The Executive Mechanism of Rastin
Profit and Loss Sharing (PLS) Banking
Bijan Bidabad [1]
Mahmoud
Allahyarifard[2]
Abstract
�
Despite the interest of bankers for
using Profit and Loss Sharing (PLS)[3]
banking for the last decades,
it has not prevailed yet executively. The existence of different
definitions of Riba, absence of appropriate operational, supervisory, and
managing mechanism on PLS are some reasons that haven't allowed this kind of
banking to be practiced yet. Here, we are going to introduce a practical method
for Profit and Loss Sharing (PLS) banking to overcome these problems. In this
bank, the basis for determination of interest rate of loans is real economy
return rate. The bank operates as an intermediary, who gets commission fee, collects saving
resources and as an attorney or legal representative of the depositor,
allocates them to investment projects, and supervises the detailed operation of
the contractor. The yields of the investment will transfer to resources owners
who are depositors whatever profit or losses.The PLS banking is a banking
system with newly defined instruments of Mosharaka and Pazireh that not only
stabilizes the financial and economic markets by preventing the banks, loanees
/entrepreneurs and design, construction and contractor sectors in the economy
from bankruptcy during crisis periods and volatile markets, but also makes the
banks as an international firm which perform similar jobs as stock exchange
markets for transactions of PLS products certificates through a secondary
certificate market on virtual internet space. Depositors will earn more
stabilized benefits too.In this designed method, a trustee (Amin) is a unit who
supervise the contractor/entrepreneur operations on behalf of the bank for
being honesty in carrying out the project, controlling on executive operations
along with announced programs, resources allocation manner, and auditing
financial statements.PLS banking will use new financial instruments and
innovations such as Mosharaka (partnership) Certificates for projects with
specific ends and Pazireh (Subscripted) Certificates for endless (productive)
projects. Establishing of secondary exchange market for the transaction of certificates,
and various insurance services will play important roles for activating and
increasing the efficiency of newly established virtual markets.All of the
activities in this method will be done on the basis of compiled instructions.
The framework and the organization of the PLS banking have been analyzed in
forms of required committees, units, and departments tailored for this type of
Non-Usury Bank (NubankCo.) definition.
Keywords: PLS,
Riba, Financial management, Islamic banking
JEL:L86 ,L87 ,G21 ,G24
Introduction
Many countries around the world have
been doing huge tasks for the fulfillment of Islamic banking. The low-risk
characteristic in this kind of banking has caused a tendency to keep getting
this kind of banking method even in many non-Muslim countries besides Muslim
countries in order to get rid of risks like American, European and some Asian
countries. Based on IMF reports, the average growth of the Islamic banking has
been estimated about 10%-15% each year in the last decade, and it will be
forecasted in the next years with the same growth as before. Despite the huge
growth, Profit and Loss Sharing (PLS) has not been developed satisfactorily,
and it usually has been mingled with usuric banking because of being so new in
view of its performance and operational mechanism. Even its financial
instruments as Profit and Loss Certificate or Investment Deposit Certificate
had been introduced at the end of the 1990s were forgotten later. Generally,
the main reasons for unsuccessful in this kind of banking method come from the
following causes:
�
Different
jurisprudential understanding of usury by different Islamic religious sects.
�
Lack
of supervisory and managing processes on loanee�s financial and executive
operations.��
The absence of appropriate executive
processes in operations, supervision, and management sides consistent with
profit and loss sharing requirements, and incompatibility of bank�s
organizational infrastructures are significant factors to unfulfilled ideal
theories of Islamic banking. Because the banks have not been organized and
established for supervising on details of investment operations as a
supervisory organization. Essentially these organizations cannot tackle this
kind of functioning. Therefore, practically, the interest rate comes into PLS
banking calculations by any definition or similarity. However, though the
manifestation of Riba is not seen in it, the interest rate would be recognized
by scrutinizing the interior of the financial operations[4]. On
the other hand, jurisprudential deductions of different Islamic sects are not
similar, so this point caused the Islamic banks around the world generating
many non-usuric products that the most of them are compatible with current
usuric banking products and moved into the usuric realm. Even in Iran, in spite
of existing more external coordination and more unanimous than other countries,
the result was similar as well. However, the unanimity in early 1360s Hejri
during approving non-usuric banking law has also digressed thereafter.
Therefore, first, the general solution for fulfillment of pure Islamic banking
requires that the subject will be analyzed and considered from the base.
The main purpose of this paper is to
consider the practical model for PLS banking and the present appropriate method
for performing real non-usury banking accompanying with necessary provisions
for applying modern financial instrument that will be provided based on
information technology. Actually, the fulfillment of PLS banking will cause
increasing stability of market transactions and equal distribution of the
revenues of investment activities and decreasing the investment risk.
On the other side, the proposed
financial instrument (participation Certificates and Subscripted Certificates)
have ability to be bought and sold on the Internet through Internet Banking and
anyone having a bank account with the approved ID information is able to buy
and sell these financial assets around the world.
The Experience of the PLS Banking
The prohibition
of Riba (Usury) and Profit and Loss Sharing (PLS) subject has a long history,
and the subject returns to Torah and historical religious texts before Islam.
The PLS was developed with Islam growth and nowadays have been paying attention
as an important financial instrument, and PLS is recognized as a modern
successful financing instrument[5]. Mudarabah and Musharakah are two financial
instruments based on the PLS method that eliminates the fixed rate of return
(interest rate) from financial operations and participate financers into the
profit and loss of investment activities.[6]
The various conceptual definitions have been presented on PLS by some
Islamic economists, and every one of them has touched it as follows:
�
"PLS is a contractual arrangement between two or more
transacting parties, which allows them to pool their resources to invest in a
project to share in profit and loss" (Humayon, Presley, 2000)
[7].
�
"Under the PLS paradigm, the assets and
liabilities of Islamic banks are integrated in the sense that borrowers share
profits and losses with the banks, which in turn share profits and losses with
the depositors" (Chong, Liu, 2007).[8]
�
"PLS leads to a more efficient allocation of
capital because the return on capital and its allocation depend on the
productivity and viability of the project" (Khan, 1986)
[9].
Chong Liu (2007) studies on Malaysia Islamic Banking in large Islamic
banking of Malaysia of capital and insurance markets (World Bank, 2006)[10] show the following consequences:
�
Despite the PLS banking focuses on the Islamic
banking, the Islamic banking of Malaysia has not been successful in fulfilling
PLS, and adoption
of PLS paradigm has been much slower on the asset side than on liability side.
Based on this study, on the asset side, only 5% of Islamic banks and financing
is based on the PLS paradigm of Mudarabah (profit-sharing) and Musharakah
(joint venture) financing. Islamic bank financing in Malaysia, in practice, is
still based largely on non-PLS manners of financing that are not allowed in the
Shariah (Islamic law) and obeys the spirit of the usury. On the liability side,
however, Mudarabah (profit-sharing) deposits, which account for 70% of total
Islamic deposits, are more dominant.
�
The
rate of return in Malaysia PLS banking is less than the rate of return in
conventional banking, so the rate of return of this kind of deposits depends on
conventional banking rate of return but not vice versa.����� ��
The same problems are observed in Iran. Generally, PLS banking in
Iran's Islamic banking did not develop because of similar reasons. Focusing on
Iran banks balance sheets items indicates that at each side of assets and
liabilities, the proportion of Musharakah products in comparison with other
products was at minimum before the compulsory decision for decreasing the
interest rate by the government. In other words, the Musharakah contractions
were at the minimum, and the exchange contractions had the maximum share on
monetary resources. Furthermore, the rates of return of this kind of
investments are determined on the basis of expected return (and not actual
return). In the debit side, in a majority of cases, the depositors receive a
return on the basis of Vekalat contraction with a specified rate determined by
the central bank of Iran. During the last decade by emerging private banks and
increasing competition, they used to pay 1% or 2% more than in part (promised)
payments as the final rate for settlement with the customers. Increasing
government pressure on banks for decreasing exchange contraction return rates to
keep the banks with positive profit markup in recent years caused the banks to
go toward the Musharakah contractions. However, the fulfillment of the PLS
banking in the assets side of Iran banks is facing the following problems:
�
Lack of specialist organizations and approaches for
effective supervision on investment projects on the basis of the Musharakah
contractions.
�
Lack of IT capabilities for applying integrated
systems in Islamic banking[11].
�
Lack of design of new financial instruments, and lack
of effective capital market for financing as PLS banking.
PLS Banking Architecture
The foundation of the PLS banking is based on the keep getting benefit
of economy real sector return for the whole participants of the economic
activities. Therefore, the capital owners (shareholders), labor, services, and
technology suppliers and operators should get benefit proportionally
on the basis of their own portion and inputs. Fulfillment of this approach
could be provided by the executive preparation of PLS banking. For designing
PLS banking architecture, first of all, each party or entity and its functions
should be explained precisely. In addition to the bank, depositor, entrepreneur
(project handler and technical and executive knowledge owner) new
organizational pillars are required for the practical structure of the PLS
banking to be established to handle over special duties regarding the specific
nature of partnership activities. In the new architecture, the functions of
each unit will be different from what they are in conventional banking, though
their names are called as same as conventional banking units.
Bank: The bank as an
authorized agent on behalf of the depositors allocates the deposit resources of
depositors to approved applicants of the credit facilities according to
specific contracts and distribute the investment return as profit or loss
consequences among the depositors, bank, and entrepreneur. The bank
contractions with each party could be made on the basis of commission or profit
and loss partnership. The bank as depositor's attorney or representative is
obliged to protect the depositor's rights and must apply her complete own
specialized powers for preserving depositor benefits.
Depositors: who is the
supplier of financial resources, based on investment Joaleh contracts uses her
financial resources to purchase certificates of participation (Mosharaka
Certificate) for participation in Finitude projects or buy Certificates of
Subscription (Pazireh Certificate) for participation in endless projects; in specific
project or specific package of projects or profit and loss participation in the
PLS bank branch, to participate in the profit and loss of the project (or
financial product) according to her share.
Entrepreneur: is a legal
entity that combines her own cash and non-liquid assets with the depositors'
deposits as joint owners (spooling) and bank intermediary to establish a joint
venture activity.
Trustee (Amin): is a unit who
takes over the responsibility of supervising on the PLS process on behalf of
the bank about the quality of carrying out the project, controlling practical
operations in compare with approved documented entrepreneur plan, benchmarking,
entrepreneur resources allocation and quality of optimum resources allocations
etc by applying key indices and verifying entrepreneur financial statements.
Arbitration
(Hakamiyat): takes
over resolving the disputes and conflicts among the bank, entrepreneur, and
depositors whose financial relationship is based on PLS banking. In the case of
concordance of the parties, resolving of claim might be to a pre-approved
third-party judicial person/entity that is acceptable for parties in the
conflict.
Secondary
Market: The
secondary market is suggested for simplifying, progressing, and to make
Mosharaka (partnership) and Pazireh (Subscripted) Certificates more attractive.
Bank creates this facility that Mosharaka (partnership) and Pazireh
(Subscripted) Certificates can be legally be sold and purchased in the
secondary market on the internet.
Consultants: The
consultants take over the role of economic, financial, and technical
assessments in PLS banking. The complexity of some projects in view of the
applied technology, the use of hiring specialists in the area is doubtlessly
inevitable.
Interactions and relations in the PLS
banking�����
The relation
between the essential pillars of PLS banking is shown in chart 1. Based on this
method, apart from the bank is private or governmental, the interest rate of
the bank's facility will be determined according to real investment return.
Bank as fund intermediary gains wage or commission as attorney or agent of the
depositor and the rest of the investment return will be paid back to depositors
as profit or loss consequences. Accordingly, bank according to participatory
investment based on general or special attorney contracts invests deposits
collectively based on a diagnosis of the depositor (in product 1 and 2) or on
her diagnosis (for product 3) in the desired projects/plan and distribute the
investment outcomes among providing depositors.
In the first
step of PLS operation, entrepreneur presents her proposal and required
documents and feasibility study regarding economic, financial and technical
aspects of his project/plan according to compiled instructions in PLS banking
instruction set. The entrepreneur delivers all required official letters and
documents to the bank according to related bank compiled instructions including
budgeting, time schedule, size of necessary resources and resource allocation
manner, qualification of carrying the project, phasing, quality management,
reporting, project completion manner, specification of completed project
quality�. The bank in case of necessity when the project contains special,
complex or high technology and the bank's specialists are not able to evaluate
and make supervision on the project will outsource the project evaluation and
supervision as well to other consultants for evaluation and/or supervision. The
bank in case of positive evaluation on both entrepreneur and proposal will
publicize the project to interested depositors for participating in depositors
according to specified PLS banking products for financing the projects. The depositors
would buy the Mosharaka (partnership) Certificates or the Pazireh (Subscripted)
Certificates and donate deposits to the bank, and the bank allocates monetary
resources to the suggested projects by empowering the entrepreneur to start the
project. Trustee (Amin) supervises and controls the operations of the
entrepreneur directly on behalf of the bank for the whole process. Obviously,
reports of the trustee will be considered as the main criterion for next
payments to an entrepreneur from the bank. After completing the project
according to the related instructions and predefined PLS accounting formulas,
the portion of profit or loss consequences and the bank commission/wage portion
will be calculated by the accounting and auditing department. The portions of
entrepreneur, depositors, and bank will be determined and are transferred to
their accounts. In case of existence of any reports on the interruption of
operations of the project from the trustee side, the amount of delaying losses
will be computed and determined according to the related instructions.
Chart 1: PLS
Banking Pillars
The PLS banking
products as Mosharaka (partnership) and Pazireh (Subscripted) Certificates are
issued by PLS bank under the central bank general approved PLS regulations[12] ,
and the Certificates will be supplied to the depositors. The depositors could
sell them at the secondary market before the due settlement time in case of
revoking to cancel their depositing activity. They can do this via the bank's
electronic portal on internet or bank's transaction counters.
Insurance
companies' collaborations to hedge the certificates have been observed in this
kind of banking.
Legal requirements
Lack of
executive experience necessary for this type of banking cause new regulations
and the development of new guidelines. The first step should be in the form of
necessary upstream regulations and rules to be issued by the central bank if
there is a lack of regulations or guidelines within the banking industry for
this kind of banking financial tools such as participation Certificates and
Subscripted Certificates for their legal protections.
Components
Generally, the
components of the PLS banking could be classified as the following items:
�
Products
and Services
v Finitude
projects
� Mosharaka
(partnership) Certificates for profit and loss sharing on a special project.
� Mosharaka
(partnership) Certificates for profit and loss sharing on a projects portfolio.
� Mosharaka
(partnership) Certificates for profit and loss sharing on a PLS bank.
v Endless projects
� Pazireh
(Subscripted) Certificates to shares
�
Customer
groups
v Depositors
� Real entity
� Legal entity
v Entrepreneurs
� Legal entities
(private, governmental)
�
Financial
instruments
v Insurance agents
v Portfolio
management of Mosharaka (partnership) and Pazireh (Subscripted) Certificates.
� Minimum risk and
return
� Middle risk and
return
� High risk and
return
v Certificates
insurance with avoidance from
� Moral hazard
� Adverse
selection
� Asymmetric
information
v Executive
insurance
� Responsibility
insurance
� Project's place
insurance
�
Mechanism
and specification of Mosharaka/Pazireh IT based transactional system
v Information
system
v Buying/ selling
of Mosharaka/Pazireh Certificates as remote
v 24x7
v Multi-languages
v Multi-currencies
v Integrated
v High secured
v Privacy
�
Contractions
v Depositor
� Jualah
� Wakalah
� Solh
v Entrepreneur
� Mosharaka
v Consultant
(assessment, trusteeship)
� Jualah
�
Office
infrastructures, organization
v PLS Strategy
committee
v Interpretation
and revising of PLS regulations and process specialist group
v PLS office
including the following department
� Legal department
� Project
evaluation, including the following specialist:
o
Economic
o
Financial
o
Technical
and engineering (Back office)
� Auditing
Department
� Financial
engineering management
� Trustee (Amin)
o
Financial
o
Technical
and engineering
o
Legal
� PLS branch
(front office)
� Information
(consulting services)
� Cashier
� Mosharaka/Pazireh
Certificates transactions
� Others
�
Typical
contracts including:
v Contraction with
entrepreneur
v Contraction with
depositors
v Contraction with
the trustee (Amin)
v Evaluation
contraction
�
Instructions
v Documents and
required papers
v Entrepreneur
ability reaching
v Justification
reports
v Accounting and
auditing
v Guarantees,
collaterals, and inputs
v Banks returns
v The general
condition of contraction
v Set out the
contraction
v Standards and
requirements for supervision
v Trustee (Amin)
competency
v Entrepreneur
reporting
v Mosharaka/Pazireh
Certificates transactions
v Mosharaka/Pazireh
Certificates swapping
v Time schedule
variation
v New partnership
v Depositor
cancellation
v Settlement
v Arbitration
v Force major
Instructions
For fulfillment
of the PLS banking, operational methods will be performed by the following
compiled instructions:
1.
Guarantees, collaterals, and capital brought: Depend on the
entrepreneur classification (green and yellow groups) the collateral will be
taken in different types of collaterals and guarantees for good performance.
The input portion of the entrepreneur, including cash or non-cash in each
category, is determined by this instruction.
2.
�Required
documents for project evaluation: All the required financial and
non-financial documents for project evaluation and legal and performance
authorizations are determined by this instruction.
3.
Entrepreneur reportings: The reports to
the bank, trustee, inspector, or other controlling authorities are determined
in this instruction.
4.
Feasibility reports: The main purpose
of this instruction is to organize and standardize the economic, technical and
financial feasibility studies of the project till the affiliated departments
can evaluate the mentioned documents according to the specified framework.
5.
Arbitration (Hakam): The condition
of referring conflicts among parties (depositors and entrepreneur with the
bank) to a pre-accepted third person/s is determined in this instruction.
6.
Force major: Coming up unexpected events for
beneficiaries of the PLS banking are to be handled by this instruction.
7.
Instruction for revocation of depositors to cancel
her deposit before due date: Revocation of depositors to
cancel her deposit for not carrying on the investment and the settlement manner
for the cancelation by selling Mosharaka and Pazireh Certificates is specified
in this instruction.
8.
Time schedule and expense deviations: In case of
coming up deviations, either in time schedules or expenses plan of the projects
coming from either fault or delinquency of the entrepreneur or effect of
inflation in calculation of costs of entrepreneur and also the manner of
calculation of share of beneficiaries in these circumstances are specified in
this instruction.
9.
New partnership: In the case of extended financing
of PLS projects, issuance of new Mosharaka and Pazireh Certificates would be
according to this instruction.
10.
To settle with an entrepreneur: The settlement
terms and manner with the entrepreneur is specified in this instruction.
11.
Pazireh Certificates swapping: To change
Pazireh Certificates to shares and the related processes and valuation of
shares are specified in this instruction.��
12.
Mosharaka and Pazireh Certificates transactions: The Mosharaka
and Pazireh Certificates transactions on internet and establishment of the
secondary market and market management are specified in this instruction.
13.
The entrepreneur ability: Including the
points regarding technical and financial capability and qualification
classification of the entrepreneurs based on the different projects,
collaterals types and guarantees for good performance, the fulfillment of
obligations, the share of entrepreneur, entrepreneur partnership inputs and
entrepreneur classification to three categories of green, yellow and read.
14.
Trustee (Amin) competency: specification
and competency of the trustee as supervisor agent to supervise the entrepreneur
performance as real persons or legal entities are described in this
instruction.
15.
The standards and supervision obligations: This instruction
takes over the whole obligations and required standards for supervisory
processes.
16.
�General
conditions of contraction: To regularize proper contractions and making
contents of contracts obligatory and legally mandatory for each party in the
PLS banking this instruction is to be used.
17.
Contracts compilation: Typical compiled
contracts of the bank with entrepreneur, depositors, the trustee (Amin) and
consultants of the project have been brought in this instruction for each type
of PLS banking products including finitude and endless projects.
18.
Accounting and auditing: The requirements
and obligations of the auditor, auditing process, financial statements of the
entrepreneur's company, and documents verifying to confirm the accuracy of the
operations of entrepreneur are cited in this instruction.
19.
Bank gains: Gains of the bank in all processes of
primary and supplementary evaluations, supervisory services, the trustee
(Amin), financial engineering, auditing, and the other services and also the
bank's wages and commissions have been specified in this instruction.
IT infrastructures
Based on the
previous researches[13],
one of the important reasons to not prevailing PLS banking is lack of
integrated systems, which able the bank to connect whole producers of
information resources together and every transaction will be traced and
supervised through them. Therefore, for achieving the ideal PLS condition it is
necessary to integrate different systems including Enterprise Resource Planning
(ERP), and Islamic core banking containing other modules and subsystems like
Customer Relationship Management (CRM), Supply Chain Management (SCM),
Manufacture Executive System (MES), Human Resource Management (HRM), Business
Process Reengineering (BPR), Workflow management (WFM). But this solution is
for as an ideal PLS. Since integrated core banking necessities for this type of
PLS banking is not available yet, so it is not possible to apply this
integrated PLS banking as full automatic banking and leave this idea for the
future extension of PLS.
The
applied technology in this phase is a web-based secondary market portal for
Mosharaka and Pazireh Certificates, which will be applicable through the
internet connection and can be connected to the personal accounts in the bank.
The individuals or the Certificate's owners become able to deal with these
kinds of digital papers (certificates) through the internet-based communication
networks. Therefore, these certificates as an asset can be negotiated and
traded over the world on the internet. Generally, the PLS banking products
specifications have been shown in table 1. The attractiveness of the products
will be increased through the internet-based transactions on the virtual
secondary market on the internet.
PLS Banking Products and Services
According
to table 1, the designed products and services in PLS banking are separated
into two categories of finitude and endless projects. The bank will get a
commission for supplying some financial management services such as making
confidence among the depositors, supervision, financial engineering, project
management, and also transparency in the whole PLS products to depositors.�
�
The finitude projects partnership: In this category
of the PLS banking products, the investment return will be allocated and
settled among the depositors, entrepreneur, and bank at the end of the fiscal
year (for product type 3) or after the ending time when the project will be
finished and sold - depending on type of project. The products used can be a
special project or a basket of projects. The applied financial instruments in
these products are Mosharaka Certificate so that after depositing of the
depositor in a project immediately Mosharaka Certificate will be delivered to
the depositors.
�
The endless project's partnership:� According to chart 2, the bank will
subscribe to the shares in the form of issuing Pazireh (Subscripted)
Certificates for financing an endless project. The Pazireh (Subscripted)
Certificate is similar to Mosharaka (partnership products) Certificate and can
be transacted at the secondary Certificate market. After ending the
construction period and when the project is ready to start the exploitation
period, the Pazireh Certificates will be transformed into the shares of the
corporation. The whole subscriptions process, exchanging Pazireh Certificates
to the share papers will be performed under the bank supervision, and
decisively the project ownership will be assigned to the depositors through
changing their Pazireh Certificates to the shares, and after this
transformation, the depositors will become company shareholders.
The bank might
do the whole transforming process through changing Pazireh Certificates owners
to shareholders by establishing a new company (and not the entrepreneur
constructing company) at the end of the construction period and at the
beginning of exploitation period. The bank might sale the shares of the Pazireh
Certificates owners in bidding, and after deducting the entrepreneur and the
bank, portions pays cash to depositors.
����������������
The Mosharaka and Pazireh Certificates������������������
���������������
The two important financial instruments
of PLS banking are The Mosharaka and Pazireh Certificates.
�
Mosharaka
Certificate is
an anonymous (digital) paper that is issued with a specified nominal price for
a specific duration (performance duration of the finitude investment project)
by the branch of the PLS bank. The owners of the papers participate on
investment return in proportion to nominal price and duration of being as a
partner in the project, and the bank will earn commission in lieu of supplying
capital management services to depositors that are offered by depositors for
investing their money resources in the PLS banking products.
�
Pazireh
(Subscripted) Certificates is an anonymous (digital) paper is issued with
specified nominal price and durations (performance duration of endless
investment project up to the end of construction period) by the branch of the
PLS bank. The owners of these papers will be the owner of the company of the
project in the form of shareholders in proportion to their nominal price of
their Certificate and duration of the partnership.
According to
table 1, anonymity, transformability to others, transact ability in virtual
secondary certificate market and in stock exchange markets, commission return
of transactions for the bank (0.0005 from each transacted parties � seller and
buyer), demand and supply (market mechanism) based price determination on
internet secondary market, and final settlement with the final authenticated
certificate owner are some of the attractive specifications for both Mosharaka
and Pazireh Certificates. The main difference between Mosharaka and Pazireh
Certificates is in finitude and endless nature of the projects. In the case of
Mosharaka Certificate, the settlement process will be done at the end of the
construction period by bidding and selling the project. In case of issuing
Mosharaka Certificate for partnership in the PLS branch's profit (product type
3), the settlement process will be done at the end of the fiscal year when the
PLS branch's financial statements are finalized. In the case of Pazireh
Certificate, the bank undertakes to change Pazireh Certificates owners to
shareholders of the investment project, and there is no responsibility for PLS
bank to pay back the depositors and entrepreneur and responsibility of the bank
will be finished after completing the above transformation. The process is
shown in chart 2.�
Table 1: The PLS
banking product and services framework
|
Mosharaka and Pazireh Certificates
specifications |
Financial hedging |
Type of contracts |
Settlement time Profit/loss |
Products |
|
-
Anonymity -
Transformable to
others -
Transactability in
virtual Internet-based secondary certificate market and on the bank counter
and stock exchange in a mechanized IT-based state. -
Earning commission
from both transactor parties per transaction. -
Valuation of
certificates based on demand and supply mechanism. -
Transformation
possibility of Pazireh Certificates to shares in endless projects. -
Decisive final
settlement with the last Mosharaka Certificates owners. -
Customer groups can
be private or governmental, real persons, or legal entities.��� |
Insurance of some portion of the value of the projects can be
arbitrarily applied Other insurance instruments as responsibility insurance, engineering
insurance, and accident insurance have been defined in different related
contracts to hedge the project execution |
Jualah Wakalah Solh |
Completion of construction and selling the constructed project |
Special project (finitude) |
|
Completion of construction and selling the constructed project |
Basket of Projects (finitude) |
|||
|
At the end of the fiscal year |
Participation in PLS branch's Profit and loss (finitude) |
|||
|
Completion of the construction period and at the beginning of the
exploitation period |
Endless projects |
Chart 2: PLS
banking products and process
According to this banking framework, the
customers can be categorized into two groups of depositors and entrepreneurs of
investments projects as follows:
� Depositors:
Depositors in PLS banking could be a real person or legal entity and either
private or governmental.
� Entrepreneurs:
Entrepreneurs in PLS banking necessarily must be a legal entity/corporation,
either private or governmental. Legal entity specification for the entrepreneurs
is necessary for auditing financial documents and statements that cause
reliable and more transparent calculation for profit or loss calculations.
Islamic Contracts In PLS Banking�
Bank
on the basis of Jualah contraction arranges a formal agreement with depositors
so that according to depositor opinion, provide partnership in entrepreneur's
investment. In the other side, the bank based on Mosharaka contract (based on
Civil Participation contraction) will be entered into interaction with the
entrepreneur. By this contract, the bank will do as an intermediate entity and
gains Haqh-aljualah (wage) from depositors and mobilize financial (deposit)
resources entrepreneur. Finally, investment returns portion for depositor will
be transferred to the suppliers of the resources (depositors) based on the
agreements of the contract. The Solh (peace pact) contract is needful beside of
the Jualah contraction as necessary for simplifying Mosharaka and Pazireh
Certificates transactions on the internet-based secondary certificate market
for depositor approval and her signature.
PLS Banking Instruments
In PLS banking, the new financial
instruments and innovations as Mosharaka and Pazireh Certificates are applied.
By PLS banking, the bank increases the efficiency of monetary and financial
markets and by issuing Mosharaka and Pazireh Certificates and establishing
secondary certificate market and designing Mosharaka Certificate
basket/portfolio will play an important role in the mobilization of resources.
Performing the mentioned specifications of PLS will facilitate domestic and
international customers to enter the PLS-based depositing and investment
simply.
The other complement financial
instruments will be separated into Mosharaka Certificate basket/portfolio,
issuing and applying insurance products for covering probable risks. The
relation between risk and return in investment and financial activities and
covering the whole customer groups' requirements in view of the
risk-acceptability, the classification of the PLS banking products is
important. Therefore, for decreasing risk in the PLS banking products, the
Certificates can be classified in the following portfolios:
�
Mosharaka
Certificate portfolio with low risk and low rate of return
�
Mosharaka
Certificate portfolio with medium risk and a medium rate of return
�
Mosharaka
Certificate portfolio with high risk and high rate of return
For insurance
encouraging and supporting of capital owners and decreasing different risks
among them as moral hazard[14],
adverse selection[15] ,
and asymmetric information,[16]
the bank can establish an organization to provide necessary supports. For
avoidance from falling in moral hazard in the side of the capital owners, it is
required that a portion of customer's principle of capital be covered by
insurance coverage. The coverage may be around 50% of the deposited capital.
This insurance is arbitrary and might be supplied by the bank or other
insurance corporations and purchased by depositors
Organization of PLS Banking�����������
The organizational structure of the PLS
banking with paying attention to the above definitions might be designed in the
form of PLS banking strategy committee, PLS banking specialist group, PLS
department, legal department, project evaluation department, auditing department,
financial engineering management department, trustee (Amin) and PLS branch in
which the latter is designed to have information, consulting services and
cashier sections.
Summary and Conclusions
As long as the PLS bank as a financial
intermediary does not operate as conventional banks and receives wages from
depositors for financial services she provides, will not meet bankruptcy in
crisis.
As the rate of the benefit of depositors
is dependent on the real rate of return of the economy, depositors benefit
increases through PLS banking.
In the period of crisis, the
entrepreneurs of investment projects are more protected from bankruptcy;
consulting, contractors, and constructors industry are not subject to serious
financial defeats with PLS banking.
The financial and economic markets meet
stability through PLS banking.
Financial innovations of mosharaka and
Pazireh Certificates make the bank act as an international portal performing
similar jobs to a stock exchange market for the transaction of PLS products
Certificates that can easily allocate and reroute resources to investments.
In the PLS banking apart from the bank
is either governmental or private, the interest rate is determined by real sector
and bank as financial intermediary gets a commission as an attorney or agent of
depositors and will transfer the remaining investment return either profit or
loss consequences to depositors. Bank would invest collected deposits into the
finitude or endless projects based on Mosharaka Contraction as either general
or special attorney according to the depositor's desire (for type 1 and 2
products) or bank own choice (for type 3 products) and finally distribute the
investment return among the depositors. In this regard, the bank after
deducting commission as being attorney or agent will assign the whole benefits
to come from investment to owners of monetary resources and do perform her own
intermediary function according to compiled instructions.
First, the entrepreneur refers to the
PLS branches and offers her proposal to the bank for doing a joint venture. She
will be announced the participation conditions and regulations through an
information portal designed for PLS banking. The related evaluation fee will be
taken from the customers and projects specifications, including proposal,
economic, financial, and technical feasibility documents of the project will be
taken from the entrepreneur.
Bank after evaluation of the proposal
will introduce it to depositors. Depositors by purchasing Mosharaka/Pazireh
Certificates allow the bank to use their deposits in participation into the
approved project.
In the PLS a trustee (Amin) unit will do
supervision on entrepreneur operations on behalf of the bank for watching good
performing of the project, executive operations controlling in comparison with
announced programs, resources allocation manner and optimized allocation of
resources by using key indices and considering the financial statements are
duties of Amin.
In PLS banking, the bank will use new
financial instruments and innovations of Mosharaka Certificates for finitude
projects and Pazireh Certificates for endless projects. Secondary Certificate
market in cyberspace for Certificates transactions is established by the bank. � The whole operations will be done according to
the compiled instructions. The PLS banking organization was designed according
to the above definition in the form of committees, units, and departments.�
For applying this kind of banking
method, it might be performed by establishing a branch inside of the
conventional bank. In this case, the whole activities of the PLS banking shall
be done alongside to the other conventional branch activities but with
separated financial, accounting, organizational and office operations for
preserving legal aspects of depositor's rights.�
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�
اداره
تحقيقات و
برنامهريزي
بانك ملي
ايران�طرح
مطالعاتي و
كاربردي بانكداري
مشاركت در سود
و زيان�، 1387-1386.
�
الهياري
فرد، محمود (1384)،
خدمات
بانكداري
الكترونيك و
نيازهاي
اجرائي آن در
مقايسه
تطبيقي هزينه
عملياتي
خدمات مختلف
بانكي،
پژوهشكده
پولي و بانكي،
بانك مركزي
ايران.
�
بيدآباد،
بيژن و عبدالرضا
هرسيني،
تحليل فقهي-
اقتصادي ربا
در وامهاي
مصرفي و سرمايهگذاري
و كاستيهاي
فقه متداول در
كشف احكام شارع. ارائه
شده به همايش
دوسالانه
اقتصاد
اسلامي،
پژوهشكدة
اقتصاد، دانشگاه
تربيت مدرس، 1382.
�http://www.bidabad.com/doc/reba9.html
�
بيدآباد،
بيژن و عبدالرضا
هرسيني، شركت
سهامي بانك
غيرربوي و
بازبيني
ماهيت ربوي و
غيرربوي
عمليات بانكي
متداول.
مجموعه
مقالات سومين
همايش دوسالانة
اقتصاد
اسلامي �نظرية
اقتصاد
اسلامي و عملكرد
اقتصاد
ايران�، 4-3 دي 1382،
پژوهشكدة
اقتصاد، دانشگاه
تربيت مدرس،
صفحات 224-193، تهران.
http://www.bidabad.com/doc/sherkat6.htm
�
بيدآباد،
بيژن و عبدالرضا
هرسيني،
تحليل فقهي-
اقتصادي انواع
بيمه و ويژگيهاي
شيوة حكومت
اسلامي.
پژوهشكدة
پولي و بانكي،
بانك مركزي
ايران، 1382،
تهران. http://www.bidabad.com/doc/bimeh6.html
�
بيدآباد،
بيژن،
نرخ و پاية
مالياتي در
ماليه اسلام و
بناي حكمت در
اصول فقه پوياي
اماميه،
پژوهشكدة
پولي و بانكي،
بانك مركزي
ايران،
فروردين 1382. http://www.bidabad.com/doc/nerkh-va-payeh-malyat1.html
�
بيدآباد،
بيژن و محمود
الهياري فرد،
بسترهای نرمافزاری
تجارت و
بانکداری
الکترونیک در
ايران.
http://www.bidabad.com/doc/narm-ebank.html
http://www.bidabad.com/doc/narm-ebank-revised.html
�
بيدآباد،
بيژن و محمود
الهياري فرد،
بهاي تمام شده
خدمات بانكي
در بانكداري
مدرن و سنتي
(بانك ملي
ايران). مجموعه
مقالات سومين
همايش تجارت
الكترونيكي،
پيشرفتها،
تنگناها،
راهبردها، 11-10
خرداد 1384، معاونت
برنامهريزي
و امور
اقتصادي
وزارت
بازرگاني،
صفحات 357-331،
تهران.
ويرايش
اول http://www.bidabad.com/doc/baha-ebank.html
ويرايش 1383 http://www.bidabad.com/doc/baha-ebank-update.html
ويرايش 1385 http://www.bidabad.com/doc/baha-ebank-update-1385.pdf
�
بيدآباد،
بيژن و عبدالرضا
هرسيني، مباني
عرفاني اقتصاد
اسلامي، پول،
بانك، بيمه و
ماليه از ديدگاه
حكمت.
پژوهشكدة
پولي و بانكي،
بانك ايران،
1383، تهران. http://www.bidabad.com/doc/eghtesadislami4.pdf
�
بيدآباد،
بيژن و محمود
الهياري فرد،
مديريت ريسك
عملياتي
دستگاههاي
خودپرداز. مجموعه
مقالات اولين
كنفرانس
جهاني
بانكداري الكترونيك،
25-24 ارديبهشت 1386،
تهران.
http://www.bidabad.com/doc/risk_management_in_e_banking.pdf
�
بيدآباد،
بيژن و محمود
الهياري فرد، مديريت
دارائي و بدهي
(ALM)
در بانكداري
اسلامي.
�http://www.bidabad.com/doc/alm-farsi.pdf
Copyrights
Copyright
for this article is retained by the author(s), with first publication rights
granted to the journal. This is an open-access article distributed under the
terms and conditions of the Creative Commons Attribution license
(http://creativecommons.org/licenses/by/4.0/).
[1]- (B.A., M.Sc., Ph.D., Post-Doc.) Professor of economics,
Islamic Azad University, Tehran, Iran.� http://www.bidabad.com/� [email protected]
Tel: +98.21.88360810� Fax:
+98.21.88360811
[2]-
Expert of R&D Dept., Bank Melli Iran ,Office: +
[3] - This invention has been
protected by US patent law under the application number: US 12/588,188
[4] For instance see:
�
�بيدآباد،
بيژن و عبدالرضا
هرسيني،
تحليل فقهي-
اقتصادي ربا
در وامهاي
مصرفي و سرمايهگذاري
و كاستيهاي
فقه متداول در
كشف احكام شارع. ارائه
شده به همايش
دوسالانه
اقتصاد
اسلامي،
پژوهشكدة
اقتصاد،
دانشگاه
تربيت مدرس، 1382.
http://www.bidabad.com/doc/reba9.html
� بيدآباد،
بيژن و عبدالرضا
هرسيني، شركت
سهامي بانك
غيرربوي و
بازبيني
ماهيت ربوي و
غيرربوي
عمليات بانكي
متداول.
مجموعه
مقالات سومين
همايش دوسالانة
اقتصاد اسلامي
�نظرية اقتصاد
اسلامي و
عملكرد
اقتصاد ايران�،
4-3 دي 1382،
پژوهشكدة
اقتصاد،
دانشگاه
تربيت مدرس،
صفحات 224-193،
تهران� . http://www.bidabad.com/doc/sherkat6.htm
� Bidabad, Bijan and Mahmoud Allahyarifard,
"Implementing IT to fulfill the profit and loss sharing mechanism",
Islamic Finance News (IFN) Journals, Vol. 3, Issue 3, 6th February
2006.� http://www.bidabad.com/doc/summary-pls-it-1.html
� Bidabad, Bijan and Mahmoud Allahyarifard, "IT role in
fulfillment of profit and loss sharing", Proceeding of The 3rd
International Islamic Banking and Finance Conference, Monash University, Kuala
Lumpur, Malaysia, 16th and 17th November 2005.� http://www.bidabad.com/doc/english-pls-5.pdf
� Bidabad, Bijan, Economic-juristic analysis of usury in
consumption and investment loans and contemporary jurisprudence shortages in
exploring legislator commandments. Proceeding of the 2nd
International Islamic Banking Conference.�
Monash University of Malaysia. 9-10 September 2004. Reprinted in:
National Interest, Journal of the Center for Strategic Research, Vol. 2, No. 1,
winter 2006, pp. 72-90. Tehran, Iran.� http://www.bidabad.com/doc/reba-english-4.html
� Bidabad, Bijan, Non-Usury Bank Corporation (NUBankCo), The
Solution to Islamic banking, Proceeding of the 3rd International Islamic
Banking and Finance Conference, Monash University, KL, Malaysia, 16-17
November, 2005. http://www.bidabad.com/doc/nubankco.html
[5] Rammal, H. G. (2003) 'Mudaraba in Islamic finance: principles and application', Business Journal for Entrepreneurs, Vol.4, pp.105�112. http://www.westga.edu/~bquest/2004/musharaka.htm
[6]Hussain Gulzar Rammal
and Ralf Zurbruegg, "Awareness of Islamic banking products among
Muslims: The case of Australia", Journal of Financial Services Marketing
(2007) 12, 65�74. doi:10.1057/palgrave.fsm.4760060,
http://www.palgrave-journals.com/fsm/journal/v12/n1/full/4760060a.html#bib24
[7] Humayon A. Dar and John R. Presley (2000), "Lack of Profit Loss Sharing in Islamic Banking: Management and Control Imbalances", Loughborough University,Department of Economics,� Economic Research Paper No. 00/24, http://www.lut.ac.uk/departments/ec/Reasearchpapers/2000/00-24/erp00-24.pdf
[8]Chong, B.S., Liu, M.H, 2007, "Islamic Banking: Interest-Free or Interest -Based", http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2007-Vienna/Papers/0019.pdf
[9]Khan, M.S., 1986. Islamic interest-free banking. IMF Staff Papers 33, 1�27. Refer to the above address
[10]World Bank, 2006. Country
brief report: Malaysia.
[11]Bidabad, Bijan and Mahmoud Allahyarifard, "Implementing IT to fulfill the profit and loss sharing mechanism", Islamic Finance News (IFN) Journals, Vol. 3, Issue 3, 6th February 2006. http://www.bidabad.com/doc/summary-pls-it-1.html
[12]- Central bank supervises on PLS banking operations as legislator of monetary regulations. Approval and confirmation of required regulations in this kind of banking method and general regulations for issuance of PLS banking products might be allowed by central bank or other monetary authorities depending on different countries legal systems.����� �
[13] Bidabad, Bijan and Mahmoud Allahyarifard, "Implementing IT to fulfill the profit and loss sharing mechanism", Islamic Finance News (IFN) Journals, Vol. 3, Issue 3, 6th February 2006. http://www.bidabad.com/doc/summary-pls-it-1.html
[14]Moral hazard in insurance market indicates some cases that insured changes his or her behavior after buying insurance policy and with this imagination that instead of supplying losses try to announce more losses or change his/her behavior of paying attention to keep insured property. For example, some of the insured after buying the insurance policy would never care on insured property and this will increase the risk of insured properties.������������ �
[15]Adverse selection is a market process that is caused by undesirable results due to asymmetric information between sellers and buyers.
[16]Asymmetric information means one party has got more information than the other in their business.