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International Overview of Islamic Finance.Product Tree of Islamic Microfinance Partnership Based Modes in Islamic MicrofinanceTrade Based Modes in Islamic MicrofinanceRental Based Modes in Islamic MicrofinanceMicroTakafulMicroTakaful Products for Islamic Microfinance Institutions.Presented by : Prof. Dr. Khawaja Amjad SaeedPrincipal: Hailey Collage of Banking & FinanceThe University of Punjab.Director Research: AlHuda: Centre of Islamic Banking & Economics
International Overview of Islamic Finance
Islamic products and services offered by Financial Institutions around the world
International Overview The size of Islamic Financial Industry has reached US$ 300 Bln. and its growing annually @ 15% per anum.51 countries have Islamic Banking Institutions 27 Muslim countries including Bahrain, UAE, Saudi Arabia, Malaysia, Brunei and Pakistan24 non-Muslim countries including USA, UK, Canada, Switzerland, South Africa and Australia
International OverviewLeading foreign Banks have opened Islamic Banking windows or subsidiaries such as:Standard Chartered Bank CitibankHSBCABN AMROUBS
International OverviewIn Feb 1999, Dow Jones introduced the Dow Jones Islamic Market Index (DJIM) of 600 companies world wide whose business complies with Islamic Shariah lawsAt present there are more than 105 Islamic Funds operational through out the world with a total fund base of over USD 3.50 billion
International OverviewGovernments of Bahrain ,Malaysia and now Pakistan have issued Islamic Bonds (Sukuk) in order to facilitate Islamic Banks in managing their liquidity. Issuance of these bonds has also paved the way for Shariah compliant Government borrowings
International OverviewInstitutions like Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Finance Services Board (IFSB) have been formed. These institutions are playing a key role in setting up and standardizing Shariah , Financial and Accounting standards for Islamic Financial Institutions.Due to these collective efforts Islamic banking is now recognized by IMF, World Bank and Basel Committee.
Takaful OperatorsThe number of Takaful operators worldwide is now estimated at:108 Takaful companies6 Retakaful companiesIn 35 Countries.Average growth rate higher than conventional insurance companies (around 25%).
NonMuslims increasingly opting for Takaful products for commercial benefits.
Takaful Geographical SpreadSouth& East Asia :51%Middle East :32% Africa:12% Europe, USA & Others:5%
PRODUCT TREEIslamic Modes of Microfinance Trade Based ModesPartnership Based ModesRental Based ModesMusharakaMudaraba
Partnership Based Modes
MUSHARAKACharacteristicsAll parties share in the capitalAll parties share profits as well as lossesProfits are distributed as per agreed ratioLoss is borne by the parties as per capital ratioEvery partner is agent of other
MUSHARAKAPARTNER APARTNER BVENTURERs.1000Rs.1000PROFIT Rs. 100LOSSRs.100Rs. 60Rs. 40Rs. 50Rs. 50May be in any agreed ratio
Must be according tocapital ratio
MUSHARAKAPARTNER APARTNER BVENTURERs.2000Rs.3000PROFIT Rs. 100LOSSRs.100Rs. 50Rs. 50Rs. 40Rs. 60May be in any agreed ratio
Must be according tocapital ratio
MUDARABAOne partner (Rab al Mal) contributes capital and the other (Mudarib) contributes his skills or services to the ventureVenture may for a fixed period or purposeBoth share profit in pre-agreed ratioLoss is borne by Rab al Mal only, Mudarib loses his services
MUDARABARABBUL MALMUDARIBVENTURESERVICESCAPITALPROFITLOSS50 %50 %ALL MONETORY LOSSLOSS OF SERVICES
MUDARABARABBUL MALMUDARIBVENTURESERVICESCAPITALPROFITLOSS40 %60 %ALL MONETORY LOSSLOSS OF SERVICES
Trade Based Modes
Basic Rules of Bai (Trade Base Mode )
Existence of Product/Commodity
Ownership of Product/Commodity
Possession of Product/CommodityUnconditional basis
Product have value/Price.
Basic Rules of Bai (Trade Base Mode )Bai on Such product which is permissible in Islam.
Product Must be Identify, clear with all demanding Qualities.
Not based on any incident, struggle etc
Price must be clearly identified.
Bai There are many type of Bais but usually following are using in Islamic Microfinance.MurabahahSalamIstisna
MurabahahMurabaha is a particular kind of sale where the seller discloses its cost and profit charged thereon.
The price in this sale can be both on spot and deferred.
It is a contract wherein the institution, upon request by the customer, purchases a asset from the third party usually a supplier/vendor and resells the same to the customer either against immediate payment or on a deferred payment basis.
MurabahahBasically, its not a mode of financing but a source to avoid interest DealingIts not a type of loan, but a deal (Bai)Murabahah can be used as source of financing when client needs funds to purchase any product/Machinery etc.
Product Must be bought from third party for avoid buy back transactionRoll over is not Valid in MurabahahIf actual cost can not be identified then Murabahah deal not possible.
SalamPay 100% amount in Advance.Product must be quantified, identified and Measured with quality.Date of delivery, Time, Place must be mentioned clearly in advance.Salam is not valid for a specific farm/land/garden.
IstisnaNot necessary to pay the 100% amount in advance Like Bai salam.Price must be decided on beginning of the contract.Qualities, features of that product must be clearly identified.
Rental Based Modes
Ijarah is to offer for a consideration the usufruct of a thing of value from which benefit can be derived without consumption, while retaining the ownership of the leased assets and assuming risks pertaining thereto.
- The leased commodity remains in the ownership of the lessor and only its usufruct is transferred to the lessee.- Any thing which cannot be used without consuming the same cannot be leased out like money, edibles, fuel, etc. - Only such assets which are owned by the lessor can be leased out except that a sub-lease is effected by the lessee with the express permission of the lessor.
- During the entire term of the lease, the lessor must retain title to the assets, and bear all risks and rewards pertaining to ownership. - If any damage or loss is caused to the leased assets due to the fault or negligence of the lessee, the consequences thereof shall be borne by the lessee.
- The lessee is also responsible for all risks and consequences in relation to third party liability, arising from or incidental to operation or use of the leased assets. - The insurance of the leased asset should be in the name of lessor and the cost of such insurance borne by him. - A lease can be terminated before expiry of the term of the lease but only with the mutual consent of the parties.
- Either party can make a unilateral promise to buy/sell the assets upon expiry of the term of lease.
- Alternatively, the lessor may make a promise to gift the asset to the lessee upon termination of the lease.
- The amount of rental must be agreed in advance- Contract of lease will be considered terminated if the leased asset ceases to give the service for which it was rented. However, if the leased asset is damaged during the period of the contract but is capable of being repaired, the contract will remain valid.
- Late Payment Plenty
- The banks can also approach competent courts for award of damages.
- Also, security or collateral can be sold by the bank (purchaser) without intervention of the court.
IjarahThe Bank leases the asset to the customerThe customer makes periodic payments as per the contractThe asset title transfers to the customer based on the method disclosed in the agreement GENERAL MECHANICS
Introduction Takaful is the Sharia Compliant brand name for the Islamic alternative to conventional insurance. Its based on the principle of Taawan or mutual assistance. It provides mutual protection and joint risk sharing in the event of a loss by one of its member
Origins of Takaful
In the event of death caused by someone from another tribe, the member of the offenders tribe would share the blood money (Khoon Baha) to provide for the family of the victim.
InvestmentIncomeOperational Cost of Takaful / ReTakafulClaims &Reserves
Surplus (Balance)P A R T I C I P A N T S T A K A F U L F U N D (P.T.F.)Mudaribs Share of PTFs Investment Income
Management Expense of the Company
Profit/LossS H A R E H O L D E R S F U N D (S.H.F.)Participant
Share HolderOperating Model in PakistanInvestment by the Company
.MicroTakaful Products for IMFs InstitutionsTrade Based ModesPartnership Based ModesRental Based ModesMusharakaMudaraba