Islamic fnance
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Transcript of Islamic fnance
Objective of the Study
Primary objective
To study the Islamic financial system, its
products and merits.
Secondary objective
To study the use these financing techniques
To analyze the feature of Islamic products
with conventional financial products.
Financial System
The system that allows the transfer of
money between savers and borrowers.
Instruments & Institutions to transfer
funds from saving surplus units to
saving deficit units in the most efficient
manner.
It facilitates intermediation between
savers (fund provider) and investors (
fund user)
Financial System Efficiency
Promotion of efficiency is the primary goal of
every Financial System.
It is measured in terms of efficiency achieved in
mobilizing savings from saving surplus units in
the economy and in allocating these funds
among saving deficit units.
Increase in the range of financial assets and
instruments would improve efficiency in
mobilization of funds.
For Improving Allocational
Efficiency it Needs
Less transaction cost
Simplified transaction system
Availability and accuracy of information
Should be a stable system.
Islamic Fianacial System Financial institutions and instruments which are
functioning on the basis of directions and rules in shariah
(a set of rules that governs every aspect of Islamic life)
are known as Islamic financial system.
In conventional finance there is a tug of war between
ethics and efficiency.
In Islamic finance ethics dominate all the concerns.
The Shari'ah specifies, inter alia, rules that relate to the
allocation of resources, property rights, production and
consumption, and the distribution of income and wealth
Shariah Prohibits
Riba: which is taking or giving of interest
Masir : which is involvement in speculative and gambling
transactions
Gharar : which is uncertainity about the terms of contract
or the subject matter, eg. Prohibits selling something
which one does not own.
Investment in business dealing in alcohol, drugs,
gambling, armaments, etc. which are considered unlawful
or undesirable.
• Prohibition of interest is not limited to Islam it is prohibited in Judaism and Christianity
• Key objective is to ensure SOCIAL JUSTICE
• Money is only a medium of exchange, no value in
itself.
• Therefore should not be allowed to give rise to more
money, via fixed interest payments, simply by being
put in a bank or lent to someone else
• Results in concentration of wealth
Interest can leads to injustice and exploitation in
society.
Why Interest/ Riba Prohibited
Principle of Islamic Finance
Freedom to contract
Freedom from Riba
Freedom from Algharar
Freedom from gambling and unearned income
Freedom from price control and manipulation
Mutual cooperation and solidarity
Public Interest
Global Islamic Finance Industry
1963 : Mit Gamir Project, Egypt.
1975 : IDB, Jeddah
1975 : Dubai Islamic Bank
Growth Rate : 10-15%
300 Institutions over 75 countries USD
800 billion under management.
Expected tocontinue with assets growing
USD 1 trillion by 2010.
Islamic Window : ABNAmro, HSBC, City
Bank
Islamic Finance Products
Investment Financing
Trade Financing
Lending
Musharakah ( Joint Venture) Musharaka is similar to a joint venture, whereby two
parties (an Islamic Financial Institution and a Client)
provide capital for a project which both may manage.
Profits are shared in pre-agreed ratios but losses are
borne in proportion to equity participation
Business Venture
Client Bank
Profit / Loss
Mudaraba – Trustee Partnership
Mudaraba is a contract between two
parties: One of them provides finance (
Rab ul maal) & other uses his labour and
expertise (Mudarib).
Profit, if earned, is distributed between the
two parties in accordance with the ratio as
per the agreement. Financial Loss, if
suffered is borne by the investor only.
Client Bank
Business Venture
Profit Loss
Murabaha ( Mark upSales) The client orders an Islamic Bank to purchase
certain goods at a specific cash price
The Bank purchase these goods from the
supplier and sells to the client at a marked – up
price ( Cost + Profit).
The differed price may be paid up on lump sum
or in installment
Client Bank
CostGoods / Ownership
Cost + Profit
Ijara ( Lease)
A contract under which an Islamic bank finances
equipment, building or other facilities for the
client against an agreed rental. The ownership
remains with the lessor bank and can be
transferred on predetermined basis.
Salam ( Forward Selling)
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.
Istisna
It is a contractual agreement for
manufacturing goods and commodities,
allowing cash payment in advance and
future delivery or a future payment and
future delivery.
Qard Hassan ( Charitable Loan)
It is an interest free loan.
Only loan permitted by Shariah.
The loans are made from the pooled donations
of the members, Zakat and are generally
granted to those who are facing emergency
personal crisis.
Activity
Client approaches Bank for loan and offers collateral
security.
Bank lends an amount to client.
Client repays amount to Bank (with or without
administrative expenses) in part or in full
TAKAFUL (INSURANCE)
Takaful, the Islamic alternative to
insurance, is based on the concept of
social solidarity, cooperation and mutual
indemnification of losses of members.
It is a deal among a group of persons who
agree to jointly indemnify the loss or
damage that may inflict upon any of them,
out of the fund they donate collectively.
What Distinguishes Islamic Banking
• Transactions are asset-based
• It is socially-responsible banking because it operates under Shariah restrictions
• Does not permit financing of prohibited goods / Industries
• It starves evil out of the society
• Ethics and moral values play a major role in investment decisions. Not a choice but a must
- Conventional banking prices money.
- Islamic banking prices goods and services which creates real wealth in the society leading to economic well-being.
Conventional Banking Islamic Banking
- Is based on fixed return on both Sides of the balance sheet.
- Is based on profitsharing on deposits side,and on profit on assetsside.
Distinguishing Features
- Does not involve itself in trade and business
- Actively participates in trade and production.
Conventional Banking Islamic Banking
- Depositors get a fixed rate regardless of the bank’s profitability, thus insulating them from the bank’s true performance.
- Profit is shared with the depositor, higher the bank’s profit, higher the depositors income.
Distinguishing Features
Basic Difference between Islamic and
Conventional Modes of Finance
Conventional
Bank Client
money
money + money (interest)
Basic Difference between Islamic and
Conventional Modes of Finance
Islamic
Bank ClientGoods &
Services
money
Performance of Islamic Finance In comparison with conventional banking
systems, Islamic bank’s assets and deposits
have grown at GR of 20-22% while those of
conventional banks have grown at a rate of 11%
for the period 2002 – 2005.
Key Isuues
Taxation & Legal Issues
Risk Management
Regulatory Issues
Fragmentation
Conclusion Islamic Finance assures Equitable
distribution of risks and rewards among
the stakeholders
Inculcating market discipline and higher
ethical standards given its emphasis on
non-exploitation and social welfare.
It may be observed that Islamic finance is
far more interesting and complex than
conventional finance as far as financing
techniques are concerned.
it is in the area of assets rather than in
liabilities that the practices of Islamic
banks are more diverse and complex than
those of conventional banks.
it is generally believed that Murabahah is
the most widely used technique and that
the majority of the financing provided by
Islamic banks goes to short-term trade and
the financing of real estate.
