(3) Introduction to Islamic Banking and Finance

04/07/23 Nizam Yaquby - Bahrain 1

Introduction to Islamic Introduction to Islamic Banking and FinanceBanking and Finance

Presentation to Bosnian Parliament – May 8Presentation to Bosnian Parliament – May 8thth 20062006

Presented by : Presented by : Nizam Yaquby Nizam Yaquby

BahrainBahrain

Introduction To Islamic Banking & Finance

Nizam YaqubyBahrain


Importance of Purifying the Source of Income in Islam The body which is nourished by non-pure sources

is bound to hellfire. On the day of Judgment, a person will not be

moved from the place which he stands until he is asked about the sources of his income, and the ways he spent it.

Purifying the source of ones’ nourishment is one of the important reasons for the acceptance of supplications by Allah.


Historical Background

* Pre-colonial Era(Partnership & Profit in Medieval Islam) by

Prof. Udovitch* Colonial Era* Post Colonial Era

(Dr. Najatuallah Siddiqi, Dr. Issa Abduh, Abu-ala’la Mawdudi,….etc)


Prohibition of Interest

Usury = Interest Judaism Christianity Islam


Latest Research And Literature On The Subject

Teachings On Usury In Judaism, Christianity And Islam

By: Susan L. BuckleyPhD Dissertation, University Of AberdeenThe Edwin Mellen Press, Lampeter, UK,

2000


Inception of Islamic Banking

Dubai Islamic Bank - 1975- modest beginnings- Initiated by businessmen who did not want to deal with interest based system- Hostile environment- Challenged by conventional banking system- Lack of public awareness


Success Story

300 + Islamic financial institutions $ 500 - 800 bn in funds Post graduate degrees offered in Islamic

banking by major academic institutions Important database system (HIFIP) Standards for the Industry (AAOIFI) Recognition by IMF, World Bank and Basel

Committee


Important Reasons for Global Interest in Islamic Banking

Good opportunity for investment

Challenge to the conventional interest-based Capitalistic System

Demand of Muslim population in many countries outside the Muslim world.


Important U.K and Singapore legislative efforts

U.K waving double stamp duty laws and recognition of ijara , musharaka and murabaha for house finance.

Singapore


Uniqueness of Islamic Banking Commingling between Finance & Religion and

ethics Sharia Supervisory Boards (SSB)

– Studies Articles of associations and bylaws– Approval of all contracts – Contribute in designing new products– Audit the actual implementations– Issuance of Fatwas (Responsas)– Conferences - Research - Training


Basic Difference between Islamic and Conventional Modes of Finance

Conventional

Bank Client

money

money + money (interest)


Basic Difference between Islamic and Conventional Modes of Finance

Islamic

Bank ClientGoods & Services

money


Major Contracts Used in Islamic Banking

Buying & Selling Mudaraba: Investment management Musharaka: Partnership Ijarah: Leasing Wakalah: Agency Istisna’: Contract of works


Main Objective Of Islamic Banking:Banking Without Riba“The main objective of an Islamic Bank is to

prohibit Muslims from dealing with interest or usury (Riba) which has been strictly prohibited by Allah, and to protect them from one of the biggest sins.”

Dubai Islamic Bank Statement


Theoretical & Conceptual Considerations: Social & Economic Justice“The Islamic economic order is based upon a set of principles

found in the Quran. No matter what aspect of the Islamic economic order is itroduced, for practical operations it has to base itself on the Qur’anic concept of social justice. The Islamic financial system, therefore, cannot be introduced merely by eliminating riba, but only by adopting the Islamic principles of social justice and introducing laws, practices, procedures and instruments which help in the maintenance and dispensation of justice, equity and fairness.”

Muazzam Ali (1988)“A Framework of Islamic Banking” Directory Of Islamic Institutions, John R Presley (ed.), London, Croom Helm


The Objectives and philosophies of Islamic banks must thus be in line with the teachings of Quran and Sunnah of the Prophet (PBUH)

Islamic banks must be guided by the entire comprehensive principles and rules of Islamic law derived from these two basic sources

Holding tight to these principles indicates whether a particular Islamic bank is acting according to Shari’a or not


Principles of Islamic Business

Eliminating riba is an important task, but Islamic banks, by default, must conform to all other Islamic business principles

All teachings imposed on Muslim individuals are also applicable to Islamic banks


Most Important Islamic Teachings Related to Business 1. Honesty & Fair trade: (Thus, trade

manipulations & malpractices like hoardings, black marketing, cheating, profiteering, short-weighting, hiding the defective quality of merchandise and adulteration are all prohibited activities).

2. The Prophet (PBUH) said: “the truthful honest merchant is with the Prophets, the truthful and martyrs [in the day of judgment].” Narrated by Al-Tirmidhi


3. Spending in good causes for the benefit and welfare of the people. Wastefulness and overindulgence in pleasurable activities are not allowed

4. Upholding justice in all dealings and transactions with both friends and enemies (Quran 4:29, 4:135). Thus, all customers must be treated equally (e.g. when imposing charges and fixing profit – sharing ratios).


5. The prohibition of Gambling and other risk related purely speculative activities based on mere luck (most derivatives are prohibited)


Important Achievements Attracting depositors in under-banked societies Encouraging saving and investment activities Channeling depositors’ funds into productive and

commercially beneficial activities Relieving Muslims from trading in prohibited

sectors or activities (e.g. opening an LC for alcoholic beverages

Encouraging Zakat and charity Disseminating knowledge in the field of Islamic

transaction law (Fiqh al-Mu’amalat)


Educating Muslim scholars in modern banking

Encouraging Takaful (Islamic Insurance) Gaining wide acceptance in the

international financial community


The Way Ahead Islamic banks must develop the concept of

Musharakah (participating in profit & loss) and Mudaraba, and use it more aggressively

Adopt new financing policies to encourage development and support for the small scale traders

Develop the Islamic liquidity management and Islamic money market

Must improve its services to be competitive with the best in the market

Thank You

(3) Introduction to Islamic Banking and Finance

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