COMPARISON b/w ISLAMIC & CONVENTIONAL BANKING.

8/6/2019 COMPARISON b/w ISLAMIC & CONVENTIONAL BANKING.

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COMMERCIAL BANKING

Submitted to:

Dr. Waheed Akhtar

Submitted by:

Asim Ali 023

Ali Ahmad Majoka 006

Muhammad Habibullah 084

Hafiz Najm Saqib 042

Khurram Shahzad 177

Submission Date:

24-12-2010

COMSATS Institute of Information Technology

Lahore.



MEEZAN BANK:

Meezan Bank Limited, a publicly listed company, is the first and largest Islamic Bank in

Pakistan and one of the fastest growing banks in the history of the banking sector of the

Country. Having the largest branch network and product range, Meezan Bank bears the critical

responsibility of leading the way forward in establishing a stable and dynamic Islamic banking

system replete with dynamic and cutting-edge products and services. Meezan Bank aims to fulfil

its prime objective of providing customers accessibility and convenience, within an atmosphere

and culture of dedicated service and recognition of their needs.

Meezan is a publicly listed company first incorporated on January 27, 1997. It started operations

as an investment bank in August of the same year. In January, 2002 in an historic initiative,

Meezan Bank was granted the nation's first full-fledged commercial banking license dedicatedto Islamic Banking, by the State Bank of Pakistan.

VISION:

Establish Islamic banking as banking of first choice to facilitate the implementation of an

equitable economic system, providing a strong foundation for establishing a fair and just society

for mankind.

MISSION:

To be a premier Islamic bank, offering a one-stop shop for innovative value added products and

services to our customers within the bounds of Shariah, while optimizing the stakeholders value

through an organizational culture based on learning, fairness, respect for individual enterprise

and performance.

To develop a committed service culture which ensures the consistent delivery of our products

and services within the highest quality service parameters, promoting Islamic values and

ensuring recognition and a quality banking experience to our customers.



Shareholders & Shariah Board

The Bank’s main shareholders are leading financial institutions of the Region namely, Noor

Financial Investment Company, Pak-Kuwait Investment Company, and the Islamic

Development Bank of Jeddah. The established position, reputation, strength and stability, of

these institutions add significant value to the Bank through Board representation and applied

synergies.

The Bank has an internationally renowned Shariah Supervisory Board Chaired by Justice

(Retd.) Maulana Muhammad Taqi Usmani, an internationally renowned figure in the field of

Shariah, particularly Islamic Finance. He holds the position of Deputy Chairman at the Islamic

Fiqh Academy, Jeddah and in his long and illustrious career has also served as a Judge in the

Shariat Appellate Bench, Supreme Court of Pakistan. The Board also includes Sheikh Essam

M. Ishaq (Bahrain), Dr. Abdul Sattar Abu Ghuddah (Saudi Arabia) and Dr. Imran Usmani who is

also the resident Shariah Advisor of the Bank.

At Meezan Bank, we strive to find commonalties with the conventional banking system

with absolutely no compromise on Shariah rulings. The bank has developed an

extraordinary research and development capability by combining investment bankers,

commercial bankers, Shariah scholars and legal experts to develop innovative, viable,

and competitive value propositions that not only meet the requirements of today's

complex financial world, but do so with the world-class service excellence that our

customers demand, all within the bounds of Shariah.

Introduction of Products

• Riba Free Meezan Providence

• Riba Free - Certificates of Islamic Investment

• Riba Free - Monthly Musharakah Certificate

• Riba Free - Dollar Saving Account

• Riba Free - Rupee Saving Account

• Riba Free - Current Account

• Car Ijarah - Islamic Car Financing

http://www.noorinvestment.com/En/Default.aspx



http://www.pkic.com/

http://www.meezanbank.com/shariahBoard.aspx


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http://www.pkic.com/


http://www.meezanbank.com/AjaxFunction.aspx?id=138&width=250



• Riba Free Meezan Providence:

Islamic Mode of Financing

• Musharakah

• Mudarabah

• Murabaha

• Salam

• Istisna

• Ijarah

NET PROFIT

Years 2006 2007 2008 2009

profit 20.15 17.80 16.27 8.27

SHARE PRICE:

Years 2006 2007 2008 2009

Share Price 23.25 19.50 38.55 21.48

Riba Free Meezan Providence:

It is a long term investment product especially designed for the need and to fulfill the

requirements of the corporate and business concerns for purpose of investing their

provident, pension and Gratuity Funds as any sensible and wise person who wants to invest

his earning, his main concerns would be total security along with the best returns possible,

especially as these earnings or funds are a trust from his employees and one that bears an

important responsibility.



Key Features of Meezan Providence

• A 100% hilal investment in strict compliance with Shariah

• Minimum investment amount: PKR 1,000,000

• Available tenures of 3, 5 and 7 years.

• Pre-mature withdrawal options available

Riba –Free-Certificates of Islamic Investment:

This investment product is designed to meet the short term and long term needs. The

minimum investment is PKR 50,000 and it is available in tenures of 3 and 6 months, 1,

2, 3 and 5 years.

Furthermore, these certificates can be en cashed at any time without any charge or penalty,

only the profit rates will be adjusted according to the tenure completed.

The deposits of the customers together with the Bank’s contribution are invested in a pool that

consists of Ijarah and Murabaha financing. The profit/loss on this pool is calculated every month

on the basis of profit sharing ratio determined by assigning weightings. Such weightings are

assigned at the beginning of every month and are displayed on the bank notice board and

website. This facility is available during the course of investment. However, profit shall be paid

only after completion of one month of investment.

Riba Free-Monthly Musharakah Certificate:

The riba free Monthly Musharaka Certificates are a flexible investment product which has been

designed to give the depositor a monthly return which is Halal. The depositors

participate with the bank in the pool of investments which is comprised of Murabaha and

Ijarah transactions. The minimum investment required is required is only PKR 100,000 and

you receive profit for each complete month of investment with the bank.

• Personalized cheque books.

• No restriction on withdrawals.

• Access to priority desk



Riba Free-Dollar Saving Account

With a minimum of only $100 you can open a Dollar Saving Account with us under a

Mudarabah arrangement that is strictly in conformity with the principles of Islamic Shariah. The

return earned on the Mudarabah pool is calculated every month and the profit ratio for all

investors is declared at the beginning of the month. If you maintain a minimum average monthly

balance of $ 500, you shall be eligible to receive profits that shall be disbursed to you every

month.

Riba Free-Rupee Saving Account

With a minimum of only PKR 10,000 THE Rupee Saving Account can be opened under

musharakah agreement. The profit earned is calculated every month. And if the client maintains

a monthly balance of PKR 10,000 the client is eligible for the profits that will be disbursed every

month. However, the clients of COII may open this account with any minimum balance.

Riba Free - Current AccountIn this type of account the client is allowed to deposit or withdraw money as he likes. He may,

thus, deposit or withdraw several times in a day as he likes. Usually the bank allows this

and charges service charges are deducted by the bank from current deposit account. It gives

advantage for paying debts by the convenient and safe means of sending cheques through the

post thus avoiding the trouble and loss.

Car Ijarah – Islamic Car Financing

Car Ijarah is Pakistan's first "Interest Free" car-financing based on Islamic financing mode

of Ijarah or Islamic leasing. This product is ideal for interest averse individuals, looking

for a car financing that provides the convenience of a well designed product while avoiding an

interest based transaction. Car Ijarah totally halal .

Key Features of Car Ijarah

No application fee

Available in tenures of 3, 4 and 5 years

Minimum security deposit as low as 20%



Islamic Mode of Financing

These modes of financing have been written by Maulana Taqi Usmani who is the former

Chairman of Shariah board of Meezan Bank. After studying these we will be in a position to

understand the 90% working of the bank. The important modes of financing are:

• Musharakah

• Mudarabah

• Ijarah

Musharakah

Interest' predetermines a fixed rate of return on a loan advanced by the financier irrespective of

the profit earned or loss suffered by the debtor, while Musharakah does not envisage a fixed

rate of return.

Risk of Loss:-

It is argued that the arrangement of musharakah is more likely to pass on losses of the business

to the financier bank or institution. This loss will be passed on to depositors also. The

depositors, being constantly exposed to the risk of loss, will not want to deposit their money in

the banks and financial institutions and thus

Murabaha

"Murabaha" is, in fact, a term of Islamic Fiqh and it refers to a particular kind of sale having

nothing to do with financing in its original sense. If a seller agrees with his purchaser to provide

him a specific commodity on a certain profit added to his cost, it is called a "Murabaha"

transaction.

Uses of Murabaha

Murabaha can be used in following conditions:

Short / Medium / Long Term Finance for

Raw material

Inventory



Equipment

Asset financing

Ijarah

The rules of Ijarah, in the sense of leasing, are very much analogous to the rules of sale,because in both cases something is transferred to another person for a valuable consideration.

The only difference between Ijarah and sale is that in the latter case the amount of the

property is transferred to the purchaser, while in the case of Ijarah, the corpus of the

property remains in the ownership of the transferor, but only its usufruct i.e. the right to use it,

is transferred to the lessee.

Basic Rules of Leasing

1. Leasing is a contract whereby the owner of something transfers its usufruct to another person for an agreed period, at an agreed consideration.

2. The subject of lease must have a valuable use. Therefore, things having no usufruct at

all cannot be leased.

3. The period of lease must be determined in clear terms.

Auto Finance

With an 8-year-old portfolio, Meezan Bank's Car Ija business now stands at Rs. 3.8 billion and is

made up of 8,000 active vehicle contracts. Going forward the strategy for 2010 is focused on

aggressive sales effort while maintaining stringent financing criteria. Healthy portfolio

management and risk diversification is evidents delinquent assets account for only 1.43% of the

portfolio which is indicative of the effectiveness of the ‘product programme’ currently being

applied by the Bank for this facility.

Housing Finance

The Bank adopted a very cautious approach in booking home mortgages and business targets

were realigned by modifying and fine tuning consumer financing policies. The total housing

finance portfolio currently stands at Rs. 3.0 billion representing 1145 customers across

Pakistan. Furthermore, contrary to the industry wide trend of an increase in non-performing

loans, Meezan Bank managed to maintain its delinquent assets within acceptable limits of



between 5% to 6%, which is one of the lowest in the industry. With the impending revival of

economy, the Bank plans to aggressively grow this business in 2010.

Summary of Direct Payment in Murabaha Financing for Meezan Bank

As per the directive of SSB to increase direct payments in Murabaha, it is a matter of

appreciation that Bank has increased the overall percentage of direct payments. In the year

2009, a significant growth of 76% was registered in terms of direct payment for Murabaha

financing as the overall percentage of direct payment was increased to 67% in the year 2009

against 38% in the year 2008.

MURABAHA FINANCING - DIRECT PAYMENT2008 2009 Growth

Overall Portfolio 38% 67% 76%

Customer Wise Breakup

Corporate 28% 60% 114%

SME/Commercial 70% 85% 21%

Region Wise Breakup

NORTH 56% 88% 57%

SOUTH 46% 81% 76%

CENTRAL 30% 54% 80%



Treasury and Financial Institutions

In 2009, Meezan Bank's Treasury continued to play an active role in the local foreign exchange

and money market. On the foreign exchange front, Treasury continues to support the various

business units in generating higher volumes of trade finance business. As trade finance

business of the bank grew to Rs. 110 billion for the year, Treasury witnessed huge growth in

foreign exchange volumes. Despite the removal of forward cover facility for importers,

relationships with good quality corporate clients continued to grow on the basis of Meezan

Bank's competitive pricing in the market. Treasury is also active in handling export business and

the Bank booked forward cover contracts totaling more than Rs. 8 billion during the year.

Meezan Bank continues its strive to develop the market for Government of Pakistan (GOP)

Ijarah Sukuks by not only successfully bidding in the auctions held in 2009



TRADE FINANCE:

Trade Finance is an important unit of the Bank’s Operations department. Alhamdulillah, during

the year the total volume of business handled by the unit crossed the landmark figure of Rs.100

billion and generated fee income of Rs.195 million. The Islamic Export Refinance Scheme also

continues to remain a successful product for the Bank's customers.

THE BANK OF PUNJAB:

Established in 1989, in pursuance of The Bank of Punjab Act 1989 and was given the status of

scheduled bank in 1994. The Bank of Punjab is working as a scheduled commercial bank with



its network of 273 branches at all major business centers in the country. The Bank provides all

types of banking services such as Deposit in Local Currency, Client Deposit in Foreign

Currency, Remittances, and Advances to Business, Trade, Industry and Agriculture A wholly

owned subsidiary of BOP First Punjab Modaraba (FPM) was established in 1992 and is being

managed by Punjab Modaraba Services (Pvt) Ltd.

VISION:

To be the customer Focused Bank with service Excellence.

MISSION:

To exceed the expectations of our stakeholders by leveraging our relationship with the

Government of Punjab and delivering a complete range of professional solutions with a focus on

programme driven products & services in the Agriculture and Middle Tier Markets through a

motivated team.

Introduction of products:

BOP HOUSE LOAN:

“BOP House Loan is a long term finance facility for

• Purchase of house/flat

http://www.punjabmodaraba.com.pk/





• Purchase of Plot & Construction thereon• Construction of house on self owned plot• Renovation/home improvement

CAR LEASE:

A lease facility for the purchase of vehicles for personal use.

Tenure Mark-up Rate

1 year Avg. 1 Year ask side KIBOR + 400 bps withfloor of 17% p.a.

2 YearsAvg. 2 Years ask side KIBOR + 400 bps withfloor of 17% p.a.

3 & 5Years

Avg. 3 Years ask side KIBOR + 400 bps withfloor of 17% p.a.

BOP Aasaish Loan

"BOP Aasaish Loan is personal loan facility for bank’s target market for the

purchase of Consumer durable goods for their personal use, repayable on easy

instalments"

Tenure Mark-up Rate (Reducing balance method)

6 months 0%

9 Months 8% p.a

12 Months 11%p.a.

18 Months 15%p.a.

24 Months 18%p.a.

BOP Debit Card

Service

The BOP Debit Card holders will be able to transact at any of the 1000 + Merchants across thecountry. The following services can be utilized at the Point of Sale (POS) terminals:

Purchasing

Your BOP Debit Card can be used in place of cash at all outlets where the M-Net logo isdisplayed. This is a service which lets you pay directly from your account without using cash.When a payment is made through the debit card, your account is directly debited.



Balance Enquiry

The Point of Sale (POS) terminal also lets you view your balance of all the linked accounts toyour card.

BOP Smart Cash Personal Loan“BOP Smart Cash Personal Loan Scheme is personal DF facility for meeting personal needs &

repayable through monthly instalments.”

Tenure Mark-up Rate 1 year Avg. 1 Year ask side KIBOR + 900 BPS with floor of 20% p.a. 2

Years Avg. 2 Year ask side KIBOR + 900 BPS with floor of 20% p.a. 3 & 5 Years Avg. 3 Year

ask side KIBOR + 1000 BPS with floor of 20% p.a.

KISSAN AABYARI:

Provision of financial facility to the farmers for installation of Tube well, turbines.

Mark-up:

18% Per Annum

Margin on Collateral Security:

50% Margin on Agri land assessed by Surveyor. 25% margin Agri land as per value in revenuerecord. The maximum amount of Finance will be allowed upto 75% of the Oast Bai Value of land(Oast Bai is verified by Revenue Officer)

Repayment:

10 equal half yearly installments (within five years).

COMPARISON BETWEEN ISLAMIC ANDCONVENTIONAL BANKING:

• The main difference between Islamic and conventional banking is that Islamic teaching

says that money itself has no intrinsic value. To make money from money is prohibited –

wealth can only be generated through legitimate trade and investment.



• In Islamic banking we generate all our profit through sharia’s compliant trading and

investment activities. We then share the profits with our customers at a pre-agreed ratio.

In order to share profits you must hold one of our savings or investment accounts.

• Conventional banking practices are concerned with "elimination of risk" where as Islamic

banks "bear the risk" when involve in any transaction. When Conventional banks involve

in transaction with consumer they do not take the liability only get the benefit from

consumer in form of interest whereas Islamic banks bear all the liability when involve in

transaction with consumer. Getting out any benefit without bearing its liability is declared

Haram in Islam.

• While the basics of what the business is are the same, the term refers to operating the

business within Islamic law. The main thing that affects this business under that law is

that Islam prohibits the charging of interest. Certainly a problem in modern banking!

Islamic Banking Issues

HUMAN RESOURCE FOR SHARIA'H COMPLIANCE

Users of Islamic financial services assign primary importance to Sharia'h compliance of the

services they use. It is understandable that Sharia'h noncompliance entails a serious

operational risk and can result in withdrawal of funds from and instability of an Islamic bank,

irrespective of its initial financial soundness. Sharia'h compliance is hence a serious matter for

an Islamic bank, in addition to its compliance with other regulatory requirements.



UNRESOLVED FIQH ISSUES

Lack of standard financial contracts and products can be a cause of ambiguity and a source of

dispute and cost. In addition, without a common understanding of certain basic foundations,

further development of banking products is hindered.

LEGAL FRAMEWORK

An appropriate legal, institutional and tax framework is a basic requirement for establishing

sound financial institutions and markets

COMPARISON b/w ISLAMIC & CONVENTIONAL BANKING.

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Transcript of COMPARISON b/w ISLAMIC & CONVENTIONAL BANKING.