An Introduction to Islamic Banking and Finance The history, role and future of Islamic Banking

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An Introduction to Islamic Banking and Finance The history, role and future of Islamic Banking. Warren Edwardes, ceo, Delphi Risk Management Ltd Presentation to The Financial Services and Banking Department of the Dubai Men's College at The Institute of Islamic Banking & Insurance - PowerPoint PPT Presentation

Transcript of An Introduction to Islamic Banking and Finance The history, role and future of Islamic Banking

Risk management in Islamic vs. conventional bankingInstitute of Islamic Banking & Insurance London, 19 April 2004
*/27
The history, role and future of Islamic Banking
Warren Edwardes, ceo, Delphi Risk Management Ltd
Presentation to The Financial Services and Banking Department of the Dubai Men's College
at The Institute of Islamic Banking & Insurance
London, 19th April 2004
Full article on: http://dc3.co.uk/islamicbanking.htm
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Quotes
Happy the man who far from schemes of business, like the early generations of mankind, ploughs and ploughs again his ancestral land with oxen of his own breeding, with no yoke of usury on his neck.
Roman philosopher, Horace
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Quotes
Neither a borrower nor a lender be; For loan oft loses both itself and friend and borrowing dulls the edge of husbandry.
Shakespeare’s «hamlet», a Danish father advising his son
UK usury laws on excessive interest abolished in 1854
South Africa and US (except Virginia and Delaware) have usury laws
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Quotes
Those who devour usury will not stand except as stands one whom the evil one by his touch hath driven to madness. That is because they say: "trade is like usury but Allah hath permitted trade and forbidden usury.”
The Koran: Surah 2, verse 275
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
In haec verba
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Delta
Sensitivity of an option price to changes in the price of the underlying equity
Theta
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Alwadiah
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Ijara
Leasing
Muqarada
Mudaraba
Mudaraba
Profit-sharing
Institute of Islamic Banking & Insurance London, 19 April 2004
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Murabaha or Shirka
Cost-plus or mark-up
Institute of Islamic Banking & Insurance London, 19 April 2004
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Overview
Hallal vs. Haram
Not just about Hallal mutton curry but also about a way of life
This is including finance
Essentially three dimensions of Islamic products
Riba free - Profits and loss sharing PLS
Riba free - Mark up
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Venture capital, non-recourse project finance, equity investment vs lending
US / UK banking vs German, Japanese, Spanish banking
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Investors’ risk aversion
Tax similarities - interest versus capital gains tax
Interpretations change
Various jurisdictions / opinions
Gulf, Malaysia, London
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Tobacco
Alcohol
Armaments
Gambling
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Not overtly Islamic - invested in trade and industry
Share of profits
Still no overt reference to Islam
1975 Islamic development bank
Fee based and PLS
Institute of Islamic Banking & Insurance London, 19 April 2004
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Brief History
1970’s Dubai Islamic bank, Faisal Islamic bank of Sudan / Egypt, Bahrain Islamic bank
Malaysia, Philippines, Nigeria, Indonesia
Denmark, Australia, south Africa
HSBC Amanah fund, ANZ first ANZ International Murabaha ltd., IBU of United Bank of Kuwait.
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
US, South Africa, UK
Trade is allowed
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Why?
Capital rental - Haram
Equity/debt hybrid profit sharing? Undated preference shares? Section 233 loans?
“Unearned” income taxed at 97% in the UK
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Mudaraba / Modaraba
Rabbulmal - capital provider / investor
Losses only to financier.
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Shirka
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Musharaka / Mosharaka
Equity investing
Limited partnership
Fair share of profits? 95% to investor?
Looks like normal equity investments or fund management
Sounds like “shares”
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Al- Wadiah
Dividend paid subject to profits through the year
Only profits no loss of capital
Short term accounts
Other retail
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Murabaha / Morabaha on asset side.
Locked-in return
Bank buys asset on behalf of client / borrower and then sells it for deferred payment
Title transfers at outset or on payment at maturity
Interest into capital gains? Use of Libor
Sounds like “Repo” a sale and repurchase agreement
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Baimuajjal
Payment in instalments or lump sum with mark-up
Predetermined profit.
Ijara wa iqtina is renting then purchase
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Baisalam
Manufacturers financing of production
Bank buys and pays for goods at a discount before manufacture
Commodity futures contract? A derivative?
Similar to Bankers Acceptance – BAs
Al Bay Bithaman Ajil
BBAs popular in Malaysia
Trade not debt
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Interest free
Avoids exploitation - no usury
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
1.2 Mio UK, 3 Mio France, 2.9 Mio Germany
so why minimal penetration?
Introduction to Islamic Banking & Finance
Institute of Islamic Banking & Insurance London, 19 April 2004
*/27
Conclusion
Islamic investors are risk averse
Aware of rating agencies
Top banking brand names such as HSBC, ANZ, UBK have an advantage - I believe
But local banks need to try harder with relationship and innovation
Speech not about economics or social science