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Islamic Banking is growingrapidly in the world by15-20% annually.Estimated $270 billionin assets is controlledby Islamic banks of theworld(Total asset base of all Islamicbanks estimated at $950billion)
Future projection suggests that Islamic banks willhold 40% to 50% of the savings of the world’s1.67 billion Muslims in 8 to 10 years, accordingto the International Islamic Finance Forum. United Kingdom Netherlands France United States Germany Middle East India Malaysia Indonesia
More than 500 Islamic banksand investment firms existglobally according to theBahrain based General Council forIslamic Banksand Financial Institutions.
Islamic Finance and Bankingis now worth around USDollar 1 trillion and isdestined to grow more than the rate of conventional investing, according to analysts at Deloitte & Touche.
Malaysian based Islamic FinancialServices and Saudi Arabian IslamicDevelopment Bank are projecting themarket to grow toUS Dollar 1.6 trillion by 2012.
Islamic finance industry continues to escape the full force of current economic turmoil.What is clear is that the rapid growth in this area of finance and its ethical foundations make Islamic finance an increasingly serious alternative to conventional finance.
The concepts of Islamic Financehave been around since theorigination of Islam itself.
In traditional finance...Interest is earned forlending money,and is paid for borrowingmoney.
Earning Interest is prohibited! Shariah prohibits usury or lendingWhy? FOR THE PROHIBITION:RATIONALE money at an exorbitant rate of interest (Riba).The Qur’an contends that an element of injustice is found intrinsically in interest. It says to give up whatever remains of Riba such that ‘Neither you wrong, nor be wronged.’ (Lit. Al Dhulm) Some injustices of Riba: -Indirectly encouraging systematic competition amongst participants -Concentrating wealth with the rich at the expense of the poor -Fueling an endless unsustainable disproportionate economic growth In Islamic finance...
Earning Interest is prohibited! Shariah prohibits usury or lendingWhy? money at an exorbitant rate of interest (Riba).RATIONALE FOR THE PROHIBITION:Money has no intrinsic value – it is only a measureof value, and since money has no value itself,there should be no charge for its use. Therefore,Islamic Finance is said to be asset based asopposed to currency based. In Islamic finance...
Other prohibitions: Masir, which is involvement in speculative and gambling transactions Gharar, which is uncertainty about the terms of contract or the subject-matter, e.g. prohibits selling something which one does not own Investment in businesses dealing in alcohol, drugs, gambling, armaments, etc. which are considered unlawful or undesirable
The Big Question Again...How do they earn in Islamic Finance
In traditional finance...Lender is guaranteed by theborrower regardless of theproject/investment’s outcome.
Risk in any transaction must be sharedbetween at least two parties so thatthe provider of capital and the user(entrepreneur) share the business riskin return for a share in profit In Islamic finance...
In summary...Islamic Conventional Functions and Functions and operations are based operations are based on fully man-made on Shariah principles principles Promote risk-sharing Investor is assured of between provider of pre-determined rate capital (investor) and of interest user of funds (entrepreneurs)
In summary...Islamic Conventional Partners, investor and Lender-Borrower traders, buyer or relationship seller relationship Based on money Encourage asset- trading. Money is a based financing and medium of exchange based on commodity and not a commodity, trading its sale and purchase is prohibited in Islam
In summary...Islamic Conventional Aim at maximizing Aim at maximizing profit but subject to profit without any Shariah restrictions restrictions No right of profit if there is no risk It is almost risk free involved. There is banking and lender profit and loss has no risk of losing sharing, provider may its money because lose money in case of interest is guaranteed loss
Product Tree Islamic Modes of FinancePartnership Trade Based Rental BasedBased Modes Modes ModesMusharaka (EquityParticipation) Murabaha Ijarah (Cost-plus sale) (Leasing)Mudaraba(Partnership Financing)
Partnership Based ModesMusharaka (Equity Participation)The parties involved contribute in varying degrees of assets, technical expertise, etc., and agree to a percentage of the returns as well as the risk.Mudaraba (Partnership Financing)is very similar to Musharaka and is a trustee type finance contract under which one party provides the labour while the other provides the capital.
Trade Based ModesMurabaha (Cost-plus sale)is essentially undertaking a trade with a markup and is used for short-term financing, similar in form to purchase finance.An example would be a bank purchasing a tangible asset of some sort from a supplier with the resale based on the cost plus an agreed markup. This is most often used to finance property, since the bank would not be allowed to charge interest on any loan. Once such a debt covenant is in place between a bank and the customer, repayments can begin until a completion point where the asset is transferred to the customer. There is no interest rate risk which is essentially covered within the markup percentage, identified at the outset.
Rental Based ModesIjarah (Leasing)is a leasing contract whereby one party leases an asset for a specific amount of time and cost from another party, usually a bank. The bank would bear all the risk and a portion of the installment payment goes towards the final purchase of the asset at the time of transfer of asset. This can also be set up as a lease-purchase contract for the term of the asset’s specified lifetime.