I S L A M I C BA N K I N G

b yN A U S H A D S u l t a n Ta l u k d a rA S L A M P A R V E Z

Rules• Islam's shariah law, taken from the Qur'an and

the Sunnah.

• Making money out of money is contraryto Islamic law

• Moderation

“Oh Children of Adam! Beautify yourselves for every act of worship, and eat and

drink (freely) but do not waste. Verily, He does not love the wasteful”.

• Wealth should directed in the 'Halal' (religiouslyacceptable) way

ISLAMIC BANKING PRACTICES

1. Deposit Accounts

2. Mode of Financing

ISLAMIC BANKING PRACTICESDeposit Accounts

1.1) Current Account

1.2) Savings Account

1.3) Investment Account

ISLAMIC BANKING PRACTICES

Mode of Financing

2.1 Investment Financing

2.2 Trade Financing

2.3 Lending

ISLAMIC BANKING PRACTICES

Investment Financing

2.1.1 Musharaka – Joint Venture

2.1.2 Mudarabha- Profit Sharing

2.1.3 Financing on the basis of an Estimated

rate of return

ISLAMIC BANKING PRACTICES

Trade Financing

2.2.1 Leasing

2.2.2 Hiring Purchase

2.2.3 Sell-and- Buy-Back

The Purpose of Shariah (Islamic law)

To promote the welfare of the people which lies on:

Safeguarding of their faith Their life Their intellect Their posterity and Their Wealth

Ethical banking

Impact of 9/11 – Reverse Capital Flight

◦ Perception of hostile climate in many Western jurisdictions, in particular, the United States, led to repatriation of dollars by Arab investors to Middle Eastern banks

◦ Islamic banks, along with conventional banks in the region, benefited from this reverse flight of capital

◦ Increase in Oil Prices Led to Dramatic Increase in Liquidity in the Gulf

Conventional Bank as lender

C SB1. Loan 2. Cash Payment

4. REPAYMENT(Principal + interest)

3. The Thing

Islamic Bank as Trader

B C S1.Cash Payment

2. The Thing3. The Thing

4.Deferred Payment*

B- Bank C-Client S-Seller

*cash price+ bank margin

“Riba” in “The Quran”

“That which you give as interest to increase the peoples wealth increases not with God;

but that which you give in charity, seeking the goodwill of God, multiplies

manifold”(chapter-30:verse 39)

Two types of ‘Riba’ to be avoided

Riba al-NasiyahRiba al Nasiyah defined as: “any excess compensation over and above the principal which is without due consideration.”

Riba al- FadlRiba al- Fadl means the excess which is taken in exchange of specific homogenous commodities, such as selling gold with another gold, whereby one has more “weight” than the other

Queries on “Theories of Islamic Banking”

Is there any scope for banking business in Islamic Economy?

Are Islamic Banks able to surpass the shari’ah rule prohibiting riba?

Should Islamic Bank act as traders?

Criticism with respect to Islamic Banking

Excessive murabahah mode of transaction neglecting other legitimate financing

Utilization of interest rate for fixing profit margins

Indifference towards the social aspect of financing

Lack of positive response to the requirements of governmental financing

Failure of Islamic banks to establish co-operation among themselves

ISLAMIC BANKING WINDOW OR FULL-FLEDGED ISLAMIC BANKS

• Islamic banking windows

– Refers to conventional banks that offer Islamic banking products and services using their existing infrastructure, including staff and branches

• Full-fledged Islamic bank

– Refers to a bank dedicated to the offering of Islamic banking products and services

– In Malaysia, a number of these banks are set up as a subsidiary to conventional banks

• Operations and management are clearly separated between the subsidiary Islamic bank and the parent conventional bank

Full Fledged Islamic Banks

International banks offering Islamic window banking

.

Reach and richness

Niche presence

Mainstream relevance

Conceptual exploration

Engaging with regulators

Reach and richness

Islamic finance industry is developing a global reach…

Factors triggering Euro Crisis and how Islamic banks got spared ?

FACTORS CONVENTIONAL BANKS

ISLAMIC BANKS DESCRIPTION

Speculations YES NO One of the triggers of global financial crisis

Invest in toxic assets

YES NO -do-

Fully asset backed financing

NO YES Assisted to shield from global financial crisis

Use of Profit andLoss Sharing

NO YES -do-

Debt Selling andBuying

YES NO One of the triggers of global financial crisis

Dependent onSubprime Mortgages

YES NO Subprime mortgages triggered financial crisis

Faith involved in investing

NO YES Prime factor that helped shield global financial crisis

Conclusion

Islamic finance and conventional finance are

quickly converging in the globe.

As conventional investors gain more comfort

with Islamic structures, cost differential between

Islamic products and conventional products

have almost disappeared

As a result, Islamic products may be more

practical because they appeal to both Islamic

and conventional investors