Lim Sei Kee @ cK. Islamic banks adhere to the concepts of Islamic law. Islamic banking refers to a...
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Transcript of Lim Sei Kee @ cK. Islamic banks adhere to the concepts of Islamic law. Islamic banking refers to a...
DIP – 10. ISLAMIC BANKING
Lim Sei Kee @ cK
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
PRINCIPLES OF ISLAMIC BANKING Prohibition of riba (interest) Profit sharing (mudharabah) Safekeeping (wadiah) Joint venture (musharakah) Cost plus (murabahab) Leasing (ijarah)
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
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
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)
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
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
The structure of a Musharakah Contract
ISLAMIC BANK
ISLAMIC BANK
PARTNER(Customer)PARTNER(Customer)
MUSHARAKAHMUSHARAKAH
60% Ownership40% Ownership
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)
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
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
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.
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.
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
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
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.
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.
THE END OF COURSE.
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
IMPORTANT DATES 25th Feb: Tutorial 10
Presentation Dates: 28th Feb 4th Mar 7th Mar 11th Mar***
NOTE: MAXIMUM 5 STUDENTS /EACH DATE.