1. Global Overview of Islamic Banking - Feb 2014

Islamic Banking – A Global & Islamic Banking – A Global & local perspective local perspective

Ahmed Ali SiddiquiExecutive Vice President

Product Development, Shariah Compliance &

Financial Advisory

Outline• Evolution of Islamic Banking• Islamic Banking Global perspective• Islamic Banking in Pakistan – Historical

perspective• Islamic Banking in Pakistan – Present status• Steps taken for promotion• Differentiating points of Islamic banking

• Islamic banking modes and agreements

History of Modern Islamic Banking Cooperative banks in the sub-continent:

o Cooperatives in Hyderabad Dakan (1940s)o Cooperative bank in Karachi (1950s)

Pilgrimage fund in Malaysia (1950s) full-fledged bank in 1967

Saving bank in Mit Ghamr, Egypt (1963)

Nasr Social Bank, Egypt (l97l), was created as an interest-free commercial bank

Dubai Islamic Bank (1974)

Islamic Development Bank (1974)

Dar-al-mal-al-Islami (DMI), Geneva, established in 1981

Islami Bank Bangladesh Limited (IBBL) the first interest free bank in Southeast Asia was incorporated in 1983

History of Modern Islamic Banking In 80s different initiatives were taken in Pakistan, Iran & Sudan.

In 80s Islamic Mutual funds & Mudarabah companies started to emerge

In 90s AAOIFI, Harvard Islamic Finance Forum, Dow Jones Islamic Index were established

In 2000-10, several Islamic Bonds (sukuks) were issued.

Key infrastructure institutes were established including IFSB, IRA (Islamic Rating Agency), CIBAFI, ARCIFI.

Recognition by IMF, World Bank and Basel Committee

Diploma programs, Graduate/Post graduate & doctorate degrees are being offered in Islamic banking by major academic institutions (CIMA, INCEIF, Durban University, IBA, IIBI-UK and several other universities )

500 + Islamic financial institutions

Total size ~ US $1.2 Trillion*

250+ Shariah compliant mutual funds with $ 300bn funds

Around 700 International Islamic sukuks issued till date

133 + Takaful companies; > US$ 8.8 billion in contribution 2005-08 global CAGR 38%

Over 35+ Shariah & Accounting Standards for Islamic financial institutions ( by AAOIFI)

Establishment of Islamic indices (Dow Jones, FTSE, KMI-30 etc.)

Global IF Hubs (London, Bahrain, Malaysia, UAE)

Islamic Banking – Global Perspective

*Arab News.com

International Groups DMI Al Baraka Al Rajihi Kuwait Finance House Noor Financial Abu Dhabi Islamic bank

In Pakistan Meezan Al Barakah Dubai Islamic

Many foreign banks now have Islamic windows. Citibank ANZ RBS Goldman Sachs Hong Kong Shanghai

bank Saudi American bank Saudi British Bank UBS AG

Islamic Banking – Global Perspective

More than 75 countries have ISLAMIC BANKING Institutions

Approx. 45 Muslim countries including Kuwait, Dubai, Saudi Arabia, Iran, Malaysia, Brunei and Pakistan

Approx 30 non-Muslim countries including USA, UK, Canada, Switzerland, Srilanka, South Africa and Australia

Islamic Banking - a Success Story

Different types of IFIs have emerged globally

Islamic Commercial Banks Islamic Investment Banks Islamic Units of conventional banks Islamic Funds Islamic House Financing Schemes International Financial Market International Institutions of Islamic Banking


AAOIFI

IFSB

IIRA

CIBAFI

Global Bodies for Islamic banking

A A O I F IAccounting & Auditing Organization

of Islamic Financial Institutions

An Umbrella organization for Islamic banking

• Established on 1 Safar, 1410H (26th February 1990).• AAOIFI is headquartered in Bahrain.• Entrusted with the task of developing for IFIs:

- Shariah Standards- Accounting Standards

- Auditing Standard• Has published standards for all major modes of Islamic Finance.• In Pakistan, AAOIFI standards are being adapted through ICAP’s Committee• Total Members are 122 Islamic Financial Institutions from 29 countries.

AAOIFI – brief Introduction

A host of world renowned Shariah Scholars.

1. Shaikh Muhammad Taqi Usmani/Chairman (Pakistan)2. Shaikh Abdullah Sulaiman Al Manea/D.Chairman (KSA)3. Shaikh AlSiddiq Mohamed Al Darir (Sudan)4. Shaikh Wahba Mustafa Al-Zuhaili (Syria)5. Shaikh Ajeel Jaseim Al-Nashmi (Kuwait)6. Shaikh Abdel-Rahman bin Saleh Al-Atram (KSA)7. Shaikh Mohamad Ali Al Taskhiri (Iran)8. Shaikh Dato Ghazali bin Abdul Rahman (Malaysia)9. Sheikh Dr. Nazih Hammad 10. Sheikh Al Ayashi Al Saddiq Faddad (KSA)11. Shaikh Abdel Sattar Abu Ghuddah (KSA)12. Shaikh Nizam Yaquby (Bahrain) 13. Shaikh Ahmad Ali Abdullah (Sudan)14. Sheikh Dr Muhammad Daud Bakar (Malaysia)15. Shiekh Dr Hussein Hamid Hassan (Dubai/UAE)

AAOIFI – Shariah Board

An international standard-setting organization

Established in November 2002 Based in Kuala Lumpur An international standard-setting body of regulatory and

supervisory agencies Introduces/adapts existing international standards

consistent with Shari'ah principles To date, it has issued 12 Standards, Guiding Principles and

Technical Notes for the IFIs Areas include Risk Management, Capital Adequacy,

Corporate Governance & Supervisory Review Process

The IFSB

Various International Fiqh bodies like:

International Islamic Fiqh Academy – Jeddah Nadwah al-Barakah

Have declared all sort of banking interest as Riba & prohibited and have approved resolutions on various products of Islamic banking

Islamic Banking – Recognition & Approval

Islamic Banking – in Pakistan

“We must work our destiny in our own way and present to the world an economic system based on true Islamic concept of equality of manhood and social justice.

Speech at the opening ceremony of State Bank of Pakistan, Karachi July 1, 1948

1947 Pakistan Resolution1949 Objectives Resolution 1962 Creation of Council of Islamic Ideology (CII) in 19621979 Pakistan adopted a policy of gradual transformation of its banking system1980 A 15 member committee of CII prepared a report on elimination of banking &

commercial interest from Pakistan and outlining the Islamic modes of financing

1980 Introduction of zakat system1983 Introduction of Ushr system1985 Introduction of mark-up based financing system in banks 1991 Federal Shariat Court (FSC) Declared mark-up procedure un-

Islamic

Islamic Banking – in PakistanHistory

1999 Shariah Appellate Bench of Supreme Court rejected all appeals against the previous and called for the establishment of an interest free financial system

2002 Meezan Bank established as Pakistan’s first Commercial Islamic Bank

2003 Establishment of Islamic Banking Department at SBP

2007 Adapted Accounting Standards for Murabaha

2008 SBP issue Instruction & Guidelines for Shariah Compliance in Islamic banks

2008 Government of Pakistan issue Ijarah based sukuk to finance its needs.

2010 5 Full fledge Islamic banks & 13 Islamic banking windows are operating and have over 8% market share in a very short span of time


Legal framework in place, licenses available for Islamic commercial bank Islamic Subsidiary of a conventional bank Stand alone Islamic branches of a

conventional bank Legal framework hybrid of Bahrain and

Malaysian model


CURRENT STATUS

Shariah Board established at SBP

Islamic products available to cover 85% of the services offered by conventional banks

Shariah compliant export refinance scheme launched

Model agreements for products developed by IBD of SBP

Shariah Audit/Compliance manuals have been developed

Various training courses and degree programs at universities

Tax laws are being rationalized to avoid double taxation of IFIs


Steps Taken for promotion

• Full Fledged Islamic Banks – 5* Meezan Bank Al-Baraka Bank Pakistan Limited * Dubai Islamic Bank Bank Islami Pakistan Burj Bank

• Many conventional banks operating Islamic Banking Branches: Bank of Khyber,MCB, Bank Alfalah, Habib Metro Bank, Bank Al Habib, Standard Chartered Bank, Soneri, HBL, UBL, Askari, NBP, Faysal/RBS etc. (13) – as they have accepted the reality and difference of Islamic banking.


* Due to merger of Al-Baraka and Emirates Global Islamic Bank Announced


• Branch network of IB participants – 799* +

• Asset base of IB – Rs. 560 bln*+

• Deposit base of IB – Rs. 452 bln*+

• Growth rate 30.2% asset & deposit 38% • Share of IB in the overall Banking system stands at 7.6% deposit wise and 7.3% asset wise approx.

As of Jun 2011; SBP Bulletin

• Branch network of IB participants – 841* +

• Asset base of IB – Rs. 568 bln*+

• Deposit base of IB – Rs. 463 bln*+

•Share of IB in the overall Banking system stands at 8.0% approx.

As of September, 2011; SBP Bulletin


What distinguishes Islamic banking from conventional banking

Objectives of Islamic banking• Equitable Distribution & Circulation of Wealth in the

society

• Avoid all Impermissible transactions Riba (Riba Al Nase’ah / Riba Al Fadhl)

Maysir / Gambling Gharar (Al Jahalah, Bai Qablal Qubz etc).

Uqood-e-Fasida

• Promote participation based & asset Backed Financing

• Fulfilling halal Customer Needs

• Ensuring Shari’a Compliance in all transactions

We find the differences are on three levels:

1. Conceptual & Socio-religious level - not money lenders

- cannot deal with interest & non permissible industries 2. Business model & Governing framework - IB actively participates in trade and production process as

a supplier, customer or investor - Governing framework in terms of Shariah Advisor &/or

SSB

Distinguishing Features

3. Product Level Implementation

- usually asset backed & involve trading/renting of asset & participation on profit & loss basis

- Implementation is not just a mere change of paper work and terms but it involves

- having the right intention, - the correct sequence of steps and

timing of execution Without a clear understanding of these differences some people even experts tends to makes a common mistake of equating Islamic banks as just another bank with mere change of name.

Distinguishing Features

What Distinguishes Islamic BankingIslamic banking• Transactions are asset-

based/backed• It is socially-responsible

banking because it operates under Shariah restrictions

• Does not permit financing of prohibited goods / Industries

• Ethics and moral values play a major role in investment decisions. Not a choice but a must

Conventional banking• Transactions are money

lending and Riba based• Involve in many

impermissible transactions like Short selling, Sale of Debt, Speculation, artificial financial transactions, no sanctity for Islamic law of contract.

• Permit financing of prohibited goods / Industries like alcohol, casinos etc.

• A matter of choice

“Those who devour Riba shall rise up before Allah like men whom Shaitan has demented by his touch; for they claim that trading is like Riba. But Allah has permitted trading and forbidden Riba. He that receives an admonition from his Rabb and mends his ways may keep what he has already earned; his faith is in the hand of Allah. But he that pays no heed shall be among the people of fire and shall remain in it forever.”

Prohibition of Riba in the Qur’an

Al Baqarah 275

Al Baqarah 278 - 279

“O you who believe, Fear Allah and give up what remains of your demand for Interest, if you are indeed a believer. If you do not, then you are warned of the declaration of war from Allah and His Messenger; But if you turn back you shall have your principal: Deal not unjustly and you shall not be dealt with unjustly.”

Prohibition of Riba in the Qur’an

From Hazrat Jabir Ibn-e-Abdullah (RA): The Prophet, peace be on him, cursed :

• The receiver and the payer of interest, • The one who records it and • The witnesses to the transaction

And said: "They are all alike [in guilt]." (Muslim, Tirmidhi and Musnad Ahmad)

Prohibition of Riba in Ahadith

Basic Difference between Islamic and Conventional Modes of Finance

Conventional

Bank Client

money

money + money (interest)

Whereas Allah has permitted trading

and forbidden Riba

Basic Difference between Islamic and Conventional Modes of Finance

Islamic

Bank ClientGoods & Services

money

Definition of Riba

Every Debt that pulls any kind of gain is RibaEvery Debt that pulls any kind of gain is Riba

Masnad ul Haris / Zawaid ul Haithmy Page 500 vol 3

Imam Al-Ghazali pointed this out 900 years ago in the following words:"Riba (interest), is prohibited because it prevents people from undertaking real economic activities. This is because when a person having money is allowed to earn more money on the basis of interest, either in spot or in deferred transactions, it becomes easy for him to earn without bothering himself to take pains in real economic activities. This leads to hampering the real interests of the humanity, because the interests of the humanity cannot be safeguarded without real trade skills, industry and construction.

Al-Ghazali, Ihya’ul’uloom, as cited by Qal’awi, Al-Masarif-al-Islamiyyah p. 52, Syria 1998

Why Interest/ Riba Prohibited

This aspect of interest has been criticized even by many modern economists. For example, James Robertson writes:

“The pervasive role of interest in the economic system results in the systematic transfer of money from those who have less to those who have more. Again, this transfer of resources from poor to rich has been made shockingly clear by the Third World debt crisis…. When we look at the money system that way and when we begin to think about how it should be redesigned to carry out its functions fairly andefficiently as part of an enabling and conserving economy, the arguments for an interest-free, inflation-free money system for the twenty-first century seems to be very strong.”

James Robertson, Future Wealth: A New Economics for the 21st Century, p. 130, 131, Cassell Publications,London 1990

Why Interest/ Riba Prohibited

ARTIFICIAL Economy & Inflation

“Financial derivatives have grown to a US$64 trillion (64,000,000,000,000) by 1996. How do you imagine a number that big? You could say that if you laid all those dollar bills end to end, they would stretch from here to the sun sixty-six times, or to the moon 25,900 times.” (Richard Thomson: Apocalypse Roulette: the lethal world of derivatives. London 1998 P.4)

ARTIFICIAL Economy & Inflation

The worth of total derivatives is reported to be US $ 741.1 Trillion in 20081, while the total GDP of the entire world was only 60.6 trillion2. It means that the worth of derivatives is 12 times more than the gross products of all the countries of the globe. How big the number of 741.1 trillion (74100,000,000,000)? When in 1996, the worth of derivatives was only 64 trillion, Richard Thomas had remarked.

Source: 1BIS.ORG 2World Bank, World Development Indicators

Islamic banking is a globally accepted reality and a viable alternative to interest based banking.

It is ethically & economically better way of banking.

Its objective are inline with the goal of Islamic Economics

Islamic alternates of Banking Products can be very effectively developed for all types of needs

However, there is a need for more focus research and innovative product development.

Ulema, bankers and professionals need to coordinate more frequently to find solutions.

The Way Forward

JAZAK ALLAH

جزاک اللہ خیر

1. Global Overview of Islamic Banking - Feb 2014

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