Islamic Banking

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Islamic Banking

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  • Islamic Financial InstrumentsMBF 709

    ByDr. Syed Zulfiqar Ali ShahPh.D (Finance), ACMARef: Own, Md Noor Ul Islam, Book

  • Course Contents

    Introduction to the Concept of Islamic Finance Overview of Conventional and Islamic BankingIslamic Economic System & Major prohibited Elements in Islamic EconomyIslamic Law of Contract & Business TransactionsIslamic Corporate Governance Overview of Modes of Islamic FinanceIslamic Financial Instruments & institutions Murabaha & Musharakah Participatory Modes: Shirkah and its VariantsSalam A Trade Based ProductIstisna A Trade Based ProductIjarah A Semi Debt based ProductIslamic Asset and Fund Management & Islamic Bond Market SukukIslamic insurance TakafulRisk Management in Islamic Finance & Appraisal of Common Criticism

  • Plan of Today's LectureFinance in General PerspectiveGeneral Decisions in FinanceFundamental Principles of Islam:Maqasid Al-Shariah:The Strategy:The Islamic World View:Islamic Financial System(ifs):Differences Between CFS & IFSPrinciples of An Islamic Financial SystemThe Objectives Islamic Economics and BankingPrinciples of Islamic Economics Systems:Deposit Products of Islamic Bank:Future of Islamic Banking

  • FinanceDecision Making

    Four types of decisionsInvestment DecisionFinancing DecisionAsset Management DecisionDividend Policy Decision

  • Investment DecisionEstimation of Cash FlowsRequired rate of returnTools and techniques to evaluate proposal

  • Financing DecisionThree options of FinancingOwn MoneyIssuance of Equity/ Shares

    Common Shares Preferred SharesDebt

    Financial Institutions General public

  • Asset Management DecisionAssets Current Assets Non Current Assets

  • Dividend Policy DecisionWhy Dividend PolicyTo avoid expected RiskTo have money for future investments

  • Fundamental Principles of Islam

    Tawhid (Oneness And Unity of Allah Allah is One, Unique & Supreme

    Khilafah (Vicegerency)The Concept of Khilafah has a Number of Implications or Corollaries. These are:Universal BrotherhoodResources are a TrustHumble Life StyleHuman FreedomAdalah (Justice)Need Fulfillment Respectable Source of EarningEquitable Distribution of Income & WealthGrowth & Stability

  • Maqasid Al-Shariah:Maqasid al-Shariah is to promote the welfare of the people by safeguarding their- Faith Prosperity (descendant) Life & intellect Wealth

    Maqasid (objectives of) al-Shariah There have been efforts by jurists to add to the list of these five requisites and also to change their sequence, but it seems that these attempts have, in general, not satisfied most jurists.

    Imam Abu iIhaq-Al-Shatibi (d. 790/1388), writing a little less than three centuries after Al-Ghazali, put his stamp of approval on his list as well as the sequence, thereby indicating that both of these are the most preferable in terms of their harmony with the essence of the Shariah.

  • The Strategy

    A socially agreed filter mechanism A strong motivating system to induce the individual to render his best in his own Interest as well as the interest of the society Restructuring of the whole economy with the objective of realizing the maqasid in spite of scarce resources. A positive and strong goal-oriented role for The government

  • The Islamic World View Inability of the capitalist & socialist countries as well as the developing economies to realize simultaneously the goals of both efficiency & equity Social Darwinism, survival of the fittest, class struggle, maximum want satisfaction, material condition of life proved unsuccessful.

  • Maqasid Al-ShariahHuman well-being to be realized by ensuring the enrichment of the following five ingredients for every individual.

    AqlIntellect

  • Islamic Financial System Islamic financial system(ifs):A financial system that is based on Islamic principles and values, which eliminates riba and ensure a profit sharing mechanism in the financial system, may be called IFS. It may be characterized by the absence' of interest based financial institution & transactions, doubtful transactions or gharar, stocks of companies dealing in unlawful activities, unethical or immoral transactions such as market manipulation, insider trading short-selling etc.

    Differences between CFS & IFSThe conventional financial system is of two types.

    1) socialistic financial system and 2) capitalistic financial system - both systems have been proved inefficient to establish economic balance in the society.

  • Islamic Financial System

    Basis of DifferenceCFSIFS1. Religious BeliefSecular & separates Religion from other Parts human lifeBelief in unity of God & relates this belief to economic Life of a man2. Freedom of EconomicActivityIn socialism govt. enjoys economic freedom but in capitalism Individuals enjoys freedom.Restrictive freedom is allowed in the light of Shariah both by the govt. &/or individuals3. Ownership of meansSocialism-state ownership, Capitalism-individual ownershipAllah is the exclusive owner. Man is the caretaker of the property4. Goals of financial SystemSocialism-profit of the society Capitalism-Individuals profitWelfare of both here and hereafter.5. CompetitionSocialism-No competitionCapitalism- Logical & unethical competitionLogical Competition and financial co-operation6. Wealth distributionSocialism-EqualCapitalism UnequalEquitable

  • Islamic Financial System

    Basis of DifferenceCFSIFS7. Basis of Economic SystemRiba or InterestInterest Free; PLS, Zakat & Compensation based8. Sources of the SystemIntellects brain storming of the economic problems of mens lifeDevine book Al-Quran & Prophets(SM) speeches9. ResultCapitalism concentration of income & economic power in few hands. InefficiencyMaximum & equitable Distribution of economic opportunities and higher production in the society10. Social & environmental welfareDo not consider the social & environmental welfareEnsure social & environmental welfare11. Owners exception in respect of respect of investmentDividend or part of profit in case of equity financing Part of Profit or Loss12. Lender or Banks expectation in terms of dept financingInterestProfit or Loss Sharing13. Modes of InvestmentLoan, Overdraft & Cash CreditMudarabah, Musharaka, Murabahah etc.

  • Principles of an Islamic Financial SystemThe basic framework for an Islamic financial system is a set of rules and laws, collectively referred to as Shariah, governing economic, social, political and cultural aspects of Islamic societies. Shariah originates from the rules dictated by the Quran and its practices, and explanations rendered (more commonly known as Sunnah) by the Prophet Muhammad. Further elaboration of the rules is provided by scholars in Islamic jurisprudence within the framework of the Quran and Sunnah. The basic principles of an Islamic financial system can be summarized as follows:

    Prohibition of interest : Prohibition of Riba, a term literally meaning "an excess" and interpreted as "any unjustifiable increase of capital whether in loans or sales" is the central tenet of the system. More precisely, any positive, fixed, predetermined rate tied to the maturity and the amount of principal (i.e.) guaranteed regardless of the performance of the investment) is considered Riba and is prohibited. The general consensus among Islamic scholars is that Riba covers not only usury but also the charging of "interest" as widely practiced.

  • Islamic Financial SystemThis prohibition is based on arguments of social justice, equality, and property rights. Islam encourages the earning of profits but forbids the charging of interest because profits, determined ex post, symbolize successful entrepreneurship and creation of additional wealth whereas interest, determined ex ante, is a cost that is accrued irrespective off the outcome of business operations and may not create wealth if there are business losses. Social justice demands that borrowers and lenders share rewards s well as losses in an equitable fashion and that the process of wealth accumulation and distribution in the economy be fair and representative of true productivity.Risk sharing: Because interest is prohibited, suppliers of funds become investors instead of creditors. The provider of financial capital and the entrepreneur share business risks in return for shares of the profits.

  • Islamic Financial SystemMoney as "Potential" Capital: Money is treated as "Potential" capital -that is, it becomes actual capital only when it joins hands with other resources to undertake a productive activity. Islam recognizes the time value of money, but only when it acts as capital, not when it is "Potential" capital.Prohibition of speculative behavior: An Islamic financial system discourages hoarding and prohibits transactions featuring extreme uncertainties, gambling, and risks.Sanctity of contracts: Islam upholds contractual obligations and the disclosure of information as a sacred duty. This feature is intended to reduce the risk of asymmetric information and moral hazard.Shariah approved activities: Only those business activities that do not violate the rules of Shariah qualify for investment. For example, any investment in businesses dealing with alcohol, gambling, and casinos would be prohibited.

  • Islamic Financial SystemThe Objectives Islamic Economics and BankingThe Objectives of ShariahThe very objective of the Shariah is to promote the welfare of the people which lies in safeguarding their faith, their life, their intellect, their posterity, and their wealth. Whatever ensures the safeguarding of these