This presentation describes the role and development of islamic banking in financial sector

1. Islamic Banking and Development:
An Alternative Banking Concept?
Collective Presentation by Monzer Kahf, Ausaf Ahmad, & Sami Homud
IRTI 1998
Islamic Perspectives in Business
Prepared by
Bobby Darmawan – CGA110107

2. Financial Sector Outlook: Regulatory Reforms, Islamic
Finance, & Risk Management, guest lecture for UM by Anita
Menon, April 2012.

4. Essential Islamic Economic System
Principles Sources
God created the whole universe
and made it subject and
available to men and women to
use and benefit from. Sahih International
It is He who made the earth tame for you - so walk among its slopes and eat of His
provision - and to Him is the resurrection ( QS Al-Mulk, 67:15)
Rasulullah SAW,” A believer will never be satisfied of doing good until he finally reaches
Heaven”
Ethical & moral values are
integrated in and interwoven
with recommended patterns of Sahih International
personal behavior as well as And those within whose wealth is a known right. For the petitioner and the deprived (QS
inter-personal transactions. Al-Ma’arij, 70:24-25)
Rasulullah SAW,” He who cheats is not one of us”
www.quran.com

5. Essential Islamic Economic System
Principles Sources
Justice, fairness, and standing
against oppression and
exploitation are hallmarks of the
Islamic socio economic-order. The
word justice and it’s derivative is
the third most repeated words
after “Allah” and “knowledge” Sahih International
O you who have believed, be persistently standing firm in justice, witnesses for Allah , even if
it be against yourselves or parents and relatives. Whether one is rich or poor, Allah is more
worthy of both. So follow not [personal] inclination, lest you not be just. And if you distort
[your testimony] or refuse [to give it], then indeed Allah is ever, with what you do, Acquainted
(QS An-Nisa’ 4: 135)
Islam enjoins that people should
help each other, share the
bounties of God with each other
and cooperate with each other in
all that is good
Sahih International
O you who have believed, do not violate the rites of Allah or [the sanctity of] the sacred
month or [neglect the marking of] the sacrificial animals and garlanding [them] or [violate the
safety of] those coming to the Sacred House seeking bounty from their Lord and [His]
approval. But when you come out of ihram, then [you may] hunt. And do not let the hatred of
a people for having obstructed you from al-Masjid al-Haram lead you to transgress. And
cooperate in righteousness and piety, but do not cooperate in sin and aggression. And fear

6. Islamic Financial System
• A commerce law known as fiqh al-mu'amalat
is the basis for the Islamic financial system.
• Issues of social justice, equity, and fairness in
all business transactions, and rests on the
promotion of entrepreneurship, the
protection of property rights, and the
transparency and sanctity of contractual
obligations.
• A commercial transaction is permissible as
long as it is free from Riba (interest), gharar
(uncertainty), maisir (gambling), and non-halal
(prohibited) activities. Ariss (2010)

7. Islamic Banking & The Purpose
• QS Al-Baqarah, 2:275
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands
who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like
interest." But Allah has permitted trade and has forbidden interest. So whoever has
received an admonition from his Lord and desists may have what is past, and his affair rests
with Allah . But whoever returns to [dealing in interest or usury] - those are the companions
of the Fire; they will abide eternally therein.
• QS Al-Baqarah, 2;276,278; QS Ali Imran, 3:130; QS An-Nisa, 4:161; QS Al-
Ma’idah, 5:62; QS Al-An’Am ,6:146; QS Al-Isra, 17:64; QS Ar Rum, 30:39.
www.quran.com

8. Islamic Banking & The Purpose
Siddiqi (2001)
• Islamic banking is founded mainly on the
prohibition of riba and sharia based finance
institution.
• To provide an Islamic alternative to the
conventional system that is based on riba. As
an alternative to riba, the profit and loss
sharing arrangement are held as an ideal
model of financing in Islamic finance.

9. Required condition for Islamic Banking
• Complete Segregation of Funds
• Shari’a Supervisory Board
• Managerial Commitment
• Safeguarding Muslim Investors' Funds
• Compliance with AAOIFI (The Accounting and
Auditing Organization for Islamic Financial
Institutions) Standards

10. Conventional Banks
VS
Islamic Banks
Similarities:
Same core of their business (intermediation)
Profit-Maximizing
Their products are somehow similar in their essence.

11. Conventional Banks
VS
Differences : Islamic Banks
Features Conventional Banking Islamic Banking
Reward for depositors Investors get a pre- determined return Risk is shared between depositors and
while bank bears the risk the Islamic bank through Profit Sharing
Investment Accounts (PSIA) where
reward is variable.
Risk sharing with borrowers Borrowers are asked to pay certain rate Share the risk with borrowers through
of pre-determined interest plus the Mudarbah & Musharkah contracts
installments
Prohibition No as long as match with bank’s criteria Prohibition on several financial
instruments TOXIC derivatives & haram
goods project related
Social responsibility Does not exist ZAKAT deducted by bank according to
savers’ approval
Source of borrowing Has the ability to easily acquire those Cannot opt to interbank markets or
mechanisms. money markets
Credit consideration Credit worthiness of their clients Viability and the worthiness of the
projects

12. Islamic Banking Products
Investment Definition
Musharakah A joint enterprise formed conducting some business in which all partners
share the profit according to pre agreed ratio while loss is shared according
to the ratio of contribution
Mudaraba Profit is shared according to agreement while loss is born by capital provider
only
Al-Wadiah People keep money with the Islamic bank. It is known as deposit.

13. Islamic Banking Products
Financing Definition
Diminishing Musharaka A form of declining partnership between IFI and client generally
used to finance real estates.
Bai Salam A form of sale contract where by IFIs purchase goods for spot
payment with deferred delivery
Bai Muajjal Is deferred / credit sales used this mode to finance the customers’
needs by supply of desired commodities.
Istasna Designed to transect business through an order to manufacture
Istasna and/or supply
Ijara A rental contract whereby IFI leases an asset for a specific rent and
period to the client. Ownership risks of the asset are born by IFI
while expenses relating to use the asset are the responsibility of
client. The difference between Ijara and sale is that ownership in
Ijara remains with lesser while in case of sales it is transferred to
purchaser.

14. Islamic Banking Products
Financing Definition
Bai Bisaman Ajil Bank sells goods or real property to a customer with deferred
payment facility usually by installments.
Ijarah Muntahia Bittamlik A service providing contract whereby an agreement is made
(bai al-tajiri, ijarah summa between two parties. One party agrees to provide certain services
al-bai and kiraa waqtina. (known as service provider) to other party and the other party
Ijarah) (known as service receiver) agrees to pay for the services
provided.
Istasna
Ujrah Is deferred / credit sales used this mode to finance the customers’
needs by supply of desired commodities.
Al-qardul Hasan Benevolent loan given to a needy person for a fixed period of
time.
Murabaha A cost-plus sale contract whereby disclosure of cost to the buyer
is necessary. Under Murabaha arrangement customer requests to
the Islamic Financial Institution (IFI) to purchase an asset for him
(customer) and sell on deferred payment.

15. Islamic Banking Products
Financing Definition
Wakalah An agency contract between the principal and the agent. The principal is
known as muakkil and the agent is known as wakil. In wakala contract, the
wakil agrees to perform a certain act on be half of the muwakkil
for payment as agreed by the parties.
Ar-Rahnu Charge or pledge or mortgage. In ar-rahnu, borrower of money puts his
valuable property such as land, building, gold jewellery etc. as charge to
secure the loan he takes from an Islamic bank.
Istasna
Kafala Guarantee. It is an alternative to ar-rahnu. Islamic bank can provide qard al-
hasan or credit facility to someone if another person becomes a guarantor
for the loan or the credit.

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17. Criticisms and challenges of Islamic
Banking:
Lack of a unified or universal authority that
assures the compliance of Islamic banking
products and services with Shari‘ah interpretation
No unified set of rules and guidelines for
adoption by all Islamic banks and financial
institutions all over the world.
Lack or the limited number of well equipped
Islamic finance experts who are aware of both
Islamic and conventional banking products

18. Criticisms and challenges of Islamic
Banking:
Form of liquidity imbalances, long- term assets
funded by short-term liabilities
Islamic banks cannot opt to the interbank
Face a fierce competition with their
counterparts of conventional banks

19. Conclusion:
Basic principles of Islamic Banking align
harmoniously with reality and the human nature
Put attention to community (Zakah)
Growth in challenging opportunity
Less risky and more profitable (Kyeong 2012)

20. Conclusion:
Basic principles of Islamic Banking align
harmoniously with reality and the human nature
Put attention to community (Zakah)
Growth in challenging opportunity

21. References :
1. Kahf, Ahmad, Homud. 1998. Islamic banking and development: an alternative concept?
2. Jalil, Rahman. 2010. Financial transactions in islamic banking are viable alternatives to the
conventional banking transactions. International Journal of Business and Social Science. Vol. 1 No. 3; December 2010
3. Menon . 2012. Financial sector outlook: regulatory reforms, islamic finance, & risk management,. Public lecture
for UM April 2012.
4. Siddiqi, M.N., 2004. Riba, Bank interest and the rationale of its prohibition. Islamic Research & TrainingI nstitute
Jeddah.
5. Ernst & Young. 2012. A brave new world report of sustainable growth: report 2011-2012. The world islamic
banking competitiveness report.
6. Islamic banking…principles and challenges. May 2012. Alex Bank Working Paper
7. Kyeong P. R. 2012. A Comparative Study between the Islamic and Conventional Banking Systems and Its
Implications. Scholarly Journal of Business Administration, Vol. 2(5) pp.48-54 May, 2012