Secured loans are multi-purpose loans that can be borrowed for any use by the borrower. They can be used for home improvement, debt consolidation, car purchase, vacation for the family, educational expenses etc.

Secured loans employ collateral, thereby helping the borrower in getting a low rate of interest. Since the lender is assured of repayment, he has no problems lowering the rate. Also, the term of repayment for secured loans is very long of around 5-25 years. This makes the repayment installments very small and comfortable for the borrower to pay. The amount that can be borrowed through secured loans lies in the range of £5000-£75000. It can, however be increased by pledging a high equity collateral with the lender.

For bad credit borrowers, secured loans are the most suitable way of borrowing money at low interest rate. Moreover, by timely repayment of secured loans, the bad credit borrowers can improve their credit history also.

With secured loans, it becomes very easy for the borrower to borrow and use money for his need and also repay it without any burden on his shoulders.

The low rate secured loan basically works on the attachment of collateral with the lender. Any asset of the borrower like a house, car, stocks, or bonds etc which has a high equity value in the market can be pledged with the lender. Due to the attachment of this asset with the loan, the borrower assures retrieval of the loan amount. If the amount is not repaid on time, then the lender can sell off the collateral to retrieve his money. However this happens only in very rare of cases.

The Low rate secured loan offers an amount in the range of £5000-£75000 for the needs of the borrower. They are personal loans which may be used for any purpose of the borrower like debt consolidation, home improvement, car purchase, wedding expenses, a vacation, buying a boat etc.

The term of repayment for low rate secured loan is very long of about 5-25 years. Due to this long term coupled with the low rate of interest due to secured nature, the repayment of the low rate secured loan becomes very comfortable. This way, the asset that is pledged with the borrower is practically at no risk.

Bad credit borrowers can also take up low rate secured loan by pledging an asset with the lender. Usually they are charged higher rates to make up for the risk involved but by attaching collateral, the risk is reduced and so is the rate of interest. This makes low rate secured loan as the best way to borrow money. To get even lower rates, online research can be taken up.

Low rate secured loan saves the hard earned money of the borrower that is otherwise paid as interest to the lender. Is there anything better you could lay your hands on?

    A review on Health sector reforms in India   The health sector reforms in India were started way back in 1970s .The Govt. of India identifies the need HSR and stated in the eighth five year plan. The Eighth Five Year Plan (1992-1997) was the first plan document to state the need for re-structuring of economic management systems, following the macro developments of the 1990s. During this period in the health sector, the concept of free medical care was revoked and people were required to pay, even if partially, for the health services (1). The Ninth Five Year Plan (1997-2002) emphasized the need to review the response of the public, voluntary and private sector health care providers as well as the population themselves to the changing health scenario, to reorganize health services to bring about greater efficiency and effectiveness and to introduce health system reforms to enable the population to obtain optimum care at affordable cost The Ninth Plan sought to increase the involvement of voluntary, private organizations and self-help groups in the provision of health care and ensure inter-sectoral coordination in implementation of health programmes and health-related activities as well as enable the Panchayati Raj Institutions (PRI) in planning and monitoring of health programmes at the local level so as to bring about greater responsiveness to health needs of the people and greater accountability; to promote inter-sectoral coordination and utilise local and community resources for health care(2) .The Tenth Five Year Plan (2002-2007) touches upon reforms at primary, secondary and tertiary level(3).                         Politics influence health systems in significant manner. The goals, priorities, and the strategies, variations in the commitment are largely decided through the political contingencies. There are competing demands on the health systems. The evolution of the health systems is largely shaped by the culture, history, and norms. Client satisfaction is very high. As per NFHS-2 data, an overwhelming majority of clients are satisfied by the services delivered by the public systems. May be the expectations are low or may be our people are so courteous. But on the hand, we have the report from Transparent International, ranked the health system in India is the most corrupt system (4)   The Government has taken several steps for improving the public health care institutions and Strengthening the primary health care infrastructure. However, the situation is compounded by severe resource constraints – financial, technical and human power related, which has resulted in policy makers as well as programme managers at differing levels being faced with difficult choices. In such a situation, attempts are being made through various reform initiatives to ensure that the health needs of the people are met One of the major reform initiatives underway is the Secondary Health System Strengthening Project funded by the World Bank in seven states (Andhra Pradesh, Karnataka, Punjab, West Bengal, Maharashtra, Orissa and Uttar Pradesh). The projects include strengthening FRUs/CHCs and district hospitals so as to improve the availability of emergency care services to patients, to reduce overcrowding at district and tertiary care hospitals, construction works, procurement of equipment, increased availability of ambulances, drugs; improvement in quality of services following skill up gradation training in clinical management, changes in attitudes and behavior of health care providers; reduction in mismatches in health personnel / infrastructure; improvement in hospital waste management, disease surveillance and response system. It is essential to assess both progress and problems in implementation of the reforms in each state and to appropriately modify the content and pace of implementation. Such an overview and analysis of all related issues is necessary to provide evidence to policy makers and other stakeholders in terms of the various dimensions and impact of health sector reform.(5) In the Indian Constitution, health is a state responsibility. During Adjustment, many state governments in India had recourse to Health Systems Development Project loans from the World Bank for carrying out health sector reforms (HSR), of which one of the key policies has been to raise public spending on health care from the abysmally low levels seen up to then. The Health Systems Development Project seeks to develop strategic management capacity; strengthen performance, accountability, and efficiency; and build implementation capacity. Further, it seeks to improve clinical service quality by renovating and expanding district, sub district, and community hospitals and improving access to services. In all seven reforming states, around 15% of the total project cost is borne by the state governments. All the project documents note the low levels of funding for secondary hospitals in the reforming states. This is attributed to the small share of overall public spending allotted to health, the limited portion of total health spending going to hospitals, and, within this, a skewed distribution of funds in favour of the tertiary hospitals. After analysis of the problems of the health sector, the governments of the reforming states have agreed-using terminology ranging from “assurances” to “commitments”-to several undertakings. These are: (i) to enhance the overall size of the health budget; (ii) to redress imbalances in public expenditure between secondary and tertiary care levels; (iii) to safeguard the operations and maintenance components of current expenditure allocations for the secondary health-care sector; (iv) to charge user fees for selected services; and (v) to address workforce issues. The Health Systems Development Project initiated in the seven states recognizes the need for enhanced public spending on health and identifies it as the foremost policy reform to be pursued. Nevertheless, such assurances and conditions have not succeeded in enhancing health sector budgets in states implementing HSR. Worse, HSR has not been able to arrest the decline in the share of health spending within total government spending. The Indian system is especially complicated, as the larger tax resources are controlled by the central government but the major responsibility for health-care spending is bestowed on the states (6).Andhra Pradesh is the first state to go with the HSR.               Health sector reforms in Andhra Pradesh   The state of Andhra Pradesh was formed on 1st November, 1956 under the States’ reorganization scheme. It is the fifth largest State with an area of 2, 76, 754 sq. km, accounting for 8.4 % of India’s territory and also the fifth most populous state with a Population of 75 crores. The state has varied physiographic features ranging from high hills, undulating plains to a coastal deltaic environment. Administratively, Andhra Pradesh is divided into 23 districts, 79 revenue divisions, 1123 mandals, about 27000 villages and 264 towns. AP’s economy grew at 7.2% during 2006-07 — the fourth consecutive year of 6% plus growth. The latest poverty headcount ratio stands at 16%, compared to 23% for India . the third-highest credit rating among the major Indian states; the third best investment climate in the country; and the fourth-lowest corruption level among Indian states Andhra Pradesh was the first Indian state to receive a multi-sector Bank operation – the Andhra Pradesh Economic Restructuring Program for US$ 550 million in 1997 – aimed at helping the state accelerate policy and institutional reforms across a wide range of sectors under a common fiscal framework. It is also the only Indian state where the Bank has disbursed three budget support operations – the First Andhra Pradesh Economic Reform Loan (APERL-1) in March 2002, the Second APERL in February 2004, and the Third APERL in January 2007 – that sought to support the state’s development program.(12) Within AP there are regional, social and gender disparities. Health outcomes are worst among Scheduled Castes (16% of population) and Scheduled Tribes (7% of population), especially those living in underserved areas in North tribal and South drought prone districts, and for women. Effective delivery of quality basic health services is hampered by demand and supply side issues, including poor health infrastructure and staffing.(15)     The reform history in health sector in the State can be traced to Andhra Pradesh First Referral Health System Project, one of the first World Bank aided health system projects in the country. This project, launched in 1995 had been implemented by AP Vaidya Vidhana Parishad (APVVP). Agencies like World Bank and DFID are supporting the reform process in the State. The Bank supported the AP Economic Restructuring Project which included improvement of primary health care as one of the component.(7) The priority reforms focus on improved access to quality and responsive health services, strengthened governance and management in health sector, improved institutional mechanisms for community participation and systems for accountability; and strengthened financial management systems.(15)  The government of Andhra Pradesh [GoAP 1999] Vision 2020 document identifies a seven-point set of priorities for health sector reform: providing universal access to primary healthcare; encouraging private investment in tertiary healthcare; focusing on specific programmes to promote family planning; focusing on improving health levels in disadvantaged groups and backward regions; ensuring a strong prevention focus; enhancing the performance of the public health system; and formulating a state information education and communication (IEC) programme to broadcast information on preventive healthcare.(13) The Government of Andhra Pradesh is embarking on a major health sector reforms to improve health care delivery in the State. D.F.I.D. has expressed its willingness to support these initiatives with a grant of 100 Million pounds over the next five years (2006-2011). The reform initiative will include measures to improve the effectiveness and accountability of public health services, measures to focus on community centric preventive healthcare system and enhance access to quality healthcare for the poorer sections of the population(14) DFID will provide up to £40 million health sector budget support to the DoHMFW, GoAP, over 3 years 2007 – 2010. The sector support will build synergy with National Rural Health Mission (NRHM) which is a health sector reform program of the central government for decentralisation, pro-poor focus, strengthening service delivery(15)     The health sector support will be provided over three years (2007-08 – 2009- 10). It aims at increased use of quality health services, especially by the poorest people and in underserved areas.(16) The main outputs will be: a) Improved access to quality and responsive services, especially in remote and interior areas; b) Governance and management of health sector strengthened; c) Institutional mechanisms for community participation and systems for accountability in functioning; and Financial management systems strengthened and improved public expenditure on health.   The performance of health services would be measured against(17)

* greater effectiveness and improved outcomes of existing programs;
* improved efficiency in the allocation of resources;
* greater access and equity; and
* consumer satisfacfion

Reforms underway in health sector   The major reforms underway are classified under these categories and the activities are noted below and we will look each of them in detail    (I) Reorganization and restructuring of existing government health care system

Establishment of Andhra Pradesh Vaidya Vidhana Parishad Strengthening of referral institutions and fixing of service norms Improvement in drug supplies Formation of Andhra Pradesh Health, Medical & Housing Infrastructure Development Corporation (APHM&HIDC) Strengthening of PHCs as 24-hour MCH centers Establishment of Comprehensive Obstetric & Neonatal Care (CEmONC) centres

(II) Changes in health system organisation, delivery and Management

Formation of Hospital Advisory Committee/ Hospital Development Societies for all PHCs and FRUs/ teaching hospitals Provision of free travel bus passes to pregnant women for antenatal check ups Public Private Partnership

(III) Changes in financing methods

Sukhibhava Scheme (Improvement of Institutional Delivery Services Scheme) User fees

(IV) Reforms related to human resources

Integration and responsibilities of functionaries for planning, implementation and monitoring of programmes of HM & FW department

(V) Involving community in health service delivery and Provision

Women Health Volunteers Scheme

(VI) Reforms to quality of care

Performance indicators for grading the PHCs Performance rating of secondary hospitals

    1.Reorganization and restructuring of existing government health care system   A)Andhra Pradesh Vaidya Vidhana Parishad   AP, has created the Andhra Pradesh Vaidya Vidhana Parishad (APVVP) by enacting an Act in the Legislative Assembly in 1986(8) This was done with the objective to lay greater emphasis on development of both preventive as well as curative health care  and to strengthen necessary linkages at appropriate levels to ensure comprehensive medical and health care services. APVVP has undertaken World Bank assisted Andhra Pradesh First Referral Health Systems Project (APFRHSP) in 1994 for a period of seven years. This has been one of the major projects undertaken by APVVP. The objectives of the project included improvement of efficiency in the allocation and use of health resources through policy and institutional developments and enhanced performance of health system by improving the quality, effectiveness and coverage of health services at the first referral level.   B)Strengthening of referral institutions and fixing of service norms   basic service norms for various categories of hospitals under the administrative control of APVVP have been fixed thereby creating a hierarchy of hospitals according to services and facilities. This system of service norms and referral linkages had been developed with a view to optimise utilisation of resources, avoid duplication and wastage of resources, regulate patient flow and reduce cost of treatment by reduction of patient burden at tertiary hospitals. the district hospital has been prescribed to provide services in eleven specialties for which 9 civil surgeon specialists, 18-20 civil assistant surgeons, 54-84 paramedical staff and other supporting staff have been Posted. C)Improvement in drug supplies To ensure regular supply of drugs at all times and in all situations, a system of three sources of drug supply has been put in place for the hospitals under APVVP: (a) centralised drug procurement system under which the institution has been allotted drugs worth a particular amount based on bed strength (Rs 2000 per bed per quarter); (b) an emergency provision for drugs (Rs 100 per bed per month) has been made to every institution from where emergency procurement of drugs is made; (c) drugs which are in short supply and for which regular rate contract suppliers are not available have been stocked at the office of District Coordinators of Health Service. Under the APFRHSP, const-ruction and repair of 160 hospitals including 81 CHCs, 58 area hospitals and 21 district hospitals had been undertaken.(10)         D)Formation of Andhra Pradesh Health, Medical & Housing Infrastructure Development Corporation (APHM&HIDC)   a separate corporation has been set up in 1987 exclusively for developing housing and other infrastructure for medical and paramedical staff and constructing sub centers, PHCs, hospitals, dispensaries, clinics and other health care centers One of the major projects undertaken by APHM&HIDC has been the World Bank assisted India Population Project-VIII launched for improving the medical care facilities in urban slums in 74 municipalities.   E)Strengthening of PHCs as 24-hour MCH centers   In a move to make available maternal and child health care at all times, 470 PHCs in backward districts have been designated as round the clock Mother and Child Health Centre (earlier called women health centres). One staff nurse, one ANM and three support staff have been appointed in each centre on contractual basis. Staff nurses have been trained to conduct normal deliveries and refer emergency cases. Additional facilities like telephone and vehicle have been provided to the PHCs in order to assist communication and transport for referral of emergency cases. Provision has been made to conduct fortnightly specialist clinics of gynaecology and paediatrics in these centres to detect high risk pregnancies and neonates for referral to FRUs.   F)Establishment of Comprehensive Obstetric & Neonatal Care (CEmONC) centres   The State Government has decided to establish 108, CEmONC centres spread across every district so that pregnant mothers requiring emergency care do not have to travel more than 40-50 kms to receive specialist care. Training of MBBS doctors in anaesthesia, neonatal care and blood transfusion is also planned to support this scheme.   2)Changes in health system organisation, delivery and Management A)Formation of Hospital Advisory Committee/ Hospital Development Societies for all PHCs and FRUs/ teaching hospitals   Hospital Development Societies have been constituted in all tertiary hospitals under the control of Directorate of Medical Education.(18) and after implementing NRHM rogi kalyam samithi at every PHC were formed to ensure the adequate participation of local institution,with an aim to improve effective and efficient services with allowed flexible financial powers. These societies are examples for decentralization . Activities of the society include maintenance of the hospital (including sanitation & water supply, electricity, building & civil works and equipment), purchase of drugs & medicine supplies and equipment. The government has set norms and limits for undertaking these works which are to be adhered to by the Society. The ‘system works’, observed an Unicef team which assessed the impact of RKS towards the end of 2000. The system, however, is not without any lacunae. For, it was pointed out that “overall control of the local RKS bodies remain in the hands of the collector and if he is not interested in health care then the whole thing might just drift(13)   B)Provision of free travel bus passes to pregnant women for antenatal check ups(19)   The Government of Andhra Pradesh has started an innovative scheme in order to enable pregnant women in rural areas to avail antenatal check ups at the nearest PHC/area hospital or FRU. It has tied up with the State Road and Transport Corporation to issue free transportation bus tickets pass to be utilised for three visits. The ANM issues the bus passes to the pregnant women on her house visits.       C)Public Private Partnership(20)   ·         Management of Urban Health Centers by NGOs   Under the World Bank assisted Andhra Pradesh Urban Slum Health Care Project (APUSHCP), 192 urban health centers (UHCs) have been established in 74 municipal towns in 21 districts covering 1848 slums. After withdrawal of support by the World Bank, the project has been funded by the state government since 2002. The outcomes of the project show marked improvement in ANC coverage, institutional deliveries, post natal care and immunisation in the slum population.   ·         108 emergency services                           Govt. has tied up with satyam computers to provide emergency transportation which proved to a most successful programme and many states are following the same like Gujarath. The objective of 108 Ambulances is to save people in life emergency . One ambulance is given for three mandals. Each ambulance fitted with equipment worth Rs.17 lakhs renders its services in life emergencies, road and fire accidents (22)   ·         Rajiv arogya sree    The innovative Govt. insurance scheme to serve people of  poor from the serious ailments now attracting the nation as this programme succeeded. this scheme provides financial support to families of BPL upto 2 lakhs per anum for treating serious ailments. it is proposed to cover the entire state by 2nd October 2008 with the govt. paying the insurance premium for all the beneficiaries .an amount of rs.450 crores are provided to implement the scheme during 2008-09. (21)       3)Changes in financing methods   A)Sukhibhava Scheme(23)   Under the Scheme, a cash assistance of Rs.300 (Rs 200 towards transportation charges and Rs 100 for food and incidental expenses) is paid to pregnant women belonging to below poverty line families who come to government hospitals/APVVP hospitals/ teaching hospitals/PHCs/CHCs for delivery serv-ices. This assistance is payable only to those women with no living children or with one living child.   B)User fees:-   If user fees are charged their main use may lie in optimization of expenditure patterns and better allocation between facilities and within facilities(24). Reddy and Vandemoortele (1996), based on a comprehensive review of user financing of basic social services carried out for UNICEF, point to three other discouraging features of user fees: (1) user financing can result in a sharp reduction in the utilization of services, particularly among the poor; (2) gender biases, seasonal variations and regional economic disparities can aggravate the effects of user financing on equity; (3) user financing  quires adequate capacities, effective decentralisation and continued government support; and (4) user financing can undermine political support for the goal of universal coverage of basic social services. In 2001, the Commission on Macroeconomics and Health (2001) also reached a similar conclusion that user fees end up excluding the poor from essential healthservices, in 2005, the Millennium Project’s recent Report to the UN Secretary General (2005) titled “Investing in Development – A Practical Plan to Achieve the Millennium Development Goals” also forcefully argues for abandoning user fees. The health sector in India has acquired a notorious reputation for inefficiency and corruption at all levels. There is little accountability in both the public and private sectors. Quality standards are practically non-existent as are performance measures and honest reporting. A recent report on human resources for health brought out by Harvard University’s Global Equity Initiative (2004) argues that it is people – health workers alone – who can produce an effective health system and deliver good ealth.(25) 4)Reforms related to human resources Integration and responsibilities of functionaries for planning, implementation and monitoring of programmes of HM & FW department At district level, District Health Coordination Committee (DHCC) has been constituted to ensure proper planning, implementation and monitoring of all programmes/activities of HM&FW Department in the district.  The Committee has been entrusted with the primary responsibility of planning, finalizing, implementing and monitoring the District Health Action Plans and institutionwise health plans in a participatory manner including all concerned officials, other concerned departments and NGOs.   5)Involving community in health service delivery and Provision  

Women Health Volunteers Scheme

  One of the key components of the National Rural Health Mission is to provide every village in the country with a trained female community health activist – ‘ASHA’ or Accredited Social Health Activist. Selected from the village itself and accountable to it, the ASHA will be trained to work as an interface between the community and the public health system. Following are the key components of ASHA(26) A woman, usually a daughter-in-law of a house who has studied upto 7th class and preferably from SC/ST community has been selected as WHV by the Gram Panchayat Health Committee. The selected WHV has been given one month training in health care aspects of pregnancy, antenatal, delivery, post natal and new born care, immunisation, diarrhoea, acute respiratory infections, first-aid and treatment of minor ailments. The training has been provided at Telugu Mahila Pranganams for three weeks and one week field level training at PHCs. Academy of Nursing Studies has been designated as the nodal agency for providing training to WHVs.   6)Reforms to quality of care   A)Performance indicators for grading the PHCs   One of the components of World Bank assisted AP Economic Restructuring Project is improvement of primary health care. In order to improve the quality of primary health care services, a system of performance rating has been developed to rate PHCs and CHCs. The grading has been accorded A to C in descending order   B)Performance rating of secondary hospitals   A performance rating system for secondary hospitals under APVVP has been  introduced. The indicators related to general services (outpatients, inpatients, bed occupancy), emergency services (emergency-OP, emergency-IP, emergency major operations, emergency minor operations), clinical services (major/minor operations, tubectomy, deliveries) and diagnostic services (X-ray, ECG, lab tests and USG) have been developed for the purpose. Normative targets for each type of hospital (district hospital, area hospital, community health center) have been fixed against which the performance is measured and rating assigned. Highest grading is A while lowest grading is C.(27)   Conclusion:-   Introduction of user charges and subcontracting of services to the private sector are the main elements of health sector reforms. The health sector reforms are only a part of drastic reforms in other major sectors undertaken as a part of Andhra Pradesh Economic Restructuring Project (APERP) and the overall impact on the health conditions of people and their access to medical care depend more on the changes proposed outside the health sector. For instance, while exempting the white ration card holders i.e. the poor from the user charges in the government hospitals, it proposes to drastically reduce the number of white card holders to half in the state. The net affect would be to reduce the percent of population eligible for free treatment.(29)   On the other hand the success of 108 EMRI services and overwhelming response from Rajiv Arogya sree scheme are the examples for HSR success. Just like every thing has gots its own pros and cons HSR should be done in such a way where the need exist and according to necessities .   Referances:-   (Note:-most part of the article was taken from ref.no 28 otherwise reference specified)

(Government of India, Eighth Five Year Plan, (1992-1997) Planning Commission, New Delhi.) (Government of India, Ninth Five Year Plan, (1997- 2002) Planning Commission, New Delhi ) ( Government of India, Tenth Five Year Plan (2002-2007) Planning Commission, New Delhi) ( D. Agarwal Health Sector Reforms: Relevance in India, Indian Journal of Community Medicine Vol. 31, No. 4, October-December, 2006) Health Sector Reforms in India, Initiatives from Nine States ( http://www.idrc.ca/en/ev-118491-201-1-DO_TOPIC.html.The international development research centre) http://www.worldbank.org.in  (The Andhra Pradesh Vaidya Vidhana Parishad Act 1986 (Act No. 29 of 1986 with Amendaments upto 31.03.1989  Dr. MCR Human Resource Development Institute of Andhra Pradesh (Undated). “Andhra Pradesh Vaidya Vidhana Parishad Departmental Manual”  6http://www.aponline.gov.in/apportal/departments/ departments.asp?dep=16&org=98 GoAP (2006), Response to Questionnaire on Health Sector Reforms from MOHFW, GoI. http://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:20970681~pagePK:141137~piPK:141127~theSitePK:295584,00.html#Ongoing_projects Grish kumar,promoting PPP in health services,EPW commentary,july19,2002  (G.O.Ms.No.130, HEALTH MEDICAL AND FAMILY WELFARE (K2) DEPARTMENT. Dated the 24th April, 2006)  ANDHRA PRADESH HEALTH SECTOR REFORM PROGRAMME (APHSRP) Terms of reference for Technical Cooperation (TC) to DoHMFW, GoAP  PRESS INFORMATION BUREAU GOVERNMENT OF INDIA, HEALTHCARE PROJECT IN AP FUNDED BY DFID, New Delhi, March 5, 2008) http://lnweb90.worldbank.org/oed/oeddoclib.nsf/DocUNIDViewForJavaSearch/0CFD6217A8A5BDA2852567F5005D32BD  G.O.Ms.No.403, dated Sept 7th 1998  GoAP (2006), Response to Questionnaire on Health Sector Reforms from MOHFW, GoI. Power Point Presentation of Govt of AP at the 2nd Regional Workshop on Health Sector Reforms: Experiences of Select States at Hyderabad, 14-15th February 2005 and ECTA Working paper 2002/61 Public-Private Partnership: Operational Framework used in Andhra Pradesh and Assam http://www.scribd.com/doc/2208678/AP-Budget-Speech  http://pibhyd.ap.nic.in/er27070702.pdf  Dept. of Health Medical Family Welfare, GoAP (undated), “Sukhibhava (Improvement of Institutional Delivery Services Scheme): Implementation Guidelines to PHC/Hospital  http://mohfw.nic.in/NRHM/Documents/CRM_report_full_report_version.pdf   (A.K.Shiv Kumar,,Budgeting for health ,some considerations) Economic and Political Weekly April 2, 2005  http://mohfw.nic.in/NRHM/asha.htm#abt http://health.ap.nic.in/apvvp/apvvp_stat.html  (http://www.whoindia.org/linkfiles/health_sector_reform_hsr_vol_ii_-_andhra_pradesh.pdf)  (Impact Of Health Sector Reforms On Hospital Services In Andhra Pradesh – A Study Of Trends In The Structures Of Provision And Utilisation Pattern)(centre for economic and social studies) (http://www.cess.ac.in/cesshome/research6b.html)

Secured loans are personal loans that can be borrowed by a person to fulfill any of his basic or luxury personal needs. Any needs like vacation trips, home improvement, debt consolidation, car purchase, etc can be fulfilled using money borrowed through these loans.

All the borrowers who possess any assets like a car, house, stocks, bonds, real estate etc which have a high equity value can take up the money by pledging the asset with the lender. This asset works as a security for the lender which assures him about the repayment of the loan amount. Higher the equity of the collateral, a bigger amount can be borrowed at a lower rate of interest.

Through secured loans, the borrowers can take up an amount in the range of £5000-£75000 for fulfilling their needs. The repayment term available to the borrowers for the money is 5-25 years. Due to secured nature of the loan, the rate of interest that is charged to the borrowers is very low thereby making repayment easy.

No risk howsoever is posed to the asset of the borrower. Since the retrieval of the money in case of non-repayment is made by repossession of the asset by the lender, this happens only in very rare cases. As it is clear that the repayment of the loan is very easy, there is no need to worry about the ownership of the asset.

Bad credit borrowers can also avail money through secured loans to fulfill their monetary requirements. Low rate deals can be researched for online. All these benefits attached to these loans make it an all time choice of the borrowers when they are in need.

Investing in real estate isn’t rocket science but does require doing your homework. If you’re sloppy doing your legwork, you’re more likely to end up with inferior properties or overpaying. Our book clearly explains how to buy the best properties at a fair (or even below-market value!) price. A point to be noted here is that investment in residential properties is more accessible & appropriate for non-experts. So, if you are a starter in the real estate market then you should begin with residential properties such as single-family homes, detached & attached condominiums, small apartments including duplexes, triplexes & multiple-family residential properties and raw (undeveloped) land. Real estate investment trusts (REITs) can also be purchased through stock exchanges or a real estate mutual fund after careful study. Foreclosures & tax sales are another uncommon options to invest in.

Although you should make money over the long-term investing in good real estate properties, you can lose money, especially in the short-term. Don’t unrealistically expect real estate values to increase every year. When you invest in real estate for the long-term, the occasional price declines should be merely bumps on an otherwise fruitful journey.

Once you are able to differentiate between real estate & other investment options, have the money that is to be invested in properties and have understood the tax advantages then you should look out to find properties which fit with your overall financial & personal plans. You should not hesitate in seeking help from professionals such as top agents, lawyers & other real estate pros in the negotiation process, plus all the ins & outs of purchase agreements, inspections & closing on your purchase.

Finding and evaluating a property, place or location is anothe aspect to look into before a buying decision and some of the points to be considered here are population & job growth, income levels, supply & demand of properties, Government’s effect on the real estate in that location, schools, crime rates, pride of ownership, real estate cycles and most importantly what attracts you to the property.

If you having a trouble in financing your property purchases then you may look at fixed-rate and adjustable-rate mortgages, borrowing against home equity & seller financing. You should think twice before you opt for mortgages such as balloon loans, interest only loans and recourse financing. Another thing that you may rely upon is real estate referral & web surfing for mortgages. You should not just blindly trust upon the advices of mortgage brokers.

Before you start upon operating your property, a risk management plan should be developed and understand the different insurance options to get the one you need.

Corruption is a major systemic-problem in many developing countries and is of particular importance for India. Studies by the World Bank (World Development Report 2005) have found that corruption was the number one constraint for firms in South Asia and that the two most corrupt public institutions identified by the respondents in India (as well as in most countries in South Asia) were the police and the judiciary. Based on Transparency International’s Corruption Perception Index, India has a score of 2.9 out of 10 in 2005 (a higher score means less corruption), which ranked 88 out of 140 countries (with the range being 1.5 to 9.7), and the ranking relative to other countries has not improved much over the past ten years.

Next, we have two measures for the quality of accounting systems. The disclosure requirements index (from 0 to 1, higher score means more disclosure; LLS 2006) measures the extent to which listed firms have to disclose their ownership structure, business operations and corporate governance mechanisms to legal authorities and the public. India’s score of 0.92 is higher than the averages of all LLSV subgroups of countries, including the English origin countries, suggesting that Indian firms must disclose a large amount of information. However, this does not imply the quality of disclosure is also good. In terms of the degree of earnings management (higher score means more earnings management; Leuz, Nanda, and Wysocki 2003), India’s score is much higher than the average of English origin countries, and is only lower than the German origin countries, suggesting that investors have a difficult time in evaluating Indian companies based on publicly available reports. It seems that while Indian companies produce copious amounts of data, form triumphs over substance in disclosure and with an accounting system that allows considerable flexibility, there is enough room for companies to hide or disguise the truth.

The efficiency and effectiveness of the legal system is of primary importance for contract enforcement, and we have two measures. First, according to the legal formalism (DLLS 2003) index, India has a higher formalism index than the average of English origin countries, and is only lower than that of the French origin countries. The legality index, a composite measure of the effectiveness of a country’s legal institutions, is based on the weighted average of five categories of the quality of legal institutions and government in the country (Berkowitz, Pistor, and Richard 2003). Consistent with other measures, India’s score is lower than the averages of all the subgroups of LLSV countries, suggesting that India’s legal institutions are less effective than those of many countries, and that it will be more difficult; for India to adopt and enforce new legal rules and regulations than other countries.

Finally, as for the business environment in India, a recent World Bank survey
found that, among the top ten obstacles to Indian businesses, the three which the firms
surveyed considered to be a “major” or “very severe” obstacle and exceeding the world average are corruption (the most important problem), availability of electricity, and labor regulations. Threat of nationalization or direct government intervention in business is no longer a major issue in India. With rampant tax evasion, the shadow economy in India is significant. It is estimated to be about 23% of GDP. Creditor and investor rights were largely unprotected in practice, with banks having little bargaining power against willful defaulters. Large corporate houses often got away with default, or got poor projects financed through the state-owned banking sector, often by using connections with influential politicians and bureaucrats.

Since the beginning of liberalization in 1991, two major improvements have taken place in the area of creditor rights protection – the establishment of the quasi-legal Debt Recovery Tribunals that have reduced delinquency and consequently lending rates (Visaria (2005)); and the passing of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act in 2002 and the subsequent Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act in 2004. These laws have paved the way for the establishment of Asset Reconstruction Companies and allow banks and financial institutions to act decisively against defaulting borrowers. In recent years,-recovery has shown significant improvement, presumably because, at least in part, of a well-performing economy (Table 2.1).

2.1. Comparison of Legal Systems: India, Country Groups and Major Emerging Economics*

Creditor

Rights

Anti-director

Rights

Corruption Perception Index

Legal Formalism

Index

Legality

Index

Disclosure

Requirement

Earnings

Managem Score

India

2

5

3.3

3.51

11.35

0.92

19.1

English-origin Ave.

2.28

4.19

5.33

3.02

15.56

0.78

11.69

French-origin Ave.

1.31

2.91

4.39

4.38

13.11

0.45

19.27

German-origin Ave.

2.33

3.04

5.58

3.57

15.53

0.60

23.60

Nordic-origin Ave.

1.75

3.80

9.34

3.32

16.42

0.56

10.15

LLSV Sample Ave.

1.828

3.3729

5.24

3.5830

14.98

0.6031

16.00

China (G)

2

1

3.3

3.40

N/a

N/a

N/a

Pakistan (E)

1

4

2.2

3.74

8.27

0.58

17.8

S. Africa (E)

3

5

4.6

3.68

11.95

0.83

5.6

Argentina (F)

1

2

2.9

5.49

10.31

0.50

N/a

Brazil (F)

1

5

3.3

3.83

11.43

0.25

N/a

Mexico (F)

0

3

3.3

4.82

10.79

0.58

N/a

Malaysia (E)

3

5

5

3.21

13.82

0.92

14.8

Sri Lanka (E)

2

4

3.1

3.89

9.68

0.75

N/a

Thailand(E)

2

4

3.6

4.25

10.70

0.92

18.3

Egypt (F)

2

3

3.3

3.60

10.14

0.50

N/a

Indonesia(F)

2

4

2.4

3.88

8.37

0.50

18.3

Peru(F)

0

3.5

3.3

5.42

9.13

0.33

N/a

Philippines (F)

1

4

2.5

5.00

7.91

0.83

8.8

Turkey (F)

2

3

3.8

3.49

9.88

0.50

N/a

Korea (South )(G)

3

4.5

5.1

3.33

12.24

0.75

26.8

Taiwan (G)

2

3

5.9

3.04

14.26

0.75

22.5

Average of EM

1.69

3.63

3.60

4.00

10.59

0.63

16.61

Source of EM

* Including all emerging economies from Table 1 for which information was available. Notation (E), (F), or (G) against a country indicates that the said country belongs to English, Fresh or German legal origin groups.

28 : DMS average 30 : DLLS (2003) average

29 : DLLS (2007) average 31 : LSS (2006) average

To summarize, despite strong protection provided by the law, legal protection is considerably weakened in practice due to an inefficient judicial system, characterized by overburdened courts, slow judicial process, and widespread corruption within the legal system and government. While the need for judicial and legal reforms has long been recognized, little legislative action has actually taken place so far (Debroy (2000)). Currently, the government is trying to emulate the success of China by following the Special Economic Zone approach rather than overhauling the entire legal system.

Financial/Business Laws and Regulations in India

Red tape and regulations still rank among the leading deterrents for business and foreign investment in India leading to its latest ranking of 116 out of 155 in the World Bank’s Ease of Doing Business indicator in 2006 (World Bank, 2006). India features consistently in the second half of the sample for all aspects of business regulation (and is out of the top 100 for most aspects) except for investor protection. To start a business in India entrepreneurs have close to twice the number of procedures to follow as in OECD countries, about three and a half times the time delay and close to nine times the cost (as a proportion of per capita income). Delays and costs of dealing with licenses in India is roughly in corresponding proportions with their respective OECD values. Very recently (second half of August 2007), the Government of India has decided to improve this situation and has announced a drastic reduction in the number of approvals and permits necessary to start new business. Whether and when this translates to actual practice is yet to be seen.

It is almost twice as hard to hire people in India as in OECD countries and almost three times as hard and costly to fire them. With have considerable variation in their labor laws across states, Besley and Burgess (2004) show that during the three and half decades before liberalization began in 1991, Indian states that followed more pro-worker policies experienced lower output, investment, employment and productivity in the registered or “formal” sector and higher urban poverty with an increase in informal sector output.

In the area of credit availability, India lags behind not because of creditors’ rights (which is close to OECD standards) but because of the paucity of credit quality information through the use of public registry or coverage of private bureaus. However, India’s excellent investor protection provisions in the law should be viewed together with her performance in contract enforcement where the number of procedures and time delays are about double that in OECD countries and the costs of contract enforcement over four times that in OECD countries.

As for securities markets regulation, using the framework of La Porta et al (2006) that focuses on disclosure and liability requirements as well as the quality of public enforcement of the regulations controlling securities markets, India scores 0.92 in the index of disclosure requirements third highest after the United States and Singapore. As for liability standard, India’s score is the fifth highest, 0.66 while the sample mean is 0.47. In terms of the quality of public enforcement, i.e. the nature and powers of the supervisory authority, the Securities and Exchanges Board of India (SEBI), India scores 0.67, higher than the overall sample mean as well as the English-origin average of 0.52 and 0.62 respectively and ranks 14th in the sample.

In comparing the regulatory powers and performance of SEBI with those of the SEC (Securities and Exchanges, Commission) in the USA, Bose (2005) concludes that while the scope of Indian securities laws, are quite pervasive, there are significant problems in enforcing compliance, particularly in the areas like price manipulation and insider trading. Between 1999 and 2004, Bose finds that SEBI took action in 481 cases as opposed to 2,789 cases for the SEC even though the latter regulates a significantly more mature market. As a ratio of actions taken to the number of companies under their respective jurisdictions, SEBI’s figure comes out to be an unimpressive 0.09 while that of the SEC is 0.52. Also the ratio for action taken to investigations made is quite low for SEBI (e.g. 1 out of 24 cases of issue related manipulation in 1996-97, 7 out of 27 in the 5 year period 1999-2004). As for appeals before higher authorities – the Securities Appellate Tribunal (SAT) or the Finance Ministry – in 30 to 50% of cases, the decision goes against SEBI. Though SEBI has had some success prosecuting intermediaries, it has failed to convince the SAT in its proceedings against corporate insiders and major market players. Thus the quality of public enforcement of securities laws appears to be a problem in India.

The institution of Debt Recovery Tribunals (DRTs) in the early 90’s and the
passing of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in 2002 were aimed at remedying the slowness of the judicial process. The SARFAESI Act paves the way for the establishment of Asset Reconstruction Companies (ARCs) that can take the Non-Performing Assets (NPAs) off the balance sheets of banks and recover them. Operations of these ARCs would be restricted to asset reconstruction and securitizatipn only. It also allows banks and financial institutions to directly seize assets of a defaulting borrower who defaults fails to respond within 60 days of a notice. Borrowers can appeal to DRTs only after the assets are seized and the Act allows the sale of seized assets. The SARFAESI Act itself, however, does not provide a final solution to the recovery problems. With the borrower’s right to approach the DRT, the DRAT (Debt Recovery Appellate Tribunal) and, in some cases, even a High Court, a case can easily be dragged for three to four years during which time the sale of the seized asset cannot take place. It is perhaps too soon to evaluate its effects on reducing defaults but, public sector banks have had some success recovering their loans by seizing and selling assets since the Act came into existence. The recovery rates of bad debts have registered a sharp rise in 2005-06, but it is difficult to separate the contribution of the booming economy to this from that of the improvement in corporate governance.

Another positive development in the area of disclosure has been the adoption of Accounting Standards (AS) 18 by the Institute of Chartered Accountants in India (ICAI) in 2001 which, among other things, makes reporting of “related party transactions” by Indian companies mandatory. Related parties include holding and subsidiary companies, key management personnel and their direct relatives, “parties with control exist” which includes joint ventures and fellow subsidiaries; and other parties like promoters and employee trusts. Transactions include purchase/sale of goods and assets, borrowing, lending and leasing, hiring and agency arrangements, guarantee agreements, transfer of research and development and management contracts. This step has gone a long way in bringing transparency to the dealings of Indian companies, particularly the group-affiliates.

The area of the Ease of Doing Business index where India fares worst is undoubtedly that of closing a business. India has the dubious distinction of being among the countries where it takes the longest time to go through bankruptcy in the world (10 years on an average). Consequently recovery rates are very low too – below 13% as opposed to about 74% in OECD countries. Kang and Naya’r (2004) point out that there is no single comprehensive and integrated policy on corporate bankruptcy in India in the lines of Chapter 11 or Chapter 7 US bankruptcy code. Overlapping jurisdictions of the High Courts, the Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR) and the Debt Recovery Tribunals (DRTs) contribute to the costs and delays of bankruptcy. The Companies (Second Amendment) Act, 2002 seeks to address these problems by establishing a National Company Law Tribunal and stipulating a time-bound rehabilitation or liquidation process to within less than two years as well as bringing about other positive changes in the bankruptcy code.

Stock Exchanges in India

India currently has two major stock exchanges: the National Stock Exchange (NSE) established in 1994 and the Bombay Stock Exchange (BSE), the oldest stock exchange in Asia, established in 1875. Up to 1992, BSE was a monopoly, marked with inefficiencies, high costs of intermediation, and manipulative, practices, so that external market users often found themselves disadvantaged. The economics reforms created four new institutions: the Securities and Exchanges: Board of India (SEBI), the National Stock Exchange (NSE), the National Securities Clearing, Corporation (NSCC), and the National Securities Depository (NSDL). The National Stock Exchange (NSE), a limited liability company owned by public sector financial institutions, now accounts for about two-thirds of the stock exchange trading in India, and virtually all of its derivatives trading.

The National Securities Clearing Corporation (NSCC) is the legal counter-party to net obligations of each brokerage firm, and thereby eliminates counter-party risk and possibility of payments crises. It follows a rigorous ‘risk containment’ framework involving collateral and intra-day monitoring. The NSCC, duly assisted by the National Securities Depository (NSDL), has an excellent record of reliable settlement schedules since its inception in the mid-nineties.

The Securities and Exchanges Board of India (SEBI) has introduced a rigorous regulatory regime to ensure fairness, transparency and good practice. For example, for greater transparency, SEBI has mandated mandatory disclosure for all transactions where total quantity of shares is more than 0.5% of the equity of the company. Brokers disclose to the stock exchange, immediately after trade execution, the name of the client in addition to trade details; and the Stock exchange disseminates the information to the general public on the same day.

The new environment of transparency, fairness and efficient regulation led BSE, in 1996, to also become a transparent electronic limit order book market with an efficient trading system similar to the NSE. Equity and equity derivatives trading in India has sky­rocketed to record levels over the course of the last ten years.

In 2005, about 5000 companies were listed and traded on NSE and/or BSE. While the dollar value of trading on the Indian stock exchanges is much lower than the dollar value of trading in Europe or in the US, it is important to note that the number of equity trades on BSE/NSE is ten times greater than that of Euronext or London, and of the same order of magnitude as that of NASDAQ/NYSE. Similarly, the number of derivatives trades on NSE is several times greater than that of Euronext/ London, and of an order of magnitude comparable to US derivatives exchanges. The number of trades is an important indicator of the extent of investor interest and investor participation in equities and equity trading, and emphasizes the crucial importance of corporate governance practices in India.

Enforcing Corporate Governance Laws

Enforcement of corporate laws remains’ the soft underbelly of the legal and corporate governance system in India. The World Bank’s Reports on the Observance of Standards and Codes (ROSC) in its 2004 report on India (World Bank (2004)) found that while India observed or largely observed most of the principles, it could do better in areas like the contribution of nominee directors from financial institutions to monitoring and supervising management; the enforcement of certain laws and regulations like those pertaining to stock listing in major exchanges and insider trading as well as in dealing with violations of the Companies Act – the backbone of the corporate governance system in India. Some of the problems arise because of unsettled questions about jurisdiction issues and powers of the SEBI.

Indian Courts-an assessment

Djankov et al (2003) (DLLS) in. their analysis of “formalism” in the judicial process around the world, gave India a score of 3.34 on its formalism index, higher than the English-origin average of 2.76 but slightly lower than the average for all countries, 3.53. Among the 42 English-origin countries in their sample, India has the 11th highest level of formalism. India has the 16th longest process of evicting a tenant (212 days) among English common law origin countries (average 199 days). For collection on a bounced check, however, India has the 16th shortest duration (106 days) among English common law origin countries (average 176 days). In both cases India’s total duration of the process is significantly shorter than the overall mean duration of all the 109 countries considered (254 for eviction of tenant and 234 for collecting on bounced check). Thus, in spite of its formalism, Indian courts do not seem to perform that poorly (relatively speaking) on these two types of eases considered.

The DLLS assurance notwithstanding, case arrears and decade-long legal battles are commonplace in India. In spite of having around 10,000 courts (not counting tribunals and special courts), India has a serious, shortfall of judicial service. While the USA has 107 judges per million citizens, Canada over 75, Britain over 50 and Australia over 41, for India the figure is slightly over 10, (Debroy (1999)). In April 2003, for instance, the Supreme Court of India had close to 25,000 cases pending before it (Parekh 2001). Hazra and Micevska (2004) report that there are about 20 million cases pending in lower courts and another 3.2 million cases in high courts. A termination dispute contested all the way can take up to 20 years for disposal. Writ petitions in high courts can take between 8 and 20 years for disposal. About 63% of pending civil cases are over a year old and 31% are over 3 years old. Automatic appeals, extensive litigation by the government, underdeveloped alternative mechanisms of dispute resolution like arbitration, the shortfall of judges all contribute to this unenviable state of affairs in Indian courts. Since the same courts try both civil and criminal matters and the latter gets priority, economic disputes suffer even greater delays.

The Small and Medium Enterprises (SME) sector in India

Allen et al (2006) conduct surveys to study the extent to which the formal legal environment directly supports and regulates businesses, particularly small and medium enterprises which form an increasingly important part of the Indian industry. This seems to indicate that the small firms sector operate in a system virtually governed through informal mechanisms based on trust, reciprocity and reputation with little recourse to the legal system and deals with widespread corruption.

Over 80% of the firms surveyed needed a license to start a business, and for about half of them obtaining it was a difficult process. Government officials were most often the problem solved usually through payment of bribes or friends of government officials to negotiate. Clearly, networks and connections are of crucial importance in negotiating the government bureaucracy.

As for conducting day-to-day business, legal concerns are far less important to

them than the unwritten codes of the informal networks in which firms operate. In cases of default and breach of contract, the primary concern is loss of reputation, followed closely by loss of property, with the fear of legal consequences being-the least important concern.

About half of the firms surveyed did not have, a regular legal adviser and less than half of those that did had lawyers in that capacity. For mediation in a business dispute or to enforce a contract, the first choice was “mutual friends or business partners”. Only 20% of the respondents mentioned going to courts as the first option indicating that the legal system, while not as effective as the informal mechanisms, is not altogether absent.

The informal system, however, is not perfect in resolving disputes and has its costs. About half of the respondents experienced a breach of contract or, non-payment with a supplier or major customer in the past three years. Over a third of them renegotiated while over 40% did nothing but continued the business relationships with the offending parties.

In general, the business environment of the SME sector is marked by strong informal mechanisms like family ties, reputation and trust. Legal remedies though present, are far less important than the rules of the informal networks.

References

Allen, F., R. Chakrabarti, S. De, J. Qian and M. Qian, 2006, “Financing Firms in India”, Working paper, The Wharton School.

Bose, Suchismita and Dipankar Coondoo, 2004, ‘The Impact of FII Regulations in India’, Money and Finance, July-December.

Bose, Suchismita, 2005. “Securities Markets Regulation: Lessons from US and Indian Experience”, Money and Finance, Jan-June, 83-124.

Besley, Timothy and Robin Burgess, 2004, “Can Labor Regulation Hinder Economic Performance? Evidence from India” Quarterly Journal of Economics.

Debroy, Bibek, 1999, “Some Issues in Law Reform in India”, in Jean-Jacques Dethier ed. Governance, decentralization, and reform in China, India, and Russia,. Boston; Kluwer Academic Publishers.

Djankov, Simeon, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, 2002. “The Regulation of Entry,” Quarterly Journal of Economics, “Courts,” Quarterly Journal of Economics, 118 (2), 453-517.

Hazra, Arnab K. and Maja Micevska, 2004, “The Problem of Court Congestion: Evidence from Indian Lower Courts”, Working Paper, University of Bonn.

Kang, Nimrit and Nitin Nayar, 2004, “The Evolution of Corporate Bankruptcy Law in India”, Money and Finance, Oct 03 – Mar 04.

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(MUSHARIKA, MURABIHA, QARDE AL’HASANA, IJAREH, MUDARABA)

Author: EHSAN ZARROKH

ZARROKH2007@YAHOO.COM

2007-04-06

ABSTRACT

Islamic finance is an old concept but a very young discipline in the academic sense. It lacks the required extent and level of theories and models needed for expansion and implementation of the framework provided by Islam. In these circumstances, unawareness and confusion exist as to the form of the Islamic financial system and instruments.

The main difference between the present economic system and the Islamic economic system is that the later is based on keeping in view certain social objectives for the benefit of human beings and society. Islam, through its various principles, guides human life and ensures free enterprise and trade. That is the reason why the conventional banker does not have to be concerned with the moral implications of the business venture for which money is lent.

TABLE OF CONTENTS

1. ABSTRACT

2. The Role of Money

3. Types of Islamic Financial Instruments

4. Risk Mitigating Features

5. Islamic Leasing

7. MUSHARIKA

8. MODARABA

9. CONCLUSIONS

Socio-economic justice is central to the Islamic way of life. Every religion has the same basic aim. In an Islamic environment, an individual not only lives for himself, but his scope of activities and responsibilities extend beyond him to the welfare and interests of society at large. The KORAN is very precise and clear on this issue. There are basically three components of an Islamic economic paradigm:

1. That as vice-regent, man should seek the bounties of the land that God has bestowed on humanity. From the wealth thus obtained, he should enjoy his own share.

2. That he should be magnanimous to others and use a part of the wealth so obtained also for the benefit of his fellow-beings.

3. That his actions should not be willfully damaging to his fellow-beings.

Human society in Islam is based upon the validity of law, of life and the validity of mankind. All these are natural corollaries of the faith. Islamic laws promote the welfare of people by safeguarding their faith, life, intellect, property and their posterity. God nurtures, nourishes, sustains, develops and leads humanity towards perfection. Even though an individual may be making a living because of his efforts, he is not the only one contributing towards that living. There are a number of divine inputs into this effort and therefore, the results of such an effort obviously cannot be construed as entirely proprietary.

Whereas the Islamic banker has a much greater responsibility. This leads us to a very fundamental concept of the Islamic financial system i.e. the relation of investors to the institution is that of partners whereas that of conventional banking is that of creditor-investor.

The Islamic financial system is based on equity whereas the conventional banking system is loan based. Islam is not against the earning of money. In fact, Islam prohibits earning of money through unfair trading practices and other activities that are socially harmful in one way or another. [1]

Those who swallow down usury cannot arise except as one whom SHAITAN (evil) has prostrated by (his) touch does rise. That is because they say, trading is only like usury; and Allah has allowed trading and forbidden usury. To whomsoever then the admonition has come from his Lord, then he desists, he shall have what has already passed, and his affair is in the hands of Allah; and whoever returns (to it) – these are the inmates of the fire; they shall abide in it [SURAH 2:275].

Not that there was any ambiguity in the Command of Allah. Far be it from Him to give any order to His Servants, which they can not comprehend. The fact is that those who had surplus money and wanted to earn profit did so either by lending it through RIBA (usury) or by investing it in trade and hypocrites were not prepared to forgo the first option. Hence, they argued that since both were means of earning profit, they were alike and the prohibition of RIBA did not stand to reason.

The practice of RIBA i.e. usury was so deep-rooted in society and continuance of the practice was so undesirable, that Allah warned the believers that if they did not desist, they should be prepared for a war against Allah and His Apostle. This warning was heeded by the Muslim UMMAH and for more than a thousand years the economies of Muslim states were free from RIBA. With the ascendancy of Western influence and its suzerainty over Muslim states, the position changed and an interest-based economy became acceptable. Efforts in Muslim countries to revert to an interest-free economy were hampered by many obstacles. [2]

The Role of Money

The traditional definition of the time value of money leads one to assume that profit maximization is the objective of investors irrespective of whether or not the earning of profit has made someone else worse off. Some economists have termed the maximization of profit as the sole objective of corporations. This view cannot be supported or defended since the profit maximization process may lead to perverse outcomes. When financial operations are removed of moralistic tone, competitive markets fail to achieve the efficient allocation of a country’s resources.

In Islam money in itself is not considered, as actual capital only exists when money, along with other resources, is sunk into productive activities. Linking the use of money to productive purposes invariably brings into action the factor of labor, a process from which benefits pass on to society.

Types of Islamic Financial Instruments

Demand for monetary instruments is influenced by the variation and level in the market rate what is meant as the market rate of return. The demand for household monetary instruments is mainly for the purpose of circulation of income. Banks need these instruments for:

1. Transaction purposes;

2. Precautionary purposes, in that some unexpected payments have to be made while some expected inflows may not be forthcoming on their due date, and;

3. not only to avoid loss but also to obtain gains in the capital value of financial assets under the expectation that the market rate of return may move in a certain direction.

What differentiates a traditional financial market from others markets is that no tangible good or service is exchanged for any monetary consideration; only a “financial claim” changes hands in the form of a promissory note or a title to any future flow of income adjusted for any capital appreciation. Not all Islamic instruments are purely financial claims. Some of the instruments also represent ownership of the underlying assets together with a claim to underlying cash flows. Basically there are the following four types of Islamic financial instruments:

1. Type “A” is a financial claim of monetary value with recourse to underlying durable assets and related cash flows. This type has a predictable future income stream, is marketable and can be discounted since with the changing of hands, the instrument passes title to the goods and not to the debt. It is basically lease-based.

2. This instrument is partly backed by durable assets and its income is not predictable, but evaluated through an asset valuation process at the end of an agreed and declared duration. The underlying transactions can be a mix of IJARA, MODARABA, MUSHARAKA etc., contracts. This Type may be traded in the secondary market at its fair market price acceptable to the parties involved but not discounted.

3. Type “C” is purely a monetary claim to an expected income stream forthcoming from underlying commercial transactions. Income is evaluated through an asset-valuation process at the end of an agreed and declared period. A transaction of this type may comprise MORABAHA, ISTASNA etc., contracts which are debt claims against third parties in respect to actual commercial transactions. The Type may be traded at its face value declared at the end of each accounting period but cannot be discounted.

4. The Type “D” is purely a financial claim of monetary value but with recourse to certain precious metals such as gold, silver, platinum, etc., or commodities quoted on exchanges. The instrument entitles the holder to take delivery of the underlying asset but does not carry any attached revenue stream except that its price is pegged to the price of the underlying precious metal or commodity quoted at recognized international exchange rates. It can be traded but not discounted. [3]

Risk Mitigating Features

The phenomenon of risk plays a pervasive role in economic life. Without it, financial and capital markets would consist of the exchange of a single instrument each period, the communications industry would cease to exist in so far as this market is concerned and the profession of investment banking would be reduced to that of accounting. Risk is further segregated from uncertainty. A situation is said to involve risk if the randomness facing an economic agent can be expressed in terms of specific numerical probabilities (these probabilities may either be objectively specified, as with lottery tickets or else reflect the individual’s own subjective beliefs). Situations where the agent cannot (or does not) assign actual probabilities to alternative possible occurrences are said to involve uncertainty.

While it is not always true that a riskier asset will pay a higher average rate of return, it is usually return. Risk is an opportunity in financial markets and also a problem. Risk-averse investors require additional return to be at additional risk and, in effect, in a competitive market higher return is accompanied by higher risk. An investor evaluates an asset in terms of its marginal contribution to his/her portfolio.

The fundamental principal of valuation is that the value of any financial asset is the present value of the cash expected. The process requires two steps:

1. Estimating the cash flow, and;

2. Determining the appropriate interest rate that should be used to calculate the present value

The following are the SHARI’AH compliant risk mitigating features:

1. By prior arrangements in the instrument, the investing company, through its banker, would have a priori right in profit sharing up to an agreed upon ratio.

2. The profit will be paid on account on a monthly basis to the investing company as provided in the projected accounts.

3. The final accounting and settlement is accomplished at the end of the term of the instrument when the profit and loss accounts are finalized.

4. In order to mitigate the risk and as per the terms of the instrument, a TAKAFUL fund is established for the term of the instrument.

5. In this TAKAFUL fund where the invested company earmarks a part of their reserves for the TAKAFUL fund.

6. The investing company will contribute 1% of the invested amount.

7. This 1% contribution is made through an advance by the invested company on account of future profits.

8. In case of any loss during the tenancy of the instrument, it will be adjusted against the TAKAFUL fund.

9. The balance will be distributed between investor and at the end of the term of instrument.

10. Through a valuation, value of the investment would be established for the purpose of exercising the put option.

11. The investing company shall have the option to exercise its put option at the value price and the company shall buy this instrument. [4]

Islamic Leasing

But before describing leasing, as aforesaid, let me very briefly touch upon two of the basic or fundamental principles of Islamic finance in order to develop a premise for meaningful discussions on leasing.

1. It has to be asset-based financing:

The first fundamental principle of SHARI’AH is that as opposed to conventional monetary dealing, profit is generated when something having intrinsic utility is sold or offered for use. Money has no intrinsic value. As such dealing in money (same currency) cannot generate profit but a RIBA unless converted into real assets to deal with.

2. There has to be an element of risk:

The second basic element of SHARI’AH is that one cannot claim a profit or fee for a property/transaction, the risk of which was never borne by him.

Based on the above fundamental principles, the most ideal mode or instrument of financing in SHARI’AH are MUSHARAKA and MUDARABA followed by SALAM and ISTINSA.

MORABAHA and leasing are not originally modes of finance. However, to meet certain specific needs where ideal modes like MUSHARAKA or MUDARABA are not workable for whatever reasons, they have been reshaped and allowed in SHARI’AH subject to certain conditions.

1. Leasing described for leasing, IJARAH is an Arabic term with origins in Islamic FIQH, meaning to give something to rent. There are two types of IJAREH. One relates to employing or hiring the services of a person for wages whereas the second type relates to the hiring of any asset or property in order to reap its benefits without the transfer of ownership, or what is called in English “USUFRUKT”. The price or consideration of this is the rent.

It is the second type of IJAREH which is the subject matter of the discussion here because it is generally used as a form of investment and also as a means of finance.

As described earlier, in the light of the two basic cornerstones of SHARIA’H, leasing is a contract whereby usufruct rights to an asset are transferred by the owner, known as the lessor, to another person, known as the lessee, at an agreed-upon price called the rent, and for an agreed-upon period of time called the term of lease.

2. Lease as a mode of financing Strictly speaking leasing is not a means of finance as originally envisaged. It is simply a transaction much as a sale/purchase. As described above, the leasing transaction simply denotes the transfer of the usufruct of a property from one person to another for an agreed-upon price called rent without transferring the corpus i.e. ownership of that asset. Accordingly, the rules of “leasing” closely resemble the rules governing “sale” because in both cases something is transferred to second person for valuable consideration.

Leasing differs from sale only in-so-much-as not transferring the corpus or ownership of the property which remains with the transferor. As such in SHARIA’H, a lease transaction is governed by a separate set of rules, which we shall outline in the following paragraphs.

Although leasing, as originally conceived, is not a means of finance, the financial institutions and the corporate world have adopted it as such. Due to several factors (including tax concessions, etc.), instead of providing an interest-bearing loan, certain financial institutions in the West started to provide requisite equipment to their customers. To arrive at the rent, the total cost of the asset is calculated plus interest or mark-up to be recovered during the period of lease on a monthly or quarterly basis. This type of lease in the West is known as a finance lease, to be distinguished from an operating lease, wherein various basic features of the leasing transaction are ignored which is tantamount to RIBA.

Knowing that leasing is lawfully allowed under SHARIA’H, since it meets one of the basic criteria of asset-based finance, a number of Islamic financial institutions have adopted leasing on this model as carried out by conventional financial institutions without making the necessary modifications that really conform to the rules under SHARIA’H, particularly in regards to assuming the risk of ownership in the leased asset. Great care needs to be exercised to ensure various SHARIA’H requirements, as rendered below, based on the basic two principles of:

1. Asset based finance, and;

2. Assuming a risk element connected to the ownership of the asset.

3. Basic Rules of Leasing

The description or definition given above, under part A, contains the following essential ingredients for outlining the basic rules under SHARIA’H:

1. That it is a contractual obligation.

2. That there has to be a valuable use of the asset and transferability of that usufruct.

3. That the ownership of the asset is retained by the transferor or lessor throughout the lease period. Consumable articles cannot be leased.

4. That the risk and liabilities of ownership lie with the lessor. The leased asset shall remain the risk of the lessor throughout the lease period. Any loss or harm caused by factors beyond the control of the lessee shall be borne by the lessor. However, the lessee is liable to compensate the lessor for any harm to the leased asset caused by any misuse or negligence on the part of the lessee.

5. That the risk and liabilities associated with the use of the asset shall be borne by the lessee. For instance, taxes and other government levies, utilities, etc. However, the contract must specify these items for clarity’s sake.

6. That the term of the lease, period of the lease, its renewal or early termination must be stipulated.

7. Purpose of use. The lessee cannot use the leased assets other than for the purpose specified in the contract or agreed to by the lessor expressly.

8. Commencement of lease. The lease commences from the date of delivery of the asset to the lessee and not from the day of payment or lease agreement, with reference to the commencement of rentals.

9. Determination of rental. The rent for the entire period of the lease must be determined at the time of the contract. Different rates of rent for different phases during the lease period are permissible. This point will be elaborated in the following discussion of the issues.

4. Issues

While operating a leasing business, a number of practical issues have cropped up which warrant discussion and interpretation under SHARIA’H. An exhaustive and conclusive list of such issues is impossible to make. However, certain important and salient issues need to be taken up in these discussions as follows:

1. Joint ownership (Lessors)/Joint Lessees – (permissible)

2. Insurance – Islamic TAKAFUL – (by the owner)

3. Renewal of or variation in the lease period – (permissible if mutually agreed-upon)

4. Future date. Agreement to commence lease on some future date is allowed. However, the rent has to commence from the date of delivery. If the lessee has paid the price and delivery of the asset is delayed by the supplier, then no rent is liable to be paid for the period of delay. It must be noted that future or forward sale in sale/purchase transaction is not permissible in SHARIA’H. This is another major point after ownership transfer which differentiates leasing from a sale/purchase transaction under SHARIA’H.

5. Acquisition of an asset by the lessee. For various reasons, the asset subject to lease may be acquired by the lessee and payment may be disbursed? Through him by the lessor. This is permissible under SHARIA’H on the principles of agent and principal. Here there are two relationships separate from and independent of one and other. The first relationship is that before becoming a lessee, an individual acts as an agent for and behalf of the lessor to acquire the asset. This is an independent arrangement. Once the asset has been acquired with all the risk and reward of ownership to the lessor, then a second relationship is created i.e. the lessor and the lessee under the lease agreement. That cost of acquisition shall be borne by the lessor being owner and not by the lessee.

6. Rentals.

1. Advance rentals are admissible subject to the condition of adjustment against the actual rental when due upon commencement of the lease as discussed before.

2. Unilateral increase by the lessor is not permissible even if stipulated in the contract.

3. Bench marks. The fixing of any bench mark for determining the amount of rent, as with an inflation index etc., is permissible provided that the lease agreement clearly stipulates the same e.g. if the inflation rate as declared by an authoritative body like the State Bank etc. is said to be 10% per annum, then the rent can be increased every year by that percentage.

7. Penalty for late payment of rentals. Penalty or compensation for late payment is not permissible. Rentals once due become a debt obligation or monetary asset which cannot generate profit under SHARIA’H. This situation has been exploited by unscrupulous lessees. In such circumstances, contemporary scholars have provided a solution whereby a penalty can be charged to the lessee for delayed payment though the amount recovered is only to be used for charitable purposes by the lessor. In other words, the late payment charges cannot be taken as income by the lessor. A suitable clause, therefore, is to be incorporated into the lease agreement to avoid any misunderstanding in this regard.

8. Premature termination of lease. Premature termination of lease is allowed provided that the lessee has violated or contravened the terms of the lease or it is by mutual consent of the lessee and the lessor. Any unilateral or unconditional termination of the lease either by the lessor or the lessee without prior notification is contrary to the principles of justice and equity, hence not allowed under SHARIA’H.

9. Repossession of an asset. In the event of early termination, or upon maturity of the term of lease, assets have to return to the lessor unless he voluntarily relinquishes his rights or makes a gift of the leased assets to the lessee. However, rent would be payable only up to the date of termination and not beyond. Entitlement or the right of the lessor to claim rent from any period after termination, even if expressly stipulated in the contract, is not valid under SHARIA’H.

10. Residual value. It is accepted under SHARIA’H that ownership of the asset belongs to the lessor and, therefore, assets should revert back to him upon expiry of the lease. Any stipulation to the contrary in the contract that the lessor can sell or transfer the asset to the lessee upon the expiry of the term of the lease at a pre-determined price called residual value is not considered valid from the point of view of SHARIA’H However, this point is currently a subject matter of debate among contemporary scholars. They are of the view that if a lessor unilaterally undertakes or promises to transfer the ownership to the lessee as a gift or at a token price separate from the lease agreement, then this can be considered validly binding on the lessor at the option of the lessee.

11. What is important is that under SHARIA’H the leasing and sale/purchase transactions are two separate things and should not be mixed up in one contract, as both are independent and governed by separate rules. Nothing, however, in SHARIA’H stops the lessor from giving away the ownership of his assets at his own discretion or good will toward the lessee at any mutually agreed-upon price or as a gift upon the expiry of the leasing contract.

12. Sale and lease back. This is allowed, but only as two separate transactions. That in the first place there is a sale of assets to be purchased by the lessor. This is governed by SHARIA’H rules of sale/purchase at a fair market value. Once the ownership title is validly passed on to the lessee, a lease transaction can then be executed separately through a lease agreement.

13. Sub-lease. Sub-lease by the lessee is permissible under SHARIA’H subject to the consent of the lessor and can be expressly outlined in the lease agreement. In SHARIA’H, however, there are divergent views if the rent arising from the sub-lease is higher than the rent payable on the original lease. Some scholars allow the differential to be retained by the lessee while others feel that the surplus received from the sub-lease should be passed on to the owner i.e. main lessor.

14. Assigning of the lease. Also permissible under SHARIA’H, the lessor can sell the leased assets to a third party along with his rights and obligations. The relationship between lessor and lessee in this case will be determined between the new owner and the lessee. However, the lessor cannot assign the lease without transferring the ownership for monetary consideration. Here the basic SHARIA’H cornerstone of asset-back transaction is not there. Rent receivables are debt obligation which cannot therefore be transacted for a monetary price. Assignment of lease rentals without monetary consideration is, however, not prohibited in SHARIA’H.

15. Securing of the lease. Leased assets can be secured along the same principles governing the assignment i.e. ownership of assets along with the rent. Rent alone without ownership of the assets cannot be secured for the reason of being a debt obligation as discussed before. Securing a lease can be made wholly or partly to one party or to a number of persons. Documentation has to be carefully prepared to ensure the securing instrument represents assets and not the debt or monetary obligation alone. [5]

Some Difficulties

Major hurdles faced by Islamic finance houses are the absence of a necessary legal framework and the lack of adequate infrastructure in the banking and investment fields. [6]

The modern banking system is based on the concept that money should be treated like any other factor of production and must earn some return over a period of time. It is argued that the establishment of large-scale enterprises, and hence material progress, is not possible unless there is an agency that can mobilize financial resources from the public by paying them some interest, while lending these resources to entrepreneurs. By charging these entrepreneurs a higher interest, these agencies were able to utilize the difference (called a spread) to meet their expenses and to make some profit for the owners of the agency (i.e. share-holders). Banks were established to fulfill this need and from the beginning were only authorized to perform this function. They were legally prohibited from entering into trade or industry. When the Government of IRAN decided to introduce an interest-free banking system, this prohibition was removed. After a lot of in-house the banks were told that they were allowed to deal in only 1 to 12 means of financing (only two were classified as “Financing by Lending”).

These two permitted lending without interest by charging the actual expense incurred by the banks to meet their cost of operation and QARDE AL’HASANA. All the rest were either trade-related or investment-type models. These included the purchase of goods by banks and their sale to clients at an appropriate mark-up price on a deferred payment basis, in case of default there being no further mark-up. This sale of goods on mark-up is known as MURABIHA. Other types of financing were hire-purchase, leasing, MUSHARIKA or profit- and-loss-sharing, equity participation and purchase of shares, etc.

Since MURABIHA was the type nearest to lending and since it did not require any expertise in buying and selling commodities, bankers limited most of their financing to this type. In order to eliminate the risk of prospective buyers refusing to accept goods purchased by the banks by reason of not being strictly in accordance with the specifications, banks were allowed to appoint the prospective buyer as their agent for the purchase of the goods and later for the sale of the goods to the buyer’s firm. Furthermore, to give as much leeway to the banks, as safeguards of public money, as possible, the ULAMA did not fix a waiting period between the two stages of buying and selling.

The banks did not assume the role of trader and MORABIHA degenerated into lending on mark-up. The banks rarely hired persons who knew even the basics of trading, nor did they train their existing staff to learn the art. They did not even bother to find out whether their agents had actually purchased the goods or not. The inability or reluctance of banks and financial institutions to change over their operations from lending to trading has been a serious impediment to the Islamisation of the economy.

The blame does not entirely fall on the bankers. Depositors have become so accustomed to their money remaining safe and yet earning profit that if a bank had really ventured to trade and incurred a slight loss, then the depositors would have immediately demanded their money back causing the bank to go bankrupt. In the existing state of morality this was more likely to happen. It actually did happen to a few investment companies that had started with good intention, but could not go on giving away handsome profits to their depositors.

A lack of seriousness and dedication in those responsible for the implementation was also another great impediment to the achievement the goal of an interest-free economy. Many of these individuals thought that in the present world, there was no alternative to interest, yet something had to be done because of demands from the government. Some, who were more influenced by Western education and culture, thought that interest banking was not prohibited by Islam. Yet others thought that the efforts being made were only superficial and in reality the new system was no different from the existing system.

One weakness in the implementation of the proposals to eliminate interest from the system was that people were not sufficiently motivated to sacrifice a part of their financial interests for the sake of carrying out the commands of Allah (SWT), and the Prophet (SAW). Anyone attempting to change a well-established practice must be prepared to make some sacrifice for this, as arguably no noble cause has been achieved without any sacrifice. The prevailing level of public morality within the existing legal and taxation system of the state made it an up-hill struggle to rid the banking system of interest. And it remains so. Beyond this, there are many avenues of making profit that would have to be forgone and many types of modern banking services which also could not be provided by a bank working strictly on Islamic principles. For example, they could not keep their surplus cash in fixed or saving deposits. In spite of these difficulties, those who were engaged in the task of Islamisation took it upon themselves to portray as successful the reforms, while those who pointed out the difficulties were labeled as either a cynic or an opponent of the new system. Anyone who uttered a word of caution was regarded as someone who did not want the experiment of Islamisation to succeed. As a matter of fact, reward in the Hereafter (AAKHIRAT) should have been the main purpose of Islamisation. It might not have attracted many people, but the foundation would have been firm.

One great obstacle in the realisation of the goal of an interest-free economy has been absence of a proper environment. Unfortunately nothing has been done to produce an ideal or a near ideal Islamic environment by government or public leaders. The most important pre-requisite for the enforcement of SHARIA’H is A’DL [translation!!!!!!]. Establishment of the rule of law and ensuring justice to aggrieved persons should be the first task of an Islamic state, yet nothing have been done to achieve this end.

One very important requirement of an ideal environment is an inflation-free economy. Inflation erodes the real value of money, meaning that when a person gives a sum of money on loan and receives the same amount back after one year, he has made a net loss. A major source of inflation is deficit financing. The printing of notes to meet budgetary deficit is in fact an injustice to the public, since the real value of their money is consequently eroded. In this respect too, the government’s performance is very discouraging. Government borrowings at high interest rates and the quantum of the government’s domestic and foreign debts has reached a level which cannot be sustained. There has also been no effort to change the taxation structure so as to bring it to conform to SHARIA’H. [7]

MUSHARIKA

MUSHARIKA represents the most desirable form of Islamic financing arrangements. Yet, in terms of its ability to be an effective and efficient instrument for replacing interest-based transactions, it poses formidable problems.

The salient features of the MUSHARIKA agreement, as practiced by the commercial banks, were as follows:

1. It was a short-term financing arrangement specific only to the parties to the contract.

2. Investment by the banks was made in the form of the sanctioning of a funding limit to the client and the degree of employment of funds was determined on the basis of daily product of outstanding balances due to the bank.

3. All participative funds, including equity, reserves and other non-debt capital was included in the definition of capital qualifying for profits.

4. Profit sharing ratio was determined through negotiations within the boundaries specified by the SBP.

5. Profits for the purpose of sharing were to be determined after apportioning a share of net-income as a management fee to the firm.

6. Provisional profits, based on projected profits, were to be paid to the bank on quarterly basis, subject to a final adjustment on the basis of actual profits or losses.

7. Shortfalls or excess profits were to be settled through the creation of a [participation] reserve fund, which would attempt to smooth out the payments to the bank.

8. Losses, if any, were to be shared in strict proportion to the bank’s investment in the total capital of the firm.

9. Against the apportioned loss of the bank, ordinary shares were to be issued, which qualified for recon version in MUSHARIKA investment under the original terms of the agreement in case profits accrued in future.

10. Standard securities in the form of pledging and hypothecation stocks or the mortgaging of properties were required against MUSHARIKA financing.

Some of these features of the instrument attracted criticism. For example, the profit sharing arrangement did not strictly conform to the requirements of SHARIA’H particularly in the treatment of losses and the payment of provisional profits or their adjustment through the participation reserve. Secondly, despite being a sharing arrangement, the actual agreement was cast within the framework of a creditor-debtor relationship, and was also protected as such in law. Three, MUSHARIKA also demanded securities which were akin to the relationship between a creditor and debtor. Finally, in the absence of a legal framework regulating the operation of MUSHARIKA, there was no standardization of the agreement, and the terms and conditions of various agreements varied considerably.

MODARABA

MODARABA represents another of the more desirable forms of Islamic financing arrangements.

The salient features of MODARABA companies and their operations are as follows:

1. Only registered companies or those established under specific laws are eligible to register as MODARABA companies.

2. MODARABA can either be specific purpose or multi-purpose and can either be for a fixed term or in perpetuity.

3. On fulfillment of certain conditions, and with the prior approval of the Registrar, MODARABA companies may float MODARABA on the stock exchange, and their certificates of issue will be tradable securities.

4. Each MODARABA will be a separate business and its operations must conform to those approved under the injunctions of SHARIA’H.

5. A Religious Board, to be periodically constituted under the ordinance, will be empowered to declare whether the operations of MODARABA were in conformity with the provisions of SHARIA’H or not.

6. Many disclosure requirements, similar to those applicable to listed companies, are applicable to MODARABAS, including statutory audit, annual meetings and investments and loans to and from the directors of the MODARABA Company.

Evidently, the entire scheme was an elegant formulation of the simple relationship required under a MODARABA contract between labor (DARIB) and capital (RABBULMA’L). The management company was to be remunerated through a fixed management fee paid out of the net income of the MODARABA and the remainder was to go to MODARABA certificate holders, with adequate provisions for retained earnings to ensure future growth.

CONCLUSIONS

To outline the broad features of a strategy which holds the promise of successfully implementing an Islamic system of finance are as follows:

1. The process has to be guided by basic legislative efforts covering all the essential elements of the proposed programmed.

2. The legislation would define RIBA and prohibit transactions connected with RIBA.

3. The application of the law would be unqualified and without exception, thus the entire financial sector, covering banking government finance and foreign transactions would be covered in its ambit.

4. Given the unqualified and non-exceptional nature of the proposed law, even existing relations will have to be converted into permissible forms, for which a suitable time frame, within a phasing-in period, will be allowed.

5. The law should also provide for the Constitution of a SHARIA’H Board which would assist the SBP to formulate permissible means of financing. Such means, specified with the prior approval of the Board, will only be illustrative and no restrictions will be placed on banks and financial institutions to design means of financing which are free of RIBA.

6. A major portion of the law will have to be devoted to a plan of restructuring the fiscal policy which comprises a scheme for the privatization of public sector assets and the use of its proceeds for the settlement of the outstanding stock of public debt.

The proposed strategy is based on the clear recognition of the scope implied by the prohibition of RIBA. This is critical, for otherwise the solution will continue to elude us.

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