Im really new in this field,Im just a pupil doing a research in this area. So forgive me if I sound so blur!
Im just wondering what happens if the defects occur after the warranty period, who will be liable and is there any legislations regarding this? As for the owner of the building for example, is his liability reduced if anything happens after the warranty period is over?
Also, can I give an anology: Say in a high rise building in genting, a disaster happen due to a design defect ; Contractually we exclude design defects and say construction defects, in death or personal injury, therefore can we say that in this scenario that the project owner be liable? What if we have designer and builder ... To what extent can we pass the buck to them?
Thanks in advance for all the assistance
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ahvincent wrote: |
Your question is many questions in one. Without being specific it is very difficult to answer. Firstly, if you identify a defect after the defects liability period then you don't stand much of a chance of a successful claim. If I bought an apartment from you (the owner) and I identify a defect within the warranty period, of course I will sue you. The contract of sale is between me and you. It has nothing to do with the builder who may have designed and constructed the apartments. I, the buyer do not have a contract with the builder, the owner does. The builder does not owe me a duty. I did not hire him and neither did I pay him, so how can I hold him responsible. I can only sue the owner who sold me the faulty apartment. However, the owner may join the builder as a co-defendent on the basis that as a result of his (the builder's) negligence he is now being sued and the builder should be held responsible. I guess one of your questions is "the owner has stated in the contract that he is not responsible for design and construction faults" thus trying to avoid any liability. I am afraid that attempt will fail. I, as the buyer can expect that the apartment is "fit for it's intended purpose." So, regardless of what you the owner try to do you will still be liable. Remember what I said before "you cannot contract out of the law." The law of tort will be on my side (the buyer). I have every right to enjoy my purchase. If you sold me an apartment and the roof falls down in 6 months and the walls start to crumble and the floor starts to sink, I will ask the court "what did you sell me?" I tell the court that you the owner sold me a faulty product and I want my money back !!!. You did not sell me an apartment that is fit for it's intended purpose i.e. as a place of residence. I will strongly suggest that a good lawyer for the owner will not try to get out of it by simply denying liability because the case is so obvious. He, the owner can quickly run away, change his name and go into hiding or he will quickly join the designer and constructor as co-defendants and seek proportional liability. Anyway, your questions sounds very unethical by trying to pass the buck. Forget it !!! No lawyer worth his salt will let you get away with putting such irresponsible "get-out of jail free" clauses. The text books tell us that the law is fair. Therefore you can try to be smart and put in lots of sneaky clauses but since the law is potentially fair it will rule any unreasonable clauses to be null & void and find you liable. There are plenty of fish in the sea. I always advise my clients if the other party wants everything in their favour - walk away from the deal. You don't want to do business with such unreasonable people. Unless of course he makes you an offer too good to refuse. But again - nobody gives away something for nothing. |
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Nik Zafri's response
Good one ahvincent!!
My turn :
corpbabes wrote: |
Im just wondering what happens if the defects occur after the warranty period, who will be liable and is there any legislations regarding this? As for the owner of the building for example, is his liability reduced if anything happens after the warranty period is over? |
That's why looking into SPA (sales and purchase agreement) is very important before signing them - (that goes to everyone..not only housebuyers but property buyers as well) we don't want to end up in sticky situations like this one. I BET no party (developers, builders, bankers, lawyers) would tell you of your RIGHTS (esp. implied ones) since their interest in ONLY to sell and attempted to their best 'intellectual' knowledge NOT to be accountable.
These parties make you look merely into the 'expressed' terms but somehow they failed or ignore/deny your rights to know the 'implied' ones.
One example - You may or may not know that even during DEFECT LIABILITY PERIOD (DFL), the purchaser/buyer has implied RIGHTS to know what's going on - otherwise, how would we know of the final quality? How 'd heck' CMGD or CF (they keep changing the terms - now they call it "Certificate of Fitness for Occupation (CFO) be issued on the first place and suddenly we buyers found out that we have been 'had' when 'leaks' are discovered in our so-called newly bought houses or buildings?
Here's another 'masterpiece' :
http://www.nst.com.my/Weekly/PropertyTimes/News/Viewpoint/20030305105233/Article/
The waiting game
Many house buyers complain of having to take over of vacant possession (VP) of their new houses when they are not ready for occupation.
One of the reasons for this is that prior to amendment, the Housing Developers Act allowed developers to hand over VP upon application for the Certificates of Fitness for Occupation (CF). Many developers exploited this tenet of the Act by rushing to hand over the properties the minute the architect declared “practical completion”.
Problems for buyers
The hand over of VP without a confirmed date for occupancy has created numerous problems for house buyers. First, the new owners would have to make all outstanding payments as stipulated in the Third Schedule of the Sale and Purchase Agreement (SPA) upon taking VP. Next, the 18-month defect liability period would start to run 14 days from the date of notification of the hand over of VP, and third, the buyers would have to take over the responsibility for the security of their properties.
This state of affairs is grossly unfair to buyers. Imagine not being able to stay in your property after you’ve made all the outstanding payments, including maintenance charges. And if you’re not able to stay in your house, how will you identify and rectify faults that may be caused by the developer? Supposing the CF is issued six months after you receive your keys; this means six months of the defect liability period would have been wasted. Another point is that if you cannot stay in your home, how can you prevent vandalism and theft of your fittings, short of hiring a security guard, which many cannot afford?
Besides these, the house Buyers Association has come across other complaints from buyers who have been shown CFs from other projects that have been presented as theirs or CFs with falsified endorsements! Some buyers have taken VP, only to find that the developers have financial difficulty in fulfilling their obligations to apply for the CF!
Developers’ responsibility
The application for CF is governed by the Building By-laws Act. As the name implies, the CF is an official document issued by the local authority to acknowledge that a building is safe for occupation.
It is the responsibility of the developer through its appointed qualified professionals, chiefly the architect, to make the application according to the Building By-laws and other conditions imposed by the appropriate authorities.
When complaints surface, both developers and the appropriate authorities point fingers at each other. As explained by Ministry of Housing and Local Government legal adviser Shamsulbahri bin Ibrahim, and advocate and solicitor Toong Gek Fong, in an article on the Malaysian Law Journal website (http://www.mlj.com.my/free/index.asp): “The crux of the problems relating to delay in issuance of CFO could be because:
1. The developer’s application for CFO is incomplete or not in compliance with all the requirements necessary for the issuance of CFO, resulting in the application being rejected by the appropriate authority. For instance, some developers fail to submit the Form E together with copies of all letters of clearance or approval (surat sokongan) from the relevant technical agencies, which are required by the appropriate authority for issuance of CFO, or
2. The delay or inefficiency of the appropriate authority issuing the CFO.”
To exonerate the local authorities from blame, the Ministry of Housing has issued directives to the effect that:
• All applications for CF submitted by developer are to be checked and confirmed to be in compliance with all requirements for issuance of CF before such applications shall be accepted by the appropriate authority;
• Upon acceptance of the Form E, the appropriate authority is to issue its written confirmation that the Form E submitted by the developer has been duly checked and accepted by the appropriate authority;
• Once such applications have been duly checked and accepted by the appropriate authority, the CF shall be issued or deemed to be issued within 14 days from the date such applications are accepted by the appropriate authority; and
• The appropriate authority will submit a written report/explanation to the Housing Ministry in respect of such cases where the CF is not issued within 14 days from the date the relevant application is accepted by the appropriate authority and in any other cases of undue delay in the issuance of the CF by the appropriate authority.
By-law 25 of the Uniform Building By-Laws 1984 was amended to provide for the issuance of the CF by the appropriate authority within 14 days from the date of acceptance of Form E, failing which the CF shall be deemed to be issued to the owner of the building.
Under the amended Housing Development Act, developers’ responsibility with regard to VP and the CF has been expanded to include the following:
1. Conditions for delivery of vacant possession
It must submit a supporting certificate signed by its architect certifying that the building has been duly constructed and completed in accordance with all relevant Acts, by-laws and regulations and that all conditions by the appropriate authority in respect of the CF have been duly complied with and a supporting letter of confirmation from the appropriate authority certifying that the Form E (the application form for CF) has been duly submitted by the developer and checked and accepted by the appropriate authority.
• Duties to the Controller of Housing:
It must inform the Controller of the handing over of VP to the buyers and submit a certified true copy of the architect’s completion certificate and that water and electricity supply are ready for connection. It must also inform the Controller if the appropriate authority has refused to accept the submission of any document relating to the issuance of the CF and submit the refusal letter from the appropriate authority.
With the amendments to the Housing Development Act and the Building By-laws, it would seem that when house buyers receive notice of hand over of VP, they can assume safely that the occupancy of the property can be confirmed within 28 days of the notice. If not, the hand over of vacant possession can be considered premature, and the house buyer has every right to challenge the notice and asked the developer to withdraw it.
With the amendments too, the HBA sees no cause for local authorities to issue temporary certificates of fitness as it is not to the house buyers’ advantage to occupy a home based on such a certificate.
We hope the Ministry of Housing is confident enough to implement further amendments of the Act, such as imposing that the delivery of VP comes with the CF. It is only right that a buyer should be able to take vacant possession of a home that is certified fit for occupation.
The National House Buyers Association is a non-profit, non-governmental, non-political organisation manned by volunteers. Our website is www.hba.org.my. E mail: info@hba.org.my
- Property Times 1st March 2003 issue -
Which also may shed the light on your next analogy
Corpbabes : Also, can I give an anology: Say in a high rise building in genting, a disaster happen due to a design defect ; Contractually we exclude design defects and say construction defects, in death or personal injury, therefore can we say that in this scenario that the project owner be liable? What if we have designer and builder ... To what extent can we pass the buck to them?
Perhaps I didn't understand the question. But somehow, I doubt that this clause (design defect) is excluded in the contract - again depending on which stage you're talking about but typically in the 'design and build' mode, it's very irregular if a contract exclude such clause cos' it is regulated in Uniformity Building By-Laws 1984 (+ The Engineers Act as well) Even if there is NO such clause, the law prevails over 'deficiency' of such clause in a contract.
Remember, when a contract doesn't favour the law (where the latter being the former's umbrella), then the law shall prevail - e.g. clause ambiguity, or 'something that should be included but excluded - yet the law states clearly that it should be included'
But alas, despite of my explanation here, you should know that ahvincent is talking about the 'ugly REALITY of the construction industry' (which I must admit..it's TRUE) and you should take his suggestions into account as well.
and corpbabes (what's your real name..or at least a short one) - don't have to apologise profusely or being humble, you should be proud to pose such difficult question amidst a topic that not many want to be participating
First of all, thanks ahvincent and nik zafri for explaining patiently to the issue that i have put forth. Dont worry, I understand the ethical issues that arise, but theoretically, i still have to see things from every issue so that i can write a good research on it.
After taking everything both ahvincent and nik said, correct me if im wrong, but does it mean that during the warranty period, in the event of personal injury and death, the owner wont be fully liable, but he can bring in, say the developer etc as contributory negligent? but after the warranty period, it would be difficult to make the owner liable for any defects that comes up?
Further, on the same thread, can we then exclude design liability? It may take years to discover the defects, but say, from the owner's point of view, can we exclude liability still by contract and also contractually exclude tort after the warranty period is over?
re there any statutory prescriptions in relation to warranty periods for construction works that i spoke about in my first post, nik, you said that would depend on which stage that i'm referring to - pre-construction, during construction and post construction? May i know if there is any statutory prescriptions for all stages of construction?
Many thanks in advance.
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nikzafri's reponse
Let me try : (I’m trying only maaah - so corpbabes – take the following as my personal views…as I may be right and I may be wrong..all is based on experience - and you must excuse me..some of your questions may not be answered - not that I don't know - and I'm sorry)
1. “during the warranty period, in the event of personal injury and death, the owner won’t be fully liable, but he can bring in, say the developer etc as contributory negligent? but after the warranty period, it would be difficult to make the owner liable for any defects that comes up?”
2. “Further, on the same thread, can we then exclude design liability? It may take years to discover the defects, but say, from the owner's point of view, can we exclude liability still by contract and also contractually exclude tort after the warranty period is over?”
No. 1 - I’m sure you remember the Highland Towers Case? It was WAY after the warranty period itself BUT the designer was still being summoned by court.
http://www.lawyerment.com.my/library/doc/laws/casecode/jdgm/11082000-01-1.shtml
Within this civil suit, you can clearly see the consultant (design) consortium (defendants) was still being called to defend itself (not necessarily being charged if proven that the onus of liability is not due to his design)
So, when a case happen, it will relate to one process to another and will start from the Design/Planning stage itself.
Of course, in the process, if the designer will argue to prove that it may or may have nothing to do with his/her design - with sufficient evidence substantiating his/her testimony – if the court is OK with it, then definitely the developer would be the NEXT target (contract may be referred to)
In this stage, probably the answer/onus may lie on the developer or the contractor. Certain things like ‘approving and/or making unlawful (design) deviation’ not according to the ‘approved design brief/specifications/drawings/plans’ or ‘using low-quality materials’ etc. etc. may come into the picture.
It depends really on how the court handle the case judging by evidence submitted. You'll be surprised that the outcome may be a LOT different that what I've said here.
But, I personally think, despite that the owner said that he can bring the developer according to the contractual obligation; yet; by right, being the owner, he should know what’s happening right from the start to the end of the project .
Back to the ‘ugly reality’ the owner would usually ‘wash his hands’ and PUT other parties responsible for the ‘failure’ just because he has all the money but he doesn’t have the experience!
But he should remember that he’s the one who was responsible for appointing the developers (if not himself IS the developer) plus agreeing to the appointment of design consultants (in turnkey/design and build environment). So it would be more effective if the owner IS a technically competent person by qualifications/and/or experience.
When it comes to court’s judgement, it’s very complex to determine ‘who is wrong for what’ as the process of the law is a bit different…too many factors to be considered. Sometimes, the law doesn’t state clearly or citing the examples but there are supporting elements that can be deemed as legal – for example, standards and codes of practice regarding design.
In another situation, the right people you should also be asking would the insurance company on construction insurance – I do not know much about this one but I do know one thing, construction insurance can sometime NOT cover a ‘prototype technology/design’ without any technical documentation, codes of practice/standard, method statements, research etc. to prove that the design is SAFE even after the warranty period. So try the insurance company…
Apart from Insurance, you should also try to pose the question to these ‘guys’ who I considered ‘my e-associates’ as well :
http://pmimy.org/modules/newbb/viewtopic.php?topic_id=90&forum=2
Nevertheless, You should take this into account as well -.every warranty period has an ‘expiry date’. In some countries, 20 years is sometimes considered ‘dilapidated’, ‘unsafe’ and possibly ‘condemned’. Notice is given and legal action can be taken…
No. 2 – It really depends on the case we’re talking about, how severe the case would be. Usually design liability cannot be excluded even after the warranty period typically ‘in the event of ‘total design or major design failure’ (I’m unsure of personal injury and death – but in Highland Towers – the main focus was the design failure as it involved ‘total structure collapse’ as the 'cause' – then, followed by 'personal injury and death' as the effect - even the effect was associated to legal action taken by immediate family of the deceased..if not, probably there would be no case)
Of course, I’m not referring in view to discover defects related to design after many years of project completion, it wouldn’t be practical (we can’t dismantle or hack what is already being installed and used)
What I’m referring to is actually the documentation/data/forms/supervision during all stages of construction including design data/calculation, design amendment procedures, inspection and testing ,construction methodology/method statements etc. as this should be ‘archived’ safely during the post-construction stage (final accounts) – usually kept by all parties – the client, the developer cum the consultants + the contractor. (again, some data could already be destroyed due to record retention policy...hmmm difficult isn't it?)
Thus, from these documentation/data, we can ‘go back in time’, detect any possible deficiency/how the corrective/preventive actions being taken (right or wrong way)
On the question of whether there is such prescription of statutory, I think my answer has been given in ‘BOLD’ abovementioned. That’s why we have contracts, codes of practice, design coordination, method statements, inspection and test plans etc. – these documentation serve as the professional justifications to the law itself and to assist implementation of the law. Again I would reiterate - in any case..the law prevails.
(Which law? you can easily buy them - 3 titles recommended - Contract Law, Uniformity Building ByLaw and the Engineer's Act)
And YES, (again this is my personal view) it SHOULD be covering ALL STAGES of construction as design is not only during pre-construction – despite being approved – they are still subject to amendment and revision – why? Because of the application based on the actual site condition – there will still be deviations even during and after the construction. (But I’m not implying that the law mention all these very clearly) – Contracts are originally about ‘proclamation of I trust you and vice versa’ and they should be ‘referred’ to the law.
Here’s another unique case you should be looking into :
http://www.contractjournal.com/Articles/2007/01/31/53440/questions-of-law-and-design-liability.html
But alas, there are too many arguments on the subject that you’ve asked. I’m not surprised if some quarters may argue my opinion..so regard what I’ve said here as ‘personal views’ and not representing anyone or any party.
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The Sun Makin Sens Section - by Tan Siok Choo
East Asia - no longer a follower?
THAT the US appears to be sliding into a recession cannot be denied. What is uncertain is whether East Asia in general, and Malaysia in particular, can avoid following in its wake. While it may be premature to offer a definitive answer to this question, three separate indicators underscore export-dependent East Asia’s growing resilience.
First, a recent article by Bloomberg suggests Japan may escape the recession that appears to be engulfing the US. As one of the world’s largest financial news and data provider notes, since 1970, Japan has followed the US into all five recessions. In 1970, the US accounted for 30% of Japan’s exports. Today, that figure has fallen to only 20%.
Japan’s reduced economic dependence on the US is largely due to the success of manufacturing companies like Toyota in capitalising on buoyant markets, particularly in China and other countries. In the past two years, Japan’s exports to China jumped by 45% while those to Russia doubled.
Additionally, a 5.6% drop in US vehicle sales didn’t stop Toyota’s total unit sales from rising in the first quarter. Furthermore, Toyota is poised to overtake the US-based General Motors as the world’s largest auto company in terms of sales.
Last month, two usually bearish brokers on Japan – Goldman Sachs and Morgan Stanley – backed off from predictions that the world’s second largest economy will go into a recession this year. The catalyst for both brokers’ changed view was because revised industrial production figures for February showed output rose to a record rather than fell, the Bloomberg article says.
Even though exports could slow down, corporate Japan is now financially stronger than when its stock and property bubble burst in the late 1980s. The average ratio of corporate liabilities to assets has dropped to about 65%, the lowest level since 1955 from about 80% in the mid-1990s, the Merrill Lynch report says.
Moreover, Japanese companies have soaked up excess production capacity. Reduced debt and streamlined production will enhance corporate Japan’s capability to withstand a slump in the US, Bloomberg notes.
Second, the price of oil has continued its inexorable climb to a record high, even though its biggest market appears to be softening. Last in electronic trading last Friday, US crude futures for June delivery hit an intra-day record of US$126.20 (RM403.84) a barrel.
Admittedly, the escalating price of oil this year may be prompted by concern about possible disruptions in continued supply in countries like Nigeria and Venezuela. That prices continue to skyrocket despite sharply declining demand from the US, the world’s largest consumer of oil, is unusual. In February this year, US demand for oil fell to 19.7 million barrels of oil a day, down by one million barrels from last year’s average.
The International Energy Agency (IEA) says oil use worldwide will increase 2% this year because of growing demand in emerging markets. For the first time this year, emerging markets will consume more crude oil than the US, the IEA notes. Emerging markets will consume 20.67 million barrels of oil a day, an increase of 4.4%. In contrast, demand in the US will contract by 2% to 20.38 million barrels daily.
"The US recession will be a footnote as far as the oil market is concerned. Supply isn’t growing and demand is growing robustly in the developing world," says Jeffrey Rubin, chief economist at CIBC World Markets in Toronto who has correctly forecast higher oil prices since 2000.
Third, shipments of personal computers (PC) grew at a double-digit pace worldwide in the first quarter despite anaemic growth in the US, technology research firm, IDC says. Indeed, global figures for the first quarter exceeded its forecast.
Although growth in US sales slowed to around 3%, overseas gains boosted global first quarter PC shipments 14.6%, IDC notes. That’s because the US accounted for 23% of global shipments in the first quarter compared with 25% a year ago.
"Even if there is a particularly bad US market, it is becoming a smaller piece of the global puzzle," IDC vice-president Bob O’Donnell points out.
Despite these positive indicators, East Asia’s growing resilience cannot be equated with total independence from the US economy.
For a start, if the US economy is in recession, it may take months before the impact is transmitted to East Asia. Additionally, in an increasingly interlinked global economy – particularly in financial markets – it is inconceivable that what happens in the US can be ring-fenced from other emerging economies.
But if the inconceivable does happen – if the US sinks into recession and if East Asia succeeds in decoupling from the world’s largest economy – then a new era in global economic history may have begun.
Microsoft and Yahoo! No deal
May 8th 2008 | SAN FRANCISCO
From The Economist print edition
Microsoft walks away from Yahoo!, and both companies lose
RATHER as John McCain cannot be displeased to have seen Hillary Clinton and Barack Obama fighting it out, Google has for the past three months enjoyed watching its only two serious rivals, Yahoo! and Microsoft, tear each other to pieces. Yahoo!, once an internet pioneer, has fallen far behind Google in web search and related advertising. Microsoft still dominates desktop computing but lags behind Google as software moves online. So Steve Ballmer, Microsoft's boss, dared ask Yahoo!: what would be wrong with making, if not exactly a dream team, at least a joint effort out of it?
But on May 3rd, after a frustrating marathon of meetings, Mr Ballmer walked away. He had raised his offer for Yahoo! from an initial $44.6 billion on January 31st to about $47.5 billion, some 70% more than Yahoo!'s value at the time of the opening bid. Jerry Yang, Yahoo!'s co-founder and boss, wanted at least $5 billion more. Mr Ballmer wrote him a bitter letter saying that “you and your stockholders have left significant value on the table.” Wall Street's verdict, on May 5th, was to cut Yahoo!'s value to $34 billion.
That the sell-off was not even worse primarily reflects the possibility that a deal may yet happen. Another software company, Oracle, recently dropped a bid for a smaller rival, BEA Systems, after its board rejected the offer, but eventually had its way after BEA's angry shareholders forced their board back into negotiations and a sale. Mr Ballmer's farewell letter to Yahoo!, by recapitulating the negotiations in all their embarrassing detail, provides just the sort of fodder for Yahoo!'s investors to order Mr Yang to resume talks.
Mr Ballmer took particular pains to criticise Yahoo!'s readiness to “make Yahoo! undesirable as an acquisition for Microsoft.” By this he means Mr Yang's apparent plan to outsource Yahoo!'s search-advertising technology to, of all people, Google. In a purely mathematical sense, this could indeed make Yahoo! somewhat more valuable. Google is better than Yahoo! or Microsoft at placing relevant ads next to search results and collects more in revenue for each resulting mouse click.
Yet it is a bizarre tactic. The history of Yahoo! during this decade is of trying, failing, and trying again to catch up with Google in search advertising. Its first big failure was not to bid high enough to buy Google outright. Its next attempt, in 2003, was to buy Overture, the company that pioneered search advertising, but by then Google was pulling ahead. An outsourcing deal with Google was considered and rejected. For the past two years Yahoo! has invested oodles in a project called Panama that was meant, again, to catch Google.
Presumably Yahoo! has been exerting itself so because it believes that the advertising technology is, along with search, the source of competitive advantage in the internet era. That is certainly what Microsoft believes, which is why it bought aQuantive, an online-advertising specialist, and built its own search-ads platform, called adCenter. What Yahoo! and Microsoft lack is volume—in the number of both searches and advertisers bidding to place ads. Teaming up would help to address that problem; but a capitulation by Yahoo! to Google would merely invite antitrust regulators to look at Google's dominance.
Mr Yang could merge Yahoo! with AOL, the web portal of Time Warner, but AOL already outsources its search ads to Google and would be no help at all in catching the leader. Asserting, as Mr Yang does, that Yahoo! all by itself could become “the starting point” on the internet, and its advertising powerhouse, rings hollow.
Things look just as bleak for Mr Ballmer. He has invested billions trying to make Microsoft an internet and advertising superpower. But it seems not to matter. According to Danny Sullivan, a web-search analyst, Microsoft “literally has no brand” when it comes to its online services—nobody has ever been advised “to Live” or “to MSN” a recipe or a cute classmate. The only one having any fun continues to be Google.
Nik
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Acknowledging China By Jianxiong Zhang | Thursday, February 28, 2008
China's economic boom of the last three decades has raised concerns about resource scarcity, pollution and trade. While China's development has made it one of the world's largest economies, hundreds of millions still live in poverty. Jianxiong Zhang argues that the United States and the European Union must acknowledge China's efforts to address climate change and trade disputes.
In the context of globalization, the economy increasingly influences international relations. This is because strengthening interdependence and intensifying frictions between economies tend to go hand-in-hand. As a result, it is no wonder China is worried about the impacts on its relations with the United States and the European Union.
The scale of China's growth
It is well-known that China's economy has been growing at an average rate over 9% for 27 years now. And, in the past five years, its annual growth rate exceeded 10%.
In 2006, China’s GDP reached $2.6 trillion (in purchasing power terms), or 5% of the world total — ranking fourth in the world.
Growth and poverty
China’s development is as an evolutionary stage, rather than an obstacle to its relations with the United States and European Union.
China has reached the top ranks of economies in the world by GDP — but it still lags behind 109 other countries in terms of per capita income.
China needs to further develop, so as to improve the living standards of its citizens, allowing them to enjoy a life comparable to that in medium-developed countries.
This is their right — and indeed one of their fundamental human rights.
Supporting the world economy
The continual growth in China makes significant contributions to the world economy. Firstly, China’s economy contributed 13.8% of the global GDP growth during the 2003-2005 period.
The rate is second only to that of the United States. That is to say, with China’s continued growth, the world economy will not substantially slide down even if the U.S. economy falls into recession.
Benefits from China
China needs to further develop, so as to improve the living standards of its citizens. This is their right — and indeed one of their fundamental human rights.
Second, cheap goods exported from China are helpful to prevent inflation in its trading partners. Third, the fruits of economic growth in China are shared by industrialized countries in general — and in the United States and the European Union in particular.
They receive a great deal of profits from their place in the international division of labor, and gain significant returns from their financial services, foreign direct investment and patent income from China.
For example, about 20% of revenues from each mobile phone, 30% from each computer and 30-40% from numerically controlled machine tools made in China go to investors or patent owners in the United States, the European Union or other countries.
Concerns from abroad
Kind-hearted people in the rest of the world are happy to see and hail the economic progress in China, for it helps millions of people there escape from poverty. Thus, it brings new impetus to economic growth globally.
However, the United States and Europe are very concerned about the consequences of China’s development. Apart from positive expectations, they wonder what negative impacts China’s development will have on them.
Managing growth
Kind-hearted people in the rest of the world hail the economic progress in China, for it helps millions of people there escape from poverty.
For instance, they wonder whether China will compete for natural resources, energy and markets with them
— and to what extent China’s development will lead to pollution and climate change. A more extreme observation even views China’s development as a “threat.”
As regards climate change, it should be noted that Beijing has already set about tackling the problem.
The Chinese government pursues a policy of “scientific development” and carries out programs to build China into a resource-conserving society, which contain a series of measures to save resources and energy.
Resources in historical perspective
From 1990 to 2005, the energy consumption per thousand dollars of GDP was cut from 2.19 to 1.17 tons of coal equivalent, with an annual reduction rate of 4.1%. This figure, however, as well as greenhouse gases emissions per unit of GDP in China, is still higher than those in the United States and the European Union.
This is largely because the United States and the European Union have been in the post-industrialized stage (where more than 70% of GDP is contributed by service sectors), while China is still in the industrializing stage (where almost half of GDP comes from the industrial sector). This can be changed only by further development — and the change is under way at an accelerating pace.
Tackling climate change
Between close trading partners, disputes are a normal phenomenon. This should not be a factor to undermine relations between them.
The Chinese government set the targets of bringing down energy consumption per unit of GDP by 20%, cutting the total discharge of major pollutants by 10% and increasing forest cover from 18.2% to 20% between the end of 2005 and 2010.
The National Program on Tackling Climate Change released in May 2007 formulates that, by 2010, China will cut CO2 emissions by one billion tons through improving technologies and replacing fossil fuels with renewable energies.
If international cooperation in developing greenhouse gas zero-discharge technologies can be accelerated, the impacts of China’s development on climate change will be further minimized.
The rights of the poor
As for the equitable distribution of energy, as well as natural resources and markets, this matter requires bilateral or multilateral consultations. Such consultations must be carried out on an equal basis.
In this process, two issues should be considered. One is the development right of poor countries. There are quite a few countries in the world where people live a life far below the living standards of industrialized countries.
A sense of equity
If international cooperation in developing greenhouse gas zero-discharge technologies can be accelerated, the impacts of China’s development on climate change will be further minimized.
When distributing the world's resources, rich countries should give more considerations to the interests and rights of poor countries. Up to now, the per capita income in China is just equal to 4.5% of that in the United States, 5% of that Japan, 5.8% of that in the eurozone and 10% of that in South Korea.
There are still 135 million people in China who live on less than $1 per day. There are 750 million such people in the world, of which China accounts for 18%.
The other issue is the principle of equality. According to the World Bank, the 2000 per capita consumption of energy was 3.8 tons of oil in the euro zone, 8.2 tons in the United States — while just 0.9 ton in China. The per capita consumption of energy in the United States is nine times that in China.
Measuring China's growth
At the same time, the per capita rate of CO2 emissions in China was two tons, compared with eight tons in the eurozone and 21 tons in the United States. In 2004, the per capita CO2 emissions in China increased to four tons.
This figure, however, was only 87% of the world average — and 33% of the OECD average.
Accepting disputes, improving relations
Along with China’s development, the trade disputes between it and the United States as well as the European Union are on the rise. Between close trading partners, disputes are a normal phenomenon. This should not undermine relations between them.
The economic structure of China can be changed only by further development — this is happening at an accelerating pace.
Trade disputes occur between the United States and the European Union, the United States and Japan, as well as the European Union and Japan. Since its inception, the WTO dispute settlement mechanism has been mostly used to deal with disputes between the United States and the European Union. The disputes, however, have never undermined the bilateral relationship.
In short, the contributions of China’s development are a net plus — even in light of its negative influences on the rest of the world. The negative effects brought about by development are controllable.
China’s development should be taken as an evolutionary process, rather than an obstacle to its relations with the United States and European Union.
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Here's something better from China Daily
China is not decoupling from US Economy
(Agencies)
Updated: 2008-01-21 10:14
BEIJING - China's central bank on Sunday poured cold water on the idea that the country's economy can decouple from the United States.
China's exports will be badly hit if US consumption weakens, Zhang Tao, deputy head of the international department of the People's Bank of China, told a financial forum.
Figures due this week are expected to show that China's gross domestic product grew more than 11 percent in the fourth quarter of 2007 from a year earlier, despite a deepening US credit crunch.
But Zhang said he saw mounting risks to US consumer demand. He noted that retail sales unexpectedly fell 0.4 percent in December, while property prices were falling and rising petrol prices were crimping disposable incomes.
"If US consumption really comes down, that's bad news for us," Zhang said. "That will have a pretty severe impact on our exports."
Wang Jian, head of the China Society of Macroeconomics, agreed that China's growing trade with Europe was unlikely to insulate it from a drop in exports to the United States.
If US demand weakened, Europe would export less to America and, in turn, would buy less from China, Wang said.
"Global demand is ultimately driven by the United States," he said.
More US interest rate cuts or a further fall in the dollar in response to a weakening economy would have an impact on Chinese monetary policy, Zhang said without elaborating.
He said the subprime crisis would not divert China from the path of financial innovation.
"It will not change our general direction. However, it serves as a warning that we need to pay attention to risk controls and launch new businesses in a steady, orderly way," he said.
Dai Genyou, director of the central bank's credit bureau department, said higher Chinese interest rates would have little impact on the ability of companies to service their debts. Nor would they derail corporate investment plans, Dai said.
Islamic banking is a new phenomenon that has taken many observers by surprise. The whole banking system has been islamized in both Iran and Pakistan. In addition, there are some thirty Islamic banks in operation in other parts of the globe, including the Jeddah-based Islamic Development Bank (IDB) but excluding numerous non-bank Islamic financial institutions (see Appendix). What is more, the speed with which Islamic banks have sprung up and the rate at which they have progressed make it worth-while to study them systematically. An attempt is made in this paper (a) to survey the growing literature on Islamic banking, in particular (b) to trace the growth and development of Islamic banking, and (c) to highlight its salient characteristics.
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Evolution
The first modern experiment with Islamic banking was undertaken in Egypt under cover, without projecting an Islamic image, for fear of being seen as a manifestation of Islamic fundamentalism which was anathema to the political regime. The pioneering effort, led by Ahmad El Najjar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in l963. This experiment lasted until l967 (Ready l98l), by which time there were nine such banks in the country. These banks, which neither charged nor paid interest, invested mostly by engaging in trade and industry, directly or in partnership with others, and shared the profits with their depositors (Siddiqi l988). Thus, they functioned essentially as saving- investment institutions rather than as commercial banks. The Nasir Social Bank, established in Egypt in l97l, was declared an interest-free commercial bank, although its charter made no reference to Islam or Shariah (Islamic law).
The IDB was established in l974 by the Organization of Islamic Countries (OIC), but it was primarily an inter-governmental bank aimed at providing funds for development projects in member countries. The IDB provides fee- based financial services and profit-sharing financial assistance to member countries. The IDB operations are free of interest and are explicitly based on
Shariah Principles
In the seventies, changes took place in the political climate of many Muslim countries so that there was no longer any strong need to establish Islamic financial institutions under cover. A number of Islamic banks, both in letter and spirit, came into existence in the Middle East, e.g., the Dubai Islamic Bank (l975), the Faisal Islamic Bank of Sudan (l977), the Faisal Islamic Bank of Egypt (l977), and the Bahrain Islamic Bank (l979), to mention a few. The Asia-Pacific region was not oblivious to the winds of change. The Philippine Amanah Bank (PAB) was established in l973 by Presidential Decree as a specialized banking institution without reference to its Islamic character in the bank's charter. The establishment of the PAB was a response by the Philippines Government to the Muslim rebellion in the south, designed to serve the special banking needs of the Muslim community. However, the primary task of the PAB was to assist rehabilitation and reconstruction in Mindanao, Sulu and Palawan in the south (Mastura l988). The PAB has eight branches located in the major cities of the southern Muslim provinces, including one in Makati (Metro Manila), in addition to the head office located at Zamboanga City in Mindanao. The PAB, however, is not strictly an Islamic bank, since interest-based operations continue to coexist with the Islamic modes of financing. It is indeed fascinating to observe that the PAB operates two 'windows' for deposit transactions, i.e., conventional and Islamic. Nevertheless, efforts are underway to convert the PAB into a full-fledged Islamic bank (Mastura l988).
Islamic banking made its debut in Malaysia in l983, but not without antecedents. The first Islamic financial institution in Malaysia was the Muslim Pilgrims Savings Corporation set up in l963 to help people save for performing hajj (pilgrimage to Mecca and Medina). In l969, this body evolved into the Pilgrims Management and Fund Board or the Tabung Haji as it is now popularly known. The Tabung Haji has been acting as a finance company that invests the savings of would-be pilgrims in accordance with Shariah, but its role is rather limited, as it is a non-bank financial institution. The success of the Tabung Haji, however, provided the main impetus for establishing Bank Islam Malaysia Berhad (BIMB) which represents a full- fledged Islamic commercial bank in Malaysia. The Tabung Haji also contributed l2.5 per cent of BIMB's initial capital of M$80 million. BIMB has a complement of fourteen branches in several parts of the country. Plans are afoot to open six new branches a year so that by l990 the branch network of BIMB will total thirty-three (Man l988).
Reference should also be made to some Islamic financial institutions established in countries where Muslims are a minority. There was a proliferation of interest-free savings and loan societies in India during the seventies (Siddiqi l988). The Islamic Banking System (now called Islamic Finance House), established in Luxembourg in l978, represents the first attempt at Islamic banking in the Western world. There is also an Islamic Bank International of Denmark, in Copenhagen, and the Islamic Investment Company has been set up in Melbourne, Australia.
Rationale
The essential feature of Islamic banking is that it is interest-free. Although it is often claimed that there is more to Islamic banking, such as contributions towards a more equitable distribution of income and wealth, and increased equity participation in the economy (Chapra l982), it nevertheless derives its specific rationale from the fact that there is no place for the institution of interest in the Islamic order.
Islam prohibits Muslims from taking or giving interest (riba) regardless of the purpose for which such loans are made and regardless of the rates at which interest is charged. To be sure, there have been attempts to distinguish between usury and interest and between loans for consumption and for production. It has also been argued that riba refers to usury practiced by petty money-lenders and not to interest charged by modern banks and that no riba is involved when interest is imposed on productive loans, but these arguments have not won acceptance. Apart from a few dissenting opinions, he general consensus among Muslim scholars clearly is that there is no difference between riba and interest. In what follows, these two terms are used interchangeably.
The prohibition of riba is mentioned in four different revelations in the Qur'an.1 The first revelation emphasizes that interest deprives wealth of God's blessings. The second revelation condemns it, placing interest in juxtaposition with wrongful appropriation of property belonging to others. The third revelation enjoins Muslims to stay clear of interest for the sake of their own welfare. The fourth revelation establishes a clear distinction between interest and trade, urging Muslims to take only the principal sum and to forgo even this sum if the borrower is unable to repay. It is further declared in the Qur'an that those who disregard the prohibition of interest are at war with God and His Prophet. The prohibition of interest is also cited in no uncertain terms in the Hadith (sayings of the Prophet). The Prophet condemned not only those who take interest but also those who give interest and those who record or witness the transaction, saying that they are all alike in guilt.2
It may be mentioned in passing that similar prohibitions are to be found in the pre-Qur'anic scriptures, although the 'People of the Book', as the Qur'an refers to them, had chosen to rationalize them. It is amazing that Islam has successfully warded off various subsequent rationalization attempts aimed at legitimizing the institution of interest.
Some scholars have put forward economic reasons to explain why interest is banned in Islam. It has been argued, for instance, that interest, being a pre- determined cost of production, tends to prevent full employment (Khan l968; Ahmad n.d.; Mannan l970). In the same vein, it has been contended that international monetary crises are largely due to the institution of interest (Khan, n.d), and that trade cycles are in no small measure attributable to the phenomenon of interest (Ahmad l952; Su'ud n.d.). None of these studies, however, has really succeeded in establishing a causal link between interest, on the one hand, and employment and trade cycles, on the other. Others, anxious to vindicate the Islamic position on interest, have argued that interest is not very effective as a monetary policy instrument even in capitalist economies and have questioned the efficacy of the rate of interest as a determinant of saving and investment (Ariff l982). A common thread running through all these discussions is the exploitative character of the institution of interest, although some have pointed out that profit (which is lawful in Islam) can also be exploitative. One response to this is that one must distinguish between profit and profiteering, and Islam has prohibited the latter as well.
Some writings have alluded to the 'unearned income' aspect of interest payments as a possible explanation for the Islamic doctrine. The objection that rent on property is considered halal (lawful) is then answered by rejecting the analogy between rent on property and interest on loans, since the benefit to the tenant is certain, while the productivity of the borrowed capital is uncertain. Besides, property rented out is subject to physical wear and tear, while money lent out is not. The question of erosion in the value of money and hence the need for indexation is an interesting one. But the Islamic jurists have ruled out compensation for erosion in the value of money, or, according to Hadith, a fungible good must be returned by its like (mithl): 'gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, equal for equal, and hand to hand ...'.3
The bottom line is that Muslims need no 'proofs' before they reject the institution of interest: no human explanation for a divine injunction is necessary for them to accept a dictum, as they recognize the limits to human reasoning. No human mind can fathom a divine order; therefore it is a matter of faith (iman).
The Islamic ban on interest does not mean that capital is costless in an Islamic system. Islam recognizes capital as a factor of production but it does not allow the factor to make a prior or pre-determined claim on the productive surplus in the form of interest. This obviously poses the question as to what will then replace the interest rate mechanism in an Islamic framework. There have been suggestions that profit-sharing can be a viable alternative (Kahf l982a and l982b). In Islam, the owner of capital can legitimately share the profits made by the entrepreneur. What makes profit- sharing permissible in Islam, while interest is not, is that in the case of the former it is only the profit-sharing ratio, not the rate of return itself that is predetermined.
It has been argued that profit-sharing can help allocate resources efficiently, as the profit-sharing ratio can be influenced by market forces so that capital will flow into those sectors which offer the highest profit- sharing ratio to the investor, other things being equal. One dissenting view is that the substitution of profit-sharing for interest as a resource allocating mechanism is crude and imperfect and that the institution of interest should therefore be retained as a necessary evil (Naqvi l982). However, mainstream Islamic thinking on this subject clearly points to the need to replace interest with something else, although there is no clear consensus on what form the alternative to the interest rate mechanism should take. The issue is not resolved and the search for an alternative continues, but it has not detracted from efforts to experiment with Islamic banking without interest.
Anatomy
As mentioned earlier, Islam does not deny that capital, as a factor of production, deserves to be rewarded. Islam allows the owners of capital a share in a surplus which is uncertain. To put it differently, investors in the Islamic order have no right to demand a fixed rate of return. No one is entitled to any addition to the principal sum if he does not share in the risks involved. The owner of capital (rabbul-mal) may 'invest' by allowing an entrepreneur with ideas and expertise to use the capital for productive purposes and he may share the profits, if any, with the entrepreneur- borrower (mudarib); losses, if any, however, will be borne wholly by the rabbul-mal. This mode of financing, termed mudaraba in the Islamic literature, was in practice even in the pre-Qur'anic days and, according to jurists, it was approved by the Prophet.
Another legitimate mode of financing recognized in Islam is one based on equity participation (musharaka) in which the partners use their capital jointly to generate a surplus. Profits or losses will be shared between the partners according to some agreed formula depending on the equity ratio. Mudaraba and musharaka constitute, at least in principle if not in practice, the twin pillars of Islamic banking. The musharaka principle is invoked in the equity structure of Islamic banks and is similar to the modern concepts of partnership and joint stock ownership. In so far as the depositors are concerned, an Islamic bank acts as a mudarib which manages the funds of the depositors to generate profits subject to the rules of mudaraba as outlined above. The bank may in turn use the depositors' funds on a mudaraba basis in addition to other lawful modes of financing. In other words, the bank operates a two-tier mudaraba system in which it acts both as the mudarib on the saving side of the equation and as the rabbul-mal on the investment portfolio side. The bank may also enter into musharaka contracts with the users of the funds, sharing profits and losses, as mentioned above. At the deposit end of the scale, Islamic banks normally operate three broad categories of account, mainly current, savings, and investment accounts. The current account, as in the case of conventional banks, gives no return to the depositors. It is essentially a safe-keeping (al-wadiah) arrangement between the depositors and the bank, which allows the depositors to withdraw their money at any time and permits the bank to use the depositors' money. As in the case of conventional banks, cheque books are issued to the current account deposit holders and the Islamic banks provide the broad range of payment facilities - clearing mechanisms, bank drafts, bills of exchange, travellers cheques, etc. (but not yet, it seems, credit cards or bank cards). More often than not, no service charges are made by the banks in this regard.
The savings account is also operated on an al-wadiah basis, but the bank may at its absolute discretion pay the depositors a positive return periodically, depending on its own profitability. Such payment is considered lawful in Islam since it is not a condition for lending by the depositors to the bank, nor is it pre-determined. The savings account holders are issued with savings books and are allowed to withdraw their money as and when they please. The investment account is based on the mudaraba principle, and the deposits are term deposits which cannot be withdrawn before maturity. The profit- sharing ratio varies from bank to bank and from time to time depending on supply and demand conditions.4 In theory, the rate of return could be positive or negative, but in practice the returns have always been positive and quite comparable to rates conventional banks offer on their term deposits.5
At the investment portfolio end of the scale, Islamic banks employ a variety of instruments. The mudaraba and musharaka modes, referred to earlier, are supposedly the main conduits for the outflow of funds from the banks. In practice, however, Islamic banks have shown a strong preference for other modes which are less risky. The most commonly used mode of financing seems to be the 'mark-up' device which is termed murabaha. In a murabaha transaction, the bank finances the purchase of a good or asset by buying it on behalf of its client and adding a mark-up before re-selling it to the client on a 'cost-plus' basis. It may appear at first glance that the mark-up is just another term for interest as charged by conventional banks, interest thus being admitted through the back door. What makes the murabaha transaction Islamically legitimate is that the bank first acquires the asset and in the process it assumes certain risks between purchase and resale. The bank takes responsibility for the good before it is safely delivered to the client. The services rendered by the Islamic bank are therefore regarded as quite different from those of a conventional bank which simply lends money to the client to buy the good.
Islamic banks have also been resorting to purchase and resale of properties on a deferred payment basis, which is termed bai' muajjal. It is considered lawful in fiqh (jurisprudence) to charge a higher price for a good if payments are to be made at a later date. According to fiqh, this does not amount to charging interest, since it is not a lending transaction but a trading one.
Leasing or ijara is also frequently practised by Islamic banks. Under this mode, the banks would buy the equipment or machinery and lease it out to their clients who may opt to buy the items eventually, in which case the monthly payments will consist of two components, i.e., rental for the use of the equipment and instalment towards the purchase price.
Reference must also be made to pre-paid purchase of goods, which is termed bai'salam, as a means used by Islamic banks to finance production. Here the price is paid at the time of the contract but the delivery would take place at a future date. This mode enables an entrepreneur to sell his output to the bank at a price determined in advance. Islamic banks, in keeping with modern times, have extended this facility to manufactures as well.
It is clear from the above sketch that Islamic banking goes beyond the pure financing activities of conventional banks. Islamic banks engage in equity financing and trade financing. By its very nature, Islamic banking is a risky business compared with conventional banking, for risk-sharing forms the very basis of all Islamic financial transactions. To minimize risks, however, Islamic banks have taken pains to distribute the eggs over many baskets and have established reserve funds out of past profits which they can fall back on in the event of any major loss.
Literature: Theory
It is not possible to cover in this survey all the publications which have appeared on Islamic banking. There are numerous publications in Arabic and Urdu which have made significant contributions to the theoretical discussion. A brief description of these in English can be found in the Appendix to Siddiqi's book on Banking without Interest (Siddiqi l983a). The early contributions on the subject of Islamic banking were somewhat casual in the sense that only passing references were made to it in the discussion of wider issues relating to the Islamic economic system as a whole. In other words, the early writers had been simply thinking aloud rather than presenting well-thought-out ideas. Thus, for example, the book by Qureshi on Islam and the Theory of Interest (Qureshi l946) looked upon banking as a social service that should be sponsored by the government like public health and education. Qureshi took this point of view since the bank could neither pay any interest to account holders nor charge any interest on loans advanced. Qureshi also spoke of partnerships between banks and businessmen as a possible alternative, sharing losses if any. No mention was made of profit-sharing.
Ahmad, in Chapter VII of his book Economics of Islam (Ahmad l952), envisaged the establishment of Islamic banks on the basis of a joint stock company with limited liability. In his scheme, in addition to current accounts, on which no dividend or interest should be paid, there was an account in which people could deposit their capital on the basis of partnership, with shareholders receiving higher dividends than the account holders from the profits made. Like Qureshi, above, Ahmad also spoke of possible partnership arrangements with the businessmen who seek capital from the banks. However, the partnership principle was left undefined, nor was it clear who would bear the loss if any. It was suggested that banks should cash bills of trade without charging interest, using the current account funds.
The principle of mudaraba based on Shariah was invoked systematically by Uzair (l955). His principal contribution lay in suggesting mudaraba as the main premise for 'interestless banking'. However, his argument that the bank should not make any capital investment with its own deposits rendered his analysis somewhat impractical.
Al-Arabi (l966) envisaged a banking system with mudaraba as the main pivot. He was actually advancing the idea of a two-tier mudaraba which would enable the bank to mobilize savings on a mudaraba basis, allocating the funds so mobilized also on a mudaraba basis. In other words the bank would act as a mudarib in so far as the depositors were concerned, while the 'borrowers' would act as mudaribs in so far as the bank was concerned. In his scheme, the bank could advance not only the capital procured through deposits but also the capital of its own shareholders. It is also of interest to note that his position with regard to the distribution of profits and the responsibility for losses was strictly in accordance with the Shariah.6 Irshad (l964) also spoke of mudaraba as the basis of Islamic banking, but his concept of mudaraba was quite different from the traditional one in that he thought of capital and labour (including entrepreneurship) as having equal shares in output, thus sharing the losses and profits equally. This actually means that the owner of capital and the entrepreneur have a fifty-fifty share in the profit or loss as the case may be, which runs counter to the Shariah position. Irshad envisaged two kinds of deposit accounts. The first sounded like current deposits in the sense that it would be payable on demand, but the money kept in this deposit would be used for social welfare projects, as the depositors would get zero return. The second one amounted to term deposits which would entitle the depositors to a share in the profits at the end of the year proportionately to the size and duration of the deposits. He recommended the setting up of a Reserve Fund which would absorb all losses so that no depositor would have to bear any loss. According to Irshad, all losses would be either recovered from the Reserve Fund or borne by the shareholders of the bank.
A pioneering attempt at providing a fairly detailed outline of Islamic banking was made in Urdu by Siddiqi in l968. (The English version was not published until l983.) His Islamic banking model was based on mudaraba and shirka (partnership or musharaka as it is now usually called). His model was essentially one based on a two-tier mudaraba financier-entrepreneur relationship, but he took pains to describe the mechanics of such transactions in considerable detail with numerous hypothetical and arithmetic examples. He classified the operations of an Islamic bank into three categories: services based on fees, commissions or other fixed charges; financing on the basis of mudaraba and partnership; and services provided free of charge. His thesis was that such interest-free banks could be a viable alternative to interest-based conventional banks.
The issue of loans for consumption clearly presents a problem, as there is no profit to be shared. Siddiqi addressed this problem, but he managed only to scratch the surface. While recognizing the need for such interest-free loans (qard hasan), especially for meeting basic needs, he seemed to think it was the duty of the community and the State (through its baitul mal or treasury) to cater to those needs; the Islamic bank's primary objective, like that of any other business unit, is to earn profit. He therefore tended to downplay the role of Islamic banks in providing consumption loans, but he suggested limited overdraft facilities without interest. He even considered a portion of the fund being set aside for consumption loans, repayment being guaranteed by the State. He also suggested that consumers buying durables on credit would issue 'certificates of sale' which could be encashed by the seller at the bank for a fee. It was then the seller not the buyer who would be liable as far as the bank was concerned. However, the principles of murabaha and bai' muajjal were not invoked.
Strangely, Siddiqi favoured keeping the number of shareholders to the minimum, without advancing any strong reasons. This is contrary to the general consensus which now seems to have emerged with reference to Islamic banks operating on a joint stock company basis, a consensus which incidentally is also in line with the Islamic value attached to a broad equity base as against heavy concentration of equity and wealth. Ironically, Siddiqi thought that interest-free banking could operate successfully 'only in a country where interest is legally prohibited and any transaction based upon interest is declared a punishable offense' (l983b:l3). He also thought it important to have Islamic laws enforced before interest-free banking could operate well. This view has not gained acceptance, as demonstrated by the many Islamic banks which operate profitably in 'hostile' environments, as noted earlier.
Chapra's model of Islamic banking (Chapra l982), like Siddiqi's, was based on the mudaraba principle. His main concern, however, centered on the role of artificial purchasing power through credit creation. He even suggested that 'seigniorage' resulting from it should be transferred to the public exchequer, for the sake of equity and justice. Al-Jarhi (l983) went so far as to favor the imposition of a l00 per cent reserve requirement on commercial banks. Chapra was also much concerned about the concentration of economic power private banks might enjoy in a system based on equity financing. He therefore preferred medium-sized banks which are neither so large as to wield excessive power nor so small as to be uneconomical. Chapra's scheme also contained proposals for loss-compensating reserves and loss-absorbing insurance facilities. He also spoke of non-bank financial institutions, which specialize in bringing financiers and entrepreneurs together and act as investment trusts.
Mohsin (l982) has presented a detailed and elaborate framework of Islamic banking in a modern setting. His model incorporates the characteristics of commercial, merchant, and development banks, blending them in novel fashion. It adds various non-banking services such as trust business, factoring, real estate, and consultancy, as though interest-free banks could not survive by banking business alone. Many of the activities listed certainly go beyond the realm of commercial banking and are of so sophisticated and specialized a nature that they may be thought irrelevant to most Muslim countries at their present stage of development. Mohsin's model clearly was designed to fit into a capitalist environment; indeed he explicitly stated that riba-free banks could coexist with interest-based banks. The point that there is more to Islamic banking than mere abolition of interest was driven home strongly by Chapra (l985). He envisaged Islamic banks whose nature, outlook and operations could be distinctly different from those of conventional banks. Besides the outlawing of riba, he considered it essential that Islamic banks should, since they handle public funds, serve the public interest rather than individual or group interests. In other words, they should play a social-welfare-oriented rather than a profit-maximizing role. He conceived of Islamic banks as a cross-breed of commercial and merchant banks, investment trusts and investment-management institutions that would offer a wide spectrum of services to their customers. Unlike conventional banks which depend heavily on the 'crutches of collateral and of non-participation in risk' (p. l55), Islamic banks would have to rely heavily on project evaluation, especially for equity-oriented financing. Thanks to the profit-and-loss sharing nature of the operations, bank-customer relations would be much closer and more cordial than is possible under conventional banking. Finally, the problems of liquidity shortage or surplus would have to be handled differently in Islamic banking, since the ban on interest rules out resort to the money market and the central bank. Chapra suggested alternatives such as reciprocal accommodation among banks without interest payments and creation of a common fund at the central bank into which surpluses would flow and from which shortages could be met without any interest charges.
The literature also discusses the question of central banking in an Islamic framework. The general opinion seems to be that the basic functions of a modern central bank are relevant also for an Islamic monetary system, although the mechanisms may have to be different. Thus, for example, the bank rate instrument cannot be used as it entails interest. Uzair (l982) has suggested adjustments in profit-sharing ratios as a substitute for bank rate manipulations by the central bank. Thus, credit can be tightened by reducing the share accruing to the businessmen and eased by increasing it. Siddiqi (l982) has suggested that variations in the so-called 'refinance ratio' (which refers to the central bank refinancing of a part of the interest-free loans provided by the commercial banks) would influence the quantum of short-term credit extended. Siddiqi has also proposed a prescribed 'lending ratio' (i.e., the proportion of demand deposits that commercial banks are obliged to lend out as interest-free loans) that can be adjusted by the central bank according to changing circumstances. In this context, reference may also be made to a proposal by Uzair (l982) that the central bank should acquire an equity stake in commercial banking by holding, say, 25 per cent of the capital stock of the commercial banks. The rationale behind this proposal was that it would give the central bank access to a permanent source of income so that it could effectively act as lender of last resort. The discussion of central banking in an Islamic context is somewhat scanty, presumably because Islamic central banking is viewed as too far-fetched an idea, except in Iran and Pakistan.
It emerges from all this that Islamic banking has three distinguishing features: (a) it is interest-free, (b) it is multi-purpose and not purely commercial, and (c) it is strongly equity-oriented. The literature contains hardly any serious criticism of the interest-free character of the operation, since this is taken for granted, although concerns have been expressed about the lack of adequate interest-free instruments. There is a near-consensus that Islamic banks can function well without interest. A recent International Monetary Fund study by Iqbal and Mirakhor (l987) has found Islamic banking to be a viable proposition that can result in efficient resource allocation. The study suggests that banks in an Islamic system face fewer solvency and liquidity risks than their conventional counterparts. The multi-purpose and extra-commercial nature of the Islamic banking operation does not seem to pose intractable problems. The abolition of interest makes it imperative for Islamic banks to look for other instruments, which renders operations outside the periphery of commercial banking unavoidable. Such operations may yield economies of scope. But it is undeniable that the multipurpose character of Islamic banking poses serious practical problems, especially in relation to the skills needed to handle such diverse and complex transactions (Iqbal and Mirakhor l987).
The stress on equity-oriented transactions in Islamic banking, especially the mudaraba mode, has been criticized. It has been argued that the replacement of pre-determined interest by uncertain profits is not enough to render a transaction Islamic, since profit can be just as exploitative as interest is, if it is 'excessive' (Naqvi l98l). Naqvi has also pointed out that there is nothing sacrosanct about the institution of mudaraba in Islam. Naqvi maintains that mudaraba is not based on the Qur'an or the Hadith but was a custom of the pre-Islamic Arabs. Historically, mudaraba, he contends, enabled the aged, women, and children with capital to engage in trade through merchants for a share in the profit, all losses being borne by the owners of capital, and therefore it cannot claim any sanctity. The fact remains that the Prophet raised no objection to mudaraba, so that it was at least not considered un-Islamic.
The distribution of profit in mudaraba transactions presents practical difficulties, especially where there are multiple providers of capital, but these difficulties are not regarded as insurmountable. The Report of Pakistan's Council of Islamic Ideology (CII l983) has suggested that the respective capital contributions of parties can be converted to a common denominator by multiplying the amounts provided with the number of days during which each component, such as the firm's own equity capital, its current cash surplus and suppliers' credit was actually deployed in the business, i.e., on a daily product basis. As for deposits, profits (net of administrative expenses, taxes, and appropriation for reserves) would be divided between the shareholders of the bank and the holders of deposits, again on a daily product basis.
Literature: Practice
Recent years have brought an increasing flow of empirical studies of Islamic banking. The earliest systematic empirical work was undertaken by Khan (l983). His observations covered Islamic banks operating in Sudan, United Arab Emirates, Kuwait, Bahrain, Jordan, and Egypt. Khan's study showed that these banks had little difficulty in devising practices in conformity with Shariah. He identified two types of investment accounts: one where the depositor authorized the banks to invest the money in any project and the other where the depositor had a say in the choice of project to be financed. On the asset side, the banks under investigation had been resorting to mudaraba, musharaka and murabaha modes. Khan's study reported profit rates ranging from 9 to 20 per cent which were competitive with conventional banks in the corresponding areas. The rates of return to depositors varied between 8 and l5 per cent, which were quite comparable with the rates of return offered by conventional banks.
Khan's study revealed that Islamic banks had a preference for trade finance and real estate investments. The study also revealed a strong preference for quick returns, which is understandable in view of the fact that these newly established institutions were anxious to report positive results even in the early years of operation. Nienhaus (1988) suggests that the relative profitability of Islamic banks, especially in the Middle East in recent years, was to a large extent due to the property (real estate) boom. He has cited cases of heavy losses which came with the crash of the property sector.
The IMF study referred to earlier by Iqbal and Mirakhor (l987) also contains extremely interesting empirical observations, although these are confined to the experience of Iran and Pakistan, both of which have attempted to islamize the entire banking system on a comprehensive basis. Iran switched to Islamic banking in August l983 with a three-year transition period. The Iranian system allows banks to accept current and savings deposits without having to pay any return, but it permits the banks to offer incentives such as variable prizes or bonuses in cash or kind on these deposits. Term deposits (both short-term and long-term) earn a rate of return based on the bank's profits and on the deposit maturity. No empirical evidence is as yet available on the interesting question as to whether interest or a profit-share provides the more effective incentive to depositors for the mobilization of private saving. Where Islamic and conventional banks exist side by side, central bank control of bank interest rates is liable to be circumvented by shifts of funds to the Islamic banks.
Iqbal and Mirakhor have noted that the conversion to Islamic modes has been much slower on the asset than on the deposit side. It appears that the Islamic banking system in Iran was able to use less than half of its resources for credit to the private sector, mostly in the form of short-term facilities, i.e., commercial and trade transactions. The slower pace of conversion on the asset side was attributed by the authors to the inadequate supply of personnel trained in long-term financing. The authors, however, found no evidence to show that the effectiveness of monetary policy in Iran, broadly speaking, was altered by the conversion.
The Pakistani experience differs from the Iranian one in that Pakistan had opted for a gradual islamization process which began in l979. In the first phase, which ended on l January l985, domestic banks operated both interest- free and interest-based 'windows'. In the second phase of the transformation process, the banking system was geared to operate all transactions on the basis of no interest, the only exceptions being foreign currency deposits, foreign loans and government debts. The Pakistani model took care to ensure that the new modes of financing did not upset the basic functioning and structure of the banking system. This and the gradual pace of transition, according to the authors, made it easier for the Pakistani banks to adapt to the new system. The rate of return on profit-and-loss sharing (PLS) deposits appears not only to have been in general higher than the interest rate before islamization but also to have varied between banks, the differential indicating the degree of competition in the banking industry. The authors noted that the PLS system and the new modes of financing had accorded considerable flexibility to banks and their clients. Once again the study concluded that the effectiveness of monetary policy in Pakistan was not impaired by the changeover.
The IMF study, however, expressed considerable uneasiness about the concentration of bank assets on short-term trade credits rather than on long-term financing. This the authors found undesirable, not only because it is inconsistent with the intentions of the new system, but also because the heavy concentration on a few assets might increase risks and destabilize the asset portfolios. The study also drew attention to the difficulty experienced in both Iran and Pakistan in financing budget deficits under a non-interest system and underscored the urgent need to devise suitable interest-free instruments. Iran has, however, decreed that government borrowing on the basis of a fixed rate of return from the nationalized banking system would not amount to interest and would hence be permissible. The official rationalization is that, since all banks are nationalized, interest rates and payments among banks will cancel out in the consolidated accounts. (This, of course, abstracts from the banks' business with non-bank customers.) There are also some small case studies of Islamic banks operating in Bangladesh (Huq l986), Egypt (Mohammad l986), Malaysia (Halim l988b), Pakistan (Khan l986), and Sudan (Salama l988b). These studies reveal interesting similarities and differences. The current accounts in all cases are operated on the principles of al-wadiah. Savings deposits, too, are accepted on the basis of al-wadiah, but 'gifts' to depositors are given entirely at the discretion of the Islamic banks on the minimum balance, so that the depositors also share in profits. Investment deposits are invariably based on the mudaraba principle, but there are considerable variations. Thus, for example, the Islamic Bank of Bangladesh has been offering PLS Deposit Accounts, PLS Special Notice Deposit Accounts, and PLS Term Deposit Accounts, while Bank Islam Malaysia has been operating two kinds of investment deposits, one for the general public and the other for institutional clients.
The studies also show that the profit-sharing ratios and the modes of payment vary from place to place and from time to time. Thus, for example, profits are provisionally declared on a monthly basis in Malaysia, on a quarterly basis in Egypt, on a half-yearly basis in Bangladesh and Pakistan, and on an annual basis in Sudan.
A striking common feature of all these banks is that even their investment deposits are mostly short-term, reflecting the depositors' preference for assets in as liquid a form as possible. Even in Malaysia, where investment deposits have accounted for a much larger proportion of the total, the bulk of them were made for a period of less than two years. By contrast, in Sudan most of the deposits have consisted of current and savings deposits, apparently because of the ceiling imposed by the Sudanese monetary authorities on investment deposits which in turn was influenced by limited investment opportunities in the domestic economy. There are also interesting variations in the pattern of resource utilization by the Islamic banks. For example, musharaka has been far more important than murabaha as an investment mode in Sudan, while the reverse has been the case in Malaysia. On the average, however, murabaha, bai'muajjal and ijara, rather than musharaka represent the most commonly used modes of financing. The case studies also show that the structure of the clientele has been skewed in favor of the more affluent segment of society, no doubt because the banks are located mainly in metropolitan centres with small branch networks.
The two main problems identified by the case studies are the absence of suitable non-interest-based financial instruments for money and capital market transactions and the high rate of borrower delinquency. The former problem has been partially redressed by Islamic banks resorting to mutual inter-bank arrangements and central bank cooperation, as mentioned earlier. The Bank Islam Malaysia, for instance, has been placing its excess liquidity with the central bank which usually exercises its discretionary powers to give some returns. The delinquency problem appears to be real and serious. Murabaha payments have often been held up because late payments cannot be penalized, in contrast to the interest system in which delayed payments would automatically mean increased interest payments. To overcome this problem, the Pakistani banks have resorted to what is called 'mark-down' which is the opposite of 'mark-up' (i.e., the profit margin in the cost-plus approach of murabaha transactions). 'Mark-down' amounts to giving rebates as an incentive for early payments. But the legitimacy of this 'mark-down' practice is questionable on Shariah grounds, since it is time- based and therefore smacks of interest.
In the Southeast Asian context, two recent studies on the Bank Islam Malaysia by Man (l988) and the Philippine Amanah Bank by Mastura (l988) deserve special mention. The Malaysian experience in Islamic banking has been encouraging. Man's study shows that the average return to depositors has been quite competitive with that offered by conventional banks. By the end of l986, after three years of operation, the bank had a network of fourteen branches. However, 90 per cent of its deposits had maturities of two years or less, and non-Muslim depositors accounted for only 2 per cent of the total. Man is particularly critical of the fact that the mudaraba and musharaka modes of operation, which are considered most meaningful by Islamic scholars, accounted for a very small proportion of the total investment portfolio, while bai'muajjal and ijara formed the bulk of the total. It is evident from Mastura's analysis that the Philippine Amanah Bank is, strictly speaking, not an Islamic bank, as interest-based operations continue to coexist with Islamic modes of financing. Thus, the PAB has been operating both interest and Islamic 'windows' for deposits. Mastura's study has produced evidence to show that the PAB has been concentrating on murabaha transactions, paying hardly any attention to the mudaraba and musharaka means of financing. The PAB has also been adopting unorthodox approaches in dealing with excess liquidity by making use of interest- bearing treasury bills. Nonetheless, the PAB has also been invoking some Islamic modes in several major investment activities. Mastura has made special references to the qirad principle adopted by the PAB in the Kilu-sang Kabuhayan at Kaunlaran (KKK) movement launched under Marcos and to the ijara financing for the acquisition of farm implements and supplies in the Quedon food production program undertaken by the present regime. So far no reference has been made to Indonesia, the largest Muslim country in the world, with Muslims accounting for 90 per cent of a population of some 165 million. The explanation is that a substantial proportion, especially in Java, are arguably nominal Muslims. Indonesians by and large subscribe to the Pancasila ideology which is essentially secular in character. The present regime seems to associate Islamic banking with Islamic fundamentalism to which the regime is not at all sympathetic. Besides, the intellectual tradition in Indonesia in modern times has not been conducive to the idea of interest-free banking. There were several well respected Indonesian intellectuals including Hatta (the former Vice President) who had argued that riba prohibited in Islam was not the same as interest charged or offered by modern commercial banks, although Islamic jurists in Indonesia hold the opposite view. The Muslim public seems somewhat indifferent to all this. This, however, does not mean that there are no interest-free financial institutions operating in Indonesia. One form of traditional interest-free borrowing is the still widely prevalent form of informal rural credit known as ijon (green) because the loan is secured on the standing crop as described by Partadireja (1974). Another is the arisan system practiced among consumers and small craftsmen and traders. In this system, each member contributes regularly a certain sum and obtains interest-free loans from the pool by drawing lots. The chances of an Islamic bank being established in Indonesia seem at present remote (cf. Rahardjo 1988).
Finally, in the most recent contribution to the growing Islamic banking literature, Nien-haus (l988) concludes that Islamic banking is viable at the microeconomic level but dismisses the proponents' ideological claims for superiority of Islamic banking as 'unfounded'. Nienhaus points out that there are some failure stories. Examples cited include the Kuwait Finance House which had its fingers burned by investing heavily in the Kuwaiti real estate and construction sector in l984, and the Islamic Bank International of Denmark which suffered heavy losses in l985 and l986 to the tune of more than 30 per cent of its paid-up capital. But then, as Nienhaus himself has noted, the quoted troubles of individual banks had specific causes and it would be inappropriate to draw general conclusions from particular cases. Nienhaus notes that the high growth rates of the initial years have been falling off, but he rejects the thesis that the Islamic banks have reached their 'limits of growth' after filling a market gap. The falling growth rates might well be due to the bigger base values, and the growth performance of Islamic banks has been relatively better in most cases than that of conventional banks in recent years.
According to Nienhaus, the market shares of many Islamic banks have increased over time, notwithstanding the deceleration in the growth of deposits. The only exception was the Faisal Islamic Bank of Sudan (FIBS) whose market share had shrunk from l5 per cent in l982 to 7 per cent in l986, but Nien-haus claims that the market shares lost by FIBS were won not by conventional banks but by newer Islamic banks in Sudan. Short-term trade financing has clearly been dominant in most Islamic banks regardless of size. This is contrary to the expectation that the Islamic banks would be active mainly in the field of corporate financing on a participation basis. Nien-haus attributes this not only to insufficient supply by the banks but also to weak demand by entrepreneurs who may prefer fixed interest cost to sharing their profits with the banks.
Conclusion
The preceding discussion makes it clear that Islamic banking is not a negligible or merely temporary phenomenon. Islamic banks are here to stay and there are signs that they will continue to grow and expand. Even if one does not subscribe to the Islamic injunction against the institution of interest, one may find in Islamic banking some innovative ideas which could add more variety to the existing financial network.
One of the main selling points of Islamic banking, at least in theory, is that, unlike conventional banking, it is concerned about the viability of the project and the profitability of the operation but not the size of the collateral. Good projects which might be turned down by conventional banks for lack of collateral would be financed by Islamic banks on a profit-sharing basis. It is especially in this sense that Islamic banks can play a catalytic role in stimulating economic development. In many developing countries, of course, development banks are supposed to perform this function. Islamic banks are expected to be more enterprising than their conventional counterparts. In practice, however, Islamic banks have been concentrating on short-term trade finance which is the least risky.
Part of the explanation is that long-term financing requires expertise which is not always available. Another reason is that there are no back-up institutional structures such as secondary capital markets for Islamic financial instruments. It is possible also that the tendency to concentrate on short-term financing reflects the early years of operation: it is easier to administer, less risky, and the returns are quicker. The banks may learn to pay more attention to equity financing as they grow older.
It is sometimes suggested that Islamic banks are rather complacent. They tend to behave as though they had a captive market in the Muslim masses who will come to them on religious grounds. This complacency seems more pronounced in countries with only one Islamic bank. Many Muslims find it more convenient to deal with conventional banks and have no qualms about shifting their deposits between Islamic banks and conventional ones depending on which bank offers a better return. This might suggest a case for more Islamic banks in those countries as it would force the banks to be more innovative and competitive. Another solution would be to allow the conventional banks to undertake equity financing and/or to operate Islamic 'counters' or 'windows', subject to strict compliance with the Shariah rules. It is perhaps not too wild a proposition to suggest that there is a need for specialized Islamic financial institutions such as mudaraba banks, murabaha banks and musharaka banks which would compete with one another to provide the best possible services.
Glossary
al-wadiah = safe keeping
bai'muajjal = deferred-payment sale
bai'salam = pre-paid purchase
baitul mal = treasury
fiqh = jurisprudence
Hadith = Prophet's commentary on Qur'an
hajj = pilgrimage
halal = lawful
haram = unlawful
ijara = leasing
iman = faith
mithl = like
mudaraba = profit-sharing
mudarib = entrepreneur-borrower
muqarada = mudaraba
murabaha = cost-plus or mark-up
musharaka = equity participation
qard hasan = benevolent loan (interest free)
qirad = mudaraba
rabbul-mal = owner of capital
riba = interest
Shariah = Islamic law
shirka = musharaka
Appendix
Islamic Financial Institutions (outside Pakistan and Iran)
Australia Islamic Investment Company, Melbourne.
Bahamas Dar al Mal al Islami, Nassau Islamic Investment Company Ltd, Nassau, Masraf Faisal Islamic Bank & Trust, Bahamas Ltd.
Bahrain Albaraka Islamic Investment Bank, Manama, Bahrain Islamic Bank, Manama, Bahrain Islamic Investment Company, Manama, Islamic Investment Company of the Gulf, Masraf Faisal al Islami, Bahrain.
Bangladesh Islamic Bank of Bangladesh Ltd, Dhaka.
Denmark Islamic Bank International of Denmark, Copenhagen.
Egypt Albaraka Nile Valley Company, Cairo, Arab Investment Bank (Islamic Banking Operations), Cairo., Bank Misr (Islamic Branches), Cairo, Faisal Islamic Bank of Egypt, Cairo, General Investment Company, Cairo, Islamic International Bank for Investment and Development, Cairo, Islamic Investment and Development Company, Cairo, Nasir Social Bank, Cairo.
Guinea Islamic Investment Company of Guinea, Conakry, Masraf Faisal al Islami of Guinea, Conakry.
India Baitun Nasr Urban Cooperative Society, Bombay.
Jordan Islamic Investment House Company Ltd Amman, Jordan Finance House, Amman, Jordan Islamic Bank for Finance and Investment, Amman.
Kibris (Turkish Cyprus) Faisal Islamic Bank of Kibris, Lefkosa.
Kuwait Al Tukhaim International Exchange Company, Safat., Kuwait Finance House, Safat.
Liberia African Arabian Islamic Bank, Monrovia.
Liechtenstein Arinco Arab Investment Company, Vaduz, Islamic Banking System Finance S.A. Vaduz.
Luxembourg Islamic Finance House Universal Holding S.A.
Malaysia Bank Islam Malaysia Berhad, Kuala Lumpur, Pilgrims Management and Fund Board, Kuala Lumpur.
Mauritania Albaraka Islamic Bank, Mauritania.
Niger Faisal Islamic Bank of Niger, Niamy.
Philippines Philippine Amanah Bank, Zamboanga.
Qatar Islamic Exchange and Investment Company, Doha, Qatar Islamic Bank.
Saudi Arabia Albaraka Investment and Development Company, Jeddah, Islamic Development Bank, Jeddah.
Senegal Faisal Islamic Bank of Senegal, Dakar, Islamic Investment Company of Senegal, Dakar.
South Africa JAAME Ltd, Durban.
Sudan Bank al Baraka al Sudani, Khartoum, Faisal Islamic Bank of Sudan, Khartoum, Islamic Bank of Western Sudan, Khartoum, Islamic Cooperative Development Bank, Khartoum, Islamic Investment Company of Sudan, Khartoum, Sudan Islamic Bank, Khartoum, Tadamun Islamic Bank, Khartoum, Jersey The Islamic Investment Company, St Helier, Masraf Faisal al Islami, St Helier.
Switzerland Dar al Mal al Islami, Geneva., Islamic Investment Company Ltd, Geneva, Shariah Investment Services, PIG, Geneva.
Thailand Arabian Thai Investment Company Ltd, Bangkok.
Tunisia Bank al Tamwil al Saudi al Tunisi.
Turkey Albaraka Turkish Finance House, Istanbul, Faisal Finance Institution, Istanbul.
U.A.E. Dubai Islamic Bank, Dubai, Islamic Investment Company Ltd, Sharjah.
U.K. Albaraka International Ltd, London, Albaraka Investment Co. Ltd, London, Al Rajhi Company for Islamic Investment Ltd, London, Islamic Finance House Public Ltd Co., London.
The list includes Islamic banks as well as Islamic investment companies but it does not include Islamic insurance or takaful companies.
Source: Siddiqi (l988)
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1 Surah al-Rum (Chapter 30), verse 39; Surah al-Nisa (Chapter 39), verse l6l; Surah al-Imran (Chapter 3), verses l30-2; Surah al-Baqarah (Chapter 2), verses 275-8l. See Yusuf Ali's Translation of the Qur'an.
2 Hadith compiled by Muslims (Kitab al-Musaqat).
3 This refers to a Hadith compiled by Muslims (Kitab al-Musaqat).
4 Bank Islam Malaysia Berhad has been offering a 70:30 profit-sharing ratio in favour of depositors (Man l988).
5 In l984 the Islamic Bank of Bangladesh offered rates of return ranging from 4.95 per cent to l4.l3 per cent. The Faisal Islamic Bank of Egypt, Cairo, gave a 9 per cent rate of return on deposits in the same year (Afkar Inquiry, December l985).
6 According to Sharia, profits arising from a mudaraba arrangement can be divided in any proportion between the two contracting parties as agreed upon