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Zubair MughalChief Executive Officer

AlHuda : Centre of Islamic Banking & Economics

Editor in Chief.Islamic Banking and Finance News , True Banking.

An Introduction to

Islamic Banking & Finance

Outline of Presentation

Introduction to Islamic Banking Riba ( Interest ) Difference between Islamic & Conventional Banking Product of Islamic Banking. Progress of Islamic Banking in Pakistan & World wide. Trade Base Modes of Islamic Banking and Finance

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Islam

Aqidah(Faith & Belief)

Shariah(Practices & Activities)

Akhlaq(Morality & Ethics)

IBADAT(Man to God Worship)

Muamalat(Man to Man Activities)

Political Activities Economic Activities Social Activities

Banking & Financial Activities

Islam and Shariah

Sources of Fiq’h in Islam (Islamic Finance)

Quran

Sunnah

Ijtehad / Qiyas

Ijama’e Ummah

Basic Difference between Islamic and Conventional Banking

ConventionalBank Client

Money

Money + Money(interest)

Bank ClientGoods & Services

money

Islamic Banking

Riba in Quran

“... God has permitted trade and forbidden interest...”

(Sura Al-Baqara 2:275)

Fulfillment of Financial Needs

Own Capital Others’ Capital

Equity Financing Debt Financing

• Murabahah• Ijarah•Salam & Istisna etc

• Musharakah• Modarabahah• Other Products

Human Financial Needs

Equity Financing Debt Financing

Uqud al-Ishtirak

(Contracts of Profit Sharing )

Uqud al-Muawadhat

(Deferred Contracts of Exchange)

Al-Mudarabah

(Trustee Profit Sharing)

Al-Bai’ Bithaman (Mu)Ajil (Deferred Installment Sale)

Al-Musharakah (Joint Venture Profit Sharing)

Bai’ al-Murabaha

(Cost Plus Profit Sale)

Others Al-Ijarah (Leasing)

Bai’ al-Salam (Commodity Sale)

Bai’ al-Istisna’ (Sale on Order)

Equity Market Debt Market

External (Equity & Debt) Financing

PRODUCT TREE

Islamic Banking Modes

Trade Based Modes

Partnership Based Modes

Rental Based Modes

Musharaka(Joint Venture Profit Sharing )

Mudaraba( Trustee Profit Sharing)

Murabaha(Cost Plus Profit Sale)

Musawama(Bargain sale )

Salam(Commodity Sale)

Istisna(Sale on Order)

Ijarah ( Leasing )

Diminishing Musharaka( Transfer of Ownership)

ONUS SHIFTS!!

Customer to Halal Restaurant Owner

Halal Restaurant Owner to Halal Meat Supplier

Halal Meat Supplier to Halal Abattoir / Butcher

Customer to Islamic Banker

Islamic Banker to Shariah Scholars

Industry Progress in Pakistan

6 Full fledge Banks having 239 and 12 Conventional Banks have 167 SAIBBS and 10 Sub Branches till 1st January , 09

Total IB Branches = 519

Year 2001

•Meezan Bank•Al Baraka

•Meezan Bank•Al Baraka•MCB•Alfalah•SCB•Bank AlHabib•Habib AG Zur.•Metropolitan•Bank of Khyber•Soneri Bank

2002 2003

•Meezan Bank•Al Baraka•MCB

•Meezan Bank•Al Baraka•MCB•Alfalah

2 10

2007 - 09

•Meezan Bank (161) •Al Baraka (30) •MCB (8) •Alfalah(40) •SCB (11) •Bank AlHabib(4 ) •HMB(4) •Bank of Khyber(16) •Soneri Bank ( 5) •HBL(1) •Bank Islami(102) •DIB (25) •EGIBL (40) • Dawood(21) •NBP(5) •RBS (3) •Askari(18) •UBL (5)

2004 - 06

1843

Industry Progress & Mkt. Share

Islamic products and services offered by 800+ Financial Institutions around the world

.United States: 20- Al Manzil Financial Services- American Finance House- Failaka Investments- HSBC - Ameen Housing Cooperative

Germany:4- Bank Sepah- Commerz Bank- Deutsche BankSwitzerland: 6

UK: 26- HSBC Amanah Finance - Al Baraka International Ltd- Takafol UK Ltd- The Halal Mutual Investment Company- J Aron & Co Ltd (Goldman Sachs)

Bahrain: 26 - Bahrain Islamic Bank- Al Baraka- ABC Islamic Bank - CitiIslamic Investment Bank

Malaysia: 492 - Pure Islamic Banks (Bank Islam, Bank Muamalat)Rest - conventional banks

Saudi Arabia: 17- Al Rajhi - SAMBA- Saudi Hollandi - Riyadh Bank

UAE: 13- Dubai Islamic Bank- Abu Dhabi Islamic Bank- HSBC Amanah

Qatar: 4- Qatar Islamic Bank- Qatar International Islamic

Kuwait: 9- Kuwait Finance House

Iran: 8

Egypt: 12- Alwatany Bank of Egypt- Egyptian Saudi Finance

Indonesia: 4

Sudan: 9

Pakistan: 21India: 3Bangladesh:9

Turkey: 7- Faisal Finance Institution- Ihlas Finance House

Yemen: 5

International Overview

The size of Islamic Financial Industry has reached US$ 950 Bln. and its

growing annually @ 15% per anum.

70 countries have Islamic Banking Institutions

37 Muslim countries including Bahrain, UAE, Saudi Arabia, Malaysia,

Brunei and Pakistan

34 non-Muslim countries including USA, UK, Canada, Switzerland,

South Africa and Australia


Leading foreign Banks have opened Islamic

Banking windows or subsidiaries such as:

• Standard Chartered Bank

• Citibank

• HSBC

• ABN AMRO

• UBS


In Feb 1999, Dow Jones introduced the Dow Jones Islamic

Market Index (DJIM) of 600 companies world wide whose

business complies with Islamic Shariah laws

At present there are more than 105 Islamic Funds operational

through out the world with a total fund base of over USD 3.50

billion


Governments 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


Institutions 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.

Functions and operations are based on fully man made principles

Functions and operations are based on Sharia’h principles

Investor is assured of pre-determined rate of interest

Promote risk-sharing between provider of capital (investor) and user of funds (entrepreneurs)

Aim at maximising profit without any restrictions

Aim at maximising profit but subject to Sharia'h restrictions

Creditor-Debtor relationship Partners, investor and traders, buyer or seller relationship

Based on money trading. Money is a medium of exchange and not a commodity

Encourage asset-based financing and based on commodity trading & Services

Conventional banking Islamic banking

It is almost risk free banking and depositor has no risk of losing its money because interest is guaranteed.

No right of profit if there is no risk involved.

It can charge additional money in case of defaulters

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

Do not Deal in Zakat ( Non Muslim Countries )

Deal in Zakat

Conventional banking Islamic banking

Bai ( Buying & Selling)

Trade Base Mode of Islamic Banking

PRODUCT TREE

Islamic Banking Modes

Trade Based Modes

Partnership Based Modes

Rental Based Modes

Musharaka(Joint Venture Profit Sharing )

Mudaraba( Trustee Profit Sharing)

Murabaha(Cost Plus Profit Sale)

Musawama(Bargain sale )

Salam(Commodity Sale)

Istisna(Sale on Order)

Ijarah ( Leasing )

Diminishing Musharaka( Transfer of Ownership)

Basic Rules of Bai

Existence of Product/Commodity

Ownership of Product/Commodity

Possession of Product/Commodity

Basic Rules of Bai

Unconditional basis

Product have value/Price.

Bai on Such product which is permissible in Islam.

Basic Rules of Bai

Product Must be Identify, clear with all demanding Qualities.

Not based on any incident, struggle etc

Price must be clearly identified.

Bai (Buying & Selling)

Basic Kinds of Bai

Kinds of Bai

Bai Musawamah Bai Murabaha Bai Surf Bai Salam Bai Istisna’ Bai Urboon

Basic Kinds of Bai

Bai Eenna Bai Touliya Bai Wadhia

Bai

There are three basic type of Bai’s which are using in Islamic Banking as the mode of financing in Pakistan

Murabahah Salam Istisna’

Murabahah

Basically, it’s not a mode of financing but a source to avoid interest Dealing

It’s 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.

Murabahah

Sharing of Risk of loss differentiate Murabahah from the interest category

Product Must be bought from third party for avoid buy back transaction

Roll over is not Valid in Murabahah If actual cost can not be identified then

Murabahah deal not possible.

Bai

Important Note

Following 3 Basic Rules of Bai are exceptional for Salam & Istisna’

Existence of Product/Commodity Ownership of Product/Commodity Possession of Product/Commodity

Salam

Pay 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.

Istisna’

Not 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.

Bai

Differences Between Istisna and Salam


Istisna deal with manufacturing items, but Salam could or could not be manufacutred, but salam ideal of agriculture sector.

In salam advance payment is necessary, but in Istisna’ its not.


Date, time of delivery the necessary part of Bai Salam, But in Istisna, it is not the part of the deal.

In Bai salam, it can be cancelled one sided, but in Istisna, it could be cancelled, if production is not started yet.

Type of Bai according to Quality

Bai Salah Bai Fasid Bai Batil Bai Maqoof Bai Majool Bai Mu’Ajal

Type of Bai according to Quality

Bai Majool Bai Muqayaddah Bai Mu’ajal

Thank You.