Lim Sei Kee @ cK. Islamic banks adhere to the concepts of Islamic law. Islamic banking refers to a...

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DIP – 10. ISLAMIC BANKING Lim Sei Kee @ cK

Transcript of Lim Sei Kee @ cK. Islamic banks adhere to the concepts of Islamic law. Islamic banking refers to a...

Page 1: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

DIP – 10. ISLAMIC BANKING

Lim Sei Kee @ cK

Page 2: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

ISLAMIC BANKING

Islamic banks adhere to the concepts of Islamic law.

Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (shariah) principles and guided by Islamic economics

Page 3: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

PRINCIPLES OF ISLAMIC BANKING Prohibition of riba (interest) Profit sharing (mudharabah) Safekeeping (wadiah) Joint venture (musharakah) Cost plus (murabahab) Leasing (ijarah)

Page 4: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

It does not deal with zakat In modern Islamic banking, it has become one of the service oriented function of the Islamic banks to be a zakat collection centre and they also pay out their zakat

It can charge additional money in case of defaulters

Islamic banks have no provision to charge any extra money from the defaulters

Very often it results in the banks own interest becoming prominent. it makes no effort to ensure growth with equity

It gives due importance to the public interest, its ultimate aim is to ensure growth with equity

Conventional bank has to guarantee all its deposits

Islamic bank can only guarantee deposits for deposit account, thus depositors are guaranteed repayment of their funds

Conventional banking Islamic banking

Page 5: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

ISLAMIC BANKING –THE CONCEPT

Concept principles no deception and no riba (interest)

It is not new 7th Century Money is a medium of exchange Interest can lead to injustice/exploitation in society

Zulm No real 'lending' as all 'lenders' obtain interests To earn money for banks, they must obtain an equity /

ownership Requires banks to participate, share risk profit varies Profit share is distributed instead of interest earned Leads to more ethical society (Unlike West you must pay

interest)

This concept encourages better resource management

Page 6: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

Islamic Banking is known by several names:

Interest free banking (Iran) PLS Banking (Pakistan) Islamic Banking (Gulf) Special Finance Houses (Turkey)

All expressions are used interchangeably.

Some people prefer Islamic Finance House instead of Islamic bank. (Beit ul tamweel)

Page 7: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

ISLAMIC MODES OF FINANCES

Rental-based Ijarah Lease

Partnership-basedMusharakah Partnership time,$ share profit

Risk is shared between 2 person loss or profit is sharedMudharabah Partnership one $, other effort

If profit, it is shared with the customer; bank takes its fee If loss, customer loses; bank does not take its fee

Page 8: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

MUSHARAKAH [USES OF FUNDS] Musharakah is from the word Sharikah. More than one partners: Partnership in capital

proportion and project supervision. A partner may waive his right of supervision or

delegate it to another partner. Arrangements: Sharing of Profit and loss in

accordance with capital proportion agreed proportion.

Variant: Share of profit in agreed proportion, share of loss in capital proportion.

Applications of Musharakah: i. in Import trade Ii. In Agriculture

Page 9: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

The structure of a Musharakah Contract

ISLAMIC BANK

ISLAMIC BANK

PARTNER(Customer)PARTNER(Customer)

MUSHARAKAHMUSHARAKAH

60% Ownership40% Ownership

Page 10: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

MUDHARABAH [USES OF FUNDS] Mudharabah existing from pre-Islamic

times. Profit and loss sharing is a wrong

translation. Arrangement: Profit is shared on an agreed

basis, loss is borne by the Rabbal Mal. (Bank)

Page 11: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

ISLAMIC CREDIT CARDS Ujrah Concept Payment in exchange for services,

benefits and privileges offered to the cardholders Mudharabah Partnership bank $, customer

benefit

Minimum age 21, With parents 18 Payable Facility Charges varies monthly; 0 if full

payment paid on or < due date Ta'widh (compensation) 1% of outstanding

balance

Page 12: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

CLIENT(Mudarib)

Investor ofCapital

ISLAMIC BANK

Payment of Mudarabah

Capital

INVESTMENT / TRADING ACTIVITIES

Earning of Profits

CLIENT

(Mudarib)

Distributor of Profits Earned

ISLAMIC BANK

Periodic proportionate Profits / Return of Capital

Page 13: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

The bank provides to the customer (mudarib) all the capital to fund a specified enterprise

The customer contributes only entrepreneurship.

The customer is responsible for the day to day management of the enterprise and is entitled to deduct its management fee (mudarib fee) from the enterprise’s profits.

The mudarib fee could be a fixed fee (to cover management expenses) and a percentage of the profits or a combination of the two.

The balance of the profit of the enterprise is payable to the bank

If the enterprise makes a loss, the bank (as the fund provider or Rabbul Mal) has to bear all the losses unless the loss has resulted from negligence on the part of the mudarib.

Page 14: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

IJARAH [USES OF FUNDS] Ijarah is emerging as a popular technique of

financing amongst the Islamic banks Elements of a lease contact: Lessor, Lessee,

instrument and period of lease, The asset remains in the ownership of the

lessor. Maintenance is the responsibility of the owner.

Page 15: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

IJARA MORTGAGES – LEASE TO OWN Find a house to purchase and agree a sale price Bank will then purchase the property outright You then enter into 2 agreements with the bank

Pay back the purchase price fixed monthly instalments over 25 years

Pay agreed $ as rent each month bank’s profit Rent is set annually, ↓ yearly in % of payment When fully paid ownership is transferred to you Borrow up to 90% of the purchase price Legitimate under Sharia law

Page 16: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

ISLAMIC BANK

ISLAMIC BANK

CUSTOMER(Lessee)

CUSTOMER(Lessee)

VENDORVENDOR

Transfer of title to bank

Assets leased to customer – title does (not) pass at end of lease term

Payment of purchase price

Ijarah Installment

The structure of an Ijarah Wa Iqtina Contract

Page 17: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

The bank buys the asset from the vendor

The bank then leases the asset to the customer

Periodic rentals are collected by the bank

The title of the asset remains with the bank under as operating ijarah

Title passes to the customer under a Lease ending with transfer of ownership, either gradually over the period of the contract, at the end.

Page 18: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

SOME MISCONCEPTIONS

ISLAMIC BANKING IS RELIGION BASED

ISLAMIC BANKING IS FOR A SPECIFIC COMMUNITY

ISLAMIC BANKING REPLACES INTEREST RATE WITH PROFIT AND THAT IS ALL.

Page 19: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

THE END OF COURSE.

Page 20: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

INDIVIDUAL PRESENTATION 1. Discuss the importance of the Islamic

system in managing a business. 2. Discuss how to make effective

decisions to comply with Islam. 3. Describe Islamic banking• Musharakah• Mudharabah• Ijarah• Takaful

Page 21: Lim Sei Kee @ cK.  Islamic banks adhere to the concepts of Islamic law.  Islamic banking refers to a system of banking or banking activity that is consistent.

IMPORTANT DATES 25th Feb: Tutorial 10

Presentation Dates: 28th Feb 4th Mar 7th Mar 11th Mar***

NOTE: MAXIMUM 5 STUDENTS /EACH DATE.