Islamic Banking

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Presentation on Islamic Banking

Members:M. Yasir13Shahid Hassan 09Hassan Aziz11M.Shahzad Saleem20M. Haroon 40Muzamil.ul.Rehman55

Yasir Malik 1 3

AbstractIslamic banking has been in practice for long but started receiving due attention and high popularityIslamic banking continues flourishing the way it is at present. Therefore advancements and achievements of Islamic banking , there remains number of controversies over various underlying concepts and practices

Islamic Banking and FinanceThe Islamic banking and finance is a system designed to allow Muslims to deal with their financial affairs in accordance with their faith. Islamic banking today is an industry that is still evolving. Islamic finance, is the absence of interest. Interest, known as RibaIt is compulsory for Muslims to completely avoid Riba in their commercial and non-commercial daily activities. It is even suggested that a shadow of interest will make a transaction haram.

The Growth of Islamic Banking Growth of Islamic Banking have following outcomeseconomic growth Financial products based on the risk-sharing and profit-sharingprovide acceptable financial returns for investorsIslamic banks are most active are in trade and commodity finance and leasing

Theoretical basis of Islamic Banking Many products offered by the Islamic banks similar conventional banking but there are some norms which are exclusive to Islam. Even some principles render certain conventional banking practices and transactions void. Before the introduction of Islamic Banking, all the Muslim customers rely on the conventional banking practices. Islamic banks products were no way near to the principles of Islam as the conventional banking products revolve around the earnings of interest (Riba) which is clearly prohibited in Islam.

ContiThe main Basics principles of Islamic Banking is derived from QURAN & SUNNAH. Uncertainty, Gharar, Riba are strictly prohibited in Islamic modes of financingIn modern world Islamic banking the fatwas are taken from highly knowledgeable, credible and trustful ulma while offer a mode of financing.Muslim countries to establish and develop the financial institutions which were in accordance with the Islamic Laws and Shariah Principles

Shahid Hassan 09

History and Development of Islamic bankingThe modern history of Islamic banking can be traced back to 1960s. It was not until last decade that Islamic banking emerged as an established player on financial scene. Middle East and Malaysia remains hub of Islamic finance though most important development is emergence of non-Muslim countries as powerful centers of Islamic banking and finance. The idea of Islamic banking was first developed in the 1950s and the first generation of Islamic investment banks were created in Egypt and Malaysia in the early 1960s Due to the success seen in countries like Dubai; (Dubai Islamic Bank), and Bahrain; (Al-Baraka),

Conti..Islamic banks in U.K by narrating that the first Islamic bank to operate in the United Kingdom was in the early 1980s, Al-Baraka bankIn 1982 the Al-Baraka Investment Company acquired Hargrave Securities, which at the time was licensed to accept deposits, when it was acquired by Al-Baraka the company was established as the first Islamic bank to serve high net worth Arabs who spent the summer in London. Al-Baraka bank offered for the first time to Muslims in the UK investment deposit facilities on a Mudaraba basis, the increase in demand from 1983 to 1991 of 23 million to 154 million showed that clearly the demand for Islamic banking within the UK was evident. In 1997 the United Bank of Kuwait entered the housing market basing it upon a Murabaha instalment structure.

Modes of Islamic Financing: Murabaha Ijarah Musharakah (joint venture) Istisna Takaful (Islamic insurance) Bai Salam Mudarabah Sukuk (Islamic bonds)

MurabahaThis concept refers to the sale of goods. such asreal estateCommoditiesVehicleIn which Murabaha the purchase and selling price, other costs, and the profit margin not interest are clearly stated at the time of the sale agreement.

IjarahIjarah means lease, rent or wage. Generally, the Ijarah concept refers to selling the benefit of use or service for a fixed price or wage.Under this concept, the Bank makes available to the customer the use of service of assets / equipment such as plant, office automation, motor vehicle for a fixed period and price.

Musharakah (joint venture)Musharakah is a relationship between two parties or more that contribute capital to a business and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit,purchase or real estate or property. In the case of real estate or property, the bank assess an imputed rent and will share it as agreed in advance. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions.

Hassan Aziz 11

IstisnaIstisna (Manufacturing Finance) is a process where payments are made in stages to facilitate the work of manufacturing / processing / construction. An installment of Istisna, for example, may enable a construction company to finance construction of sections of a building or help manufacturers pay for an order of raw materials. Istisna helps use of limited funds to develop higher value goods/assets in different stages / contracts.

Takaful (Islamic insurance)Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers.

Bai SalamBai Salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.

Mudarabah"Mudarabah" or Profit-and-loss sharing contract is a kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The capital investment should normally come from both partners. Both should have some skin in the game. The Mudarabah (Profit Sharing) is a contract, with one party providing 100 percent of the capital and the other party providing its specialized knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to a pre-agreed ratio. If there is a loss, the first partner "rabb-ul-mal" will lose his capital, and the other party "mudarib" will lose the time and effort invested in the project the profit is usually shared 50%-50% or 60%-40% for rabb-ul-mal.

Sukuk (Islamic bonds)Sukuk (Arabic: , plural of Sakk, "legal instrument, deed, check") is the Arabic name for financial certificates, but commonly referred to as "sharia compliant" bonds. Sukuk are defined by the AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) as "securities of equal denomination representing individual ownership interests in a portfolio of eligible existing or future assets.Sukuk securities are structured to comply by not paying interest. This is generally done by involving a tangible asset in the investment. For example, by giving partial ownership of a property built by the investment company to the bond owner who collect the profit as rent, which is allowed under Islamic law. Upon expiration of the Sukuk, the rent payments cease.

M.Shahzad Saleem20

Current Status of Islamic Banking:The US had an appealing banking system and naturally attracted overseas investors, including those oil-rich wealthy Muslims. Conflict between the US and Middle-East erupted in 2001 following terrorist attacks many Muslims closing their US banking services and seeking new places to deposit their moneyThe current climate in the Islamic banking proves that the UK is still able to prove itself as innovative in the products which it is continuously developingstricter laws regarding intellectual property rights the UK has now a major impact on the Islamic banking sector world-wide

Britain InitiativeBank of Britain (IBB) being the first Islamic institution in the world to offer Murabaha treasury deposit accounts, proving that dynamic economies have innovative financial sectorsThe governments role in making Islamic banking the hub for Islamic finance is crucial and in the early days the governments actions were limited but this was due to their limited knowledge of the Islamic banking sector.The consortium gained the approval of the Financial Services Authority (FSA) and opened their first branch on Edgware Road in September 2004 and had the headquarters in Birmingham calling the bank The Islamic Bank of Britain

Conti.locations of the branch and headquarters are very significant as they were placed in the two areas of the UK with the highest density of Muslim population, to achieve the exposure they required so. This increased to five branches by the end of 2005, showing that the demand for Islamic banking and finance was always there, dr