Presentation on Islamic Banking

Members:

M. Yasir13

Shahid Hassan 09

Hassan Aziz11

M.Shahzad Saleem20

M. Haroon 40

Muzamil.ul.Rehman55

Yasir Malik 1 3

Abstract• Islamic banking has been in practice for long but

started receiving due attention and high popularity• Islamic banking continues flourishing the way it is at

present. • Therefore advancements and achievements of

Islamic banking , there remains number of controversies over various underlying concepts and practices

Islamic Banking and Finance

• The Islamic banking and finance is a system designed to allow Muslims to deal with their financial affairs in accordance with their faith. Islamic banking today is an industry that is still evolving. • Islamic finance, is the absence of interest. Interest,

known as Riba• It is compulsory for Muslims to completely avoid

Riba in their commercial and non-commercial daily activities. It is even suggested that a shadow of interest will make a transaction haram.

The Growth of Islamic Banking

• Growth of Islamic Banking have following outcomes• economic growth • Financial products based on the risk-sharing and

profit-sharing• provide acceptable financial returns for investors• Islamic banks are most active are in trade and

commodity finance and leasing

Theoretical basis of Islamic Banking

• Many products offered by the Islamic banks similar conventional banking but there are some norms which are exclusive to Islam. • Even some principles render certain conventional banking

practices and transactions void. Before the introduction of Islamic Banking, all the Muslim customers rely on the conventional banking practices. • Islamic banks products were no way near to the principles of

Islam as the conventional banking products revolve around the earnings of interest (Riba) which is clearly prohibited in Islam.

Conti…• The main Basics principles of Islamic Banking is

derived from QURAN & SUNNAH. • Uncertainty, Gharar, Riba are strictly prohibited in

Islamic modes of financing• In modern world Islamic banking the fatwas are

taken from highly knowledgeable, credible and trustful ulma while offer a mode of financing.• Muslim countries to establish and develop the

financial institutions which were in accordance with the Islamic Laws and Shariah Principles

Shahid Hassan 09

History and Development of Islamic banking

• The modern history of Islamic banking can be traced back to 1960s. It was not until last decade that Islamic banking emerged as an established player on financial scene. • Middle East and Malaysia remains hub of Islamic finance though

most important development is emergence of non-Muslim countries as powerful centers of Islamic banking and finance. • The idea of Islamic banking was first developed in the 1950’s and

the first generation of Islamic investment banks were created in Egypt and Malaysia in the early 1960’s• Due to the success seen in countries like Dubai; (Dubai Islamic

Bank), and Bahrain; (Al-Baraka),

Conti…..• Islamic banks in U.K by narrating that the first Islamic bank to operate

in the United Kingdom was in the early 1980’s, Al-Baraka bank• In 1982 the Al-Baraka Investment Company acquired Hargrave

Securities, which at the time was licensed to accept deposits, when it was acquired by Al-Baraka the company was established as the first Islamic bank to serve high net worth Arabs who spent the summer in London. • Al-Baraka bank offered for the first time to Muslims in the UK

investment deposit facilities on a Mudaraba basis, the increase in demand from 1983 to 1991 of £23 million to £154 million showed that clearly the demand for Islamic banking within the UK was evident. • In 1997 the United Bank of Kuwait entered the housing market basing

it upon a Murabaha instalment structure.

Modes of Islamic Financing:

o Murabahao Ijaraho Musharakah (joint venture)o Istisnao Takaful (Islamic insurance)o Bai Salamo Mudarabaho Sukuk (Islamic bonds)

MurabahaThis concept refers to the sale of goods. such as

i. real estateii. Commoditiesiii. Vehicle

In which Murabaha the purchase and selling price, other costs, and the profit margin not interest are clearly stated at the time of the sale agreement.

Ijarah

• Ijarah means lease, rent or wage. Generally, the Ijarah concept refers to selling the benefit of use or service for a fixed price or wage.• Under this concept, the Bank makes available to the customer

the use of service of assets / equipment such as plant, office automation, motor vehicle for a fixed period and price.

Musharakah (joint venture)

Musharakah is a relationship between two parties or more that contribute capital to a business and divide the net profit and loss pro rata.

This is often used in • investment projects, • letters of credit,• purchase or real estate or property.

In the case of real estate or property, the bank assess an imputed rent and will share it as agreed in advance. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions.

Hassan Aziz 11

IstisnaIstisna (Manufacturing Finance) is a process where payments are made in stages to facilitate the work of manufacturing / processing / construction. An installment of Istisna, for example, may enable a construction company to finance construction of sections of a building or help manufacturers pay for an order of raw materials. Istisna helps use of limited funds to develop higher value goods/assets in different stages / contracts.

Takaful (Islamic insurance)

Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers.

Bai SalamBai 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. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.

Mudarabah• "Mudarabah" or Profit-and-loss sharing contract is a kind of

partnership where one partner gives money to another for investing it in a commercial enterprise. The capital investment should normally come from both partners. Both should have some skin in the game. • The Mudarabah (Profit Sharing) is a contract, with one party

providing 100 percent of the capital and the other party providing its specialized knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to a pre-agreed ratio. If there is a loss, the first partner "rabb-ul-mal" will lose his capital, and the other party "mudarib" will lose the time and effort invested in the project the profit is usually shared 50%-50% or 60%-40% for rabb-ul-mal.

Sukuk (Islamic bonds)• Sukuk (Arabic: كوكPص, plural of صك Sakk, "legal instrument,

deed, check") is the Arabic name for financial certificates, but commonly referred to as "sharia compliant" bonds. • Sukuk are defined by the AAOIFI (Accounting and Auditing

Organization for Islamic Financial Institutions) as "securities of equal denomination representing individual ownership interests in a portfolio of eligible existing or future assets.“• Sukuk securities are structured to comply by not paying

interest. This is generally done by involving a tangible asset in the investment. For example, by giving partial ownership of a property built by the investment company to the bond owner who collect the profit as rent, which is allowed under Islamic law. Upon expiration of the Sukuk, the rent payments cease.

M.Shahzad Saleem 20

Current Status of Islamic Banking:

• The US had an appealing banking system and naturally attracted overseas investors, including those oil-rich wealthy Muslims. Conflict between the US and Middle-East erupted in 2001 following terrorist attacks

• many Muslims closing their US banking services and seeking new places to deposit their money

• The current climate in the Islamic banking proves that the UK is still able to prove itself as innovative in the products which it is continuously developing

• stricter laws regarding intellectual property rights the UK has now a major impact on the Islamic banking sector world-wide

Britain Initiative

• Bank of Britain (IBB) being the first Islamic institution in the world to offer Murabaha treasury deposit accounts, proving that dynamic economies have innovative financial sectors• The government’s role in making Islamic banking the hub for

Islamic finance is crucial and in the early days the government’s actions were limited but this was due to their limited knowledge of the Islamic banking sector.• The consortium gained the approval of the Financial Services

Authority (FSA) and opened their first branch on Edgware Road in September 2004 and had the headquarters in Birmingham calling the bank ‘The Islamic Bank of Britain’

Conti….• locations of the branch and headquarters are very significant as

they were placed in the two areas of the UK with the highest density of Muslim population, to achieve the exposure they required so. • This increased to five branches by the end of 2005, showing that

the demand for Islamic banking and finance was always there, drawing great similarities to Al-Baraka Bank in the early stages of Islamic Finance in the UK.• These were the hurdles which restricted Murabaha, Ijarah and

diminishing Musharakah. Comment that due to the relative infancy of Islamic Banks the importance of their products must compare well to those of the conventional banks as many of the high street banks now have Islamic windows within their branches

Cont.…..• A method currently being used to achieve a larger number

of retail deposits from Muslims specifically is the attempt to attract administration of Masjids and Madarasahs, as these Muslims are the important figures within Muslim communities and attracting their investment will undoubtedly• The recent rise in oil prices has meant that the Gulf region

has increased in liquidity surpluses and due to the saturation of the Gulf markets themselves there has been a demand for the money to be invested in other locations and the demand for financial assets has consequently risen because of this.

M. Haroon 40

Major Challenges Faced by Islamic Banking &

FinanceThe first challenge relates to building the capacity to

manage the increasing uncertainties generated by financial innovation, the increasing prominence of the non-regulated sector and the increasing interconnectedness between financial institutions and markets. Such developments have not only resulted in the emergence of new risks to the financial system but have also changed the dynamics of how risks in the financial system are transmitted to the real economy.

In this environment, it is vital to have a legal and regulatory framework that is robust and dynamic enough to enable the central bank to respond to these developments.

Conti……The second challenge concerns the effective

implementation of financial safety nets and the effective coordination of the different components of the safety net to maintain public confidence and to support continuous financial intermediation.

Appropriate legislation and regulations that ensure credibility and integrity of the safety nets are an essential part of maintaining financial stability.

Regulatory problems arise not only because of the need for domestic regulators – operating within diverse national regulatory norms and cultures – to cooperate and coordinate in the domestic environment but also across jurisdictions

Conti……The third challenge relates to the increasingly and highly

complex financial and economic integration associated with globalization. This has resulted in a significant expansion in cross-border financial activities and introduced new sources of risks to domestic financial systems. The recent crisis raised many issues for which clear solutions, or even consensus, have yet to emerge, suitable approaches to cross-border resolutions, and the significant challenge of coordinating policies across different legal and institutional frameworks.

Operational and legal issues in cross-border resolution arise where the regulatory frameworks of different countries do not provide for a common solution in areas such as the unwinding of financial transactions and the enforceability of secured parties' rights to collateral in the foreign jurisdiction.

Conti….. The fourth challenge in Islamic Banking & finance is accounting

& auditing standards. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has made an important regulatory beginning. It seeks to support the faith of Islam by developing accounting standards for Islamic investment vehicles and by conducting related training and publicity.

It also expects to strengthen the effectiveness of Sharia committees by facilitating evaluation of emerging financing instruments and by aiding in the implementation of Islamic ethics. The agency merits close monitoring by Western bankers and their accountants, given the rapidly growing asset base of Islamic financial institutions.

Muzamil.ul.Rehman 55

An Islamic Perspective on Capital Markets

CAPITAL MARKET

A market in which individuals and institutions trade financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets. 

Capital Market

Stock Market

Bond Market

Primary Market

Secondary Market

ISLAMIC CAPITAL MARKET

• According to Islamic Capital Market Task Force report

“Islamic capital market is a market where investment , financing activities and products are structured in accordance with shariah principles”.

• Bursa Malaysia's

“The Islamic Capital Market (ICM) refers to the market where activities are carried out in ways which doesn’t conflict with the principles of Islam”.

The importance of capital markets in Islamic financial system also stems from the fact that Islam prohibits interest and encourages trade.

HISTORY OF ICMIslamic Finance starts in 1961 in Egypt by establishing the earliest Islamic

Bank [Mit Ghimar Bank]

Structured Involvement of Islamic Finance in Financial Markets started in the decades of 1970 and 1980’s by establishing many Islamic Banks, Takaful and Investment companies.

Boost in Islamic Capital Markets came after financial liberalization. ICM started in 1980s in Malaysia while in Bahrain, Pakistan and some other countries in early 1990s

COMPONENT OF ICMMarkets: Products:

Sukuk Market Mudarbaha Sukuk

Equity Market Ijarah Sukuk

Derivative Partnership

Sukuk

Commodity Market Ordinary Stocks

Forex and Money Market Preferred Stocks/Warrants

Mutual Funds

Single Stock Futures

Controversies face by the Islamic banking

• Islamic banking based on Shariah board therefore .These Shariah Boards normally consist of a number of shariah scholars who have well equipped with shariah and finance knowledge. However, due to the limited number of scholars who are well versed in both finance and religion, the Shariah boards tend to be overburdened and the approval process becomes difficult and unpredictable. • the number of shariah scholars is very low. It would be around

the range of 250 – 300 which is quite less than what it should be. Out of these numbers, around 15 – 20 are most sought (Bokhari, 2008). It is widely criticised that these scholars are making millions of dollars every year.

Conti….• The rapid growth of Islamic banking has meant that the

industry has not been able to produce enough experts needed to support this growth. At present, many professionals interested in working in this industry have not had enough time to gain the required experience to enable them to competently manage or advice on Islamic financial transactions. • In general, Islamic assets are of long-term in nature and

relatively illiquid. However, under normal market conditions, the mismatch between the duration of assets which are long-term and illiquid and the liabilities which are short-term can present serious challenge for the Islamic banking• short coming of qualified professionals scholar