Introduction to islamic banking & finance june 2010 1

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  • Presentation on Islamic Banking Services Ali Rehman, Vice President, Askari Islamic
  • Presentation on Islamic Banking Services Ali Rehman, Vice President, Askari Islamic
  • Introduction to islamic banking & finance june 2010 1

    1. 2.
    2. 3. <ul><li>Introduction to Islamic Banking Products </li></ul><ul><li>PRESENTED BY </li></ul><ul><li>Ali Rehman </li></ul><ul><li>Vice President </li></ul><ul><li>Askari Bank Ltd. Islamic Banking Services </li></ul><ul><li>Disclaimer: Views expressed here in a personal capacity. </li></ul>
    3. 4. <ul><li>ISLAMIC BANKING PRODUCTS & THEIR OPERATIONAL MECHANISIM </li></ul>
    4. 5. <ul><li>All transactions are asset-based </li></ul><ul><li>It is socially-responsible banking because it operates under Shariah restrictions </li></ul><ul><li>Does not permit financing of prohibited goods / Industries </li></ul>Islamic Banking
    5. 6. Main Financial Contracts/ Islamic Modes
    6. 7. Islamic Mode Description Basis of Shariah Permissibility Murabaha Cost + Profit Sale Quran, Sunnah & Ijma’Consensus Istisnaá Sale on Order Sunnah & Ijma’Conses Salam Commodity Sale Quran, Sunnah & Ijma’Consensus Ijarah Leasing Quran, Sunnah & Ijma’Consensus Musharakah Joint Venture Profit Sharing Quran, Sunnah & Ijma’Consensus Mudarabah Trustee Profit Sharing Quran, Sunnah & Ijma’Consensus
    7. 8. MURABAHA Islamic Mode Description Basis of Shariah Permissibility Murabaha Cost + Profit Sale Quran, Sunnah & Ijma’Consensus
    8. 9. MURABAHA <ul><li>Murabaha is a particular kind of sale where the seller discloses its cost and profit charged thereon. </li></ul><ul><li>The price in this sale can be both on spot and deferred. </li></ul>
    9. 10. MURABAHA <ul><li>The product of Murabaha that is being used in Islamic banking as a mode of finance is something different from the Murabaha used in normal trade . </li></ul><ul><li>This transaction is concluded with a prior promise to buy, submitted by a person interested in acquiring goods through the institution. </li></ul>
    10. 11. MURABAHA <ul><li>It is called Murabaha to the purchase orderer . </li></ul><ul><li>It is a bunch of contracts completed in steps and ultimately suffices the financial needs of the client. </li></ul><ul><li>The sequence of their execution is extremely important to make the transaction Shariah compliant. </li></ul>
    11. 12. MURABAHA <ul><li>As it is a kind of sale, there must be a seller and buyer and some thing that is bought and sold . The institution is the seller and the client is buyer. </li></ul><ul><li>It cannot be used as a substitute for running finance facility , which provides cash for fulfilling various needs of the client. </li></ul>
    12. 13. MURABAHA <ul><li>Step by Step Murabaha </li></ul>
    13. 14. MURABAHA <ul><li>1- Promise stage </li></ul><ul><li>Stage One (a) for Murabaha financing </li></ul><ul><li>1. Client approach the bank for facility through Murabaha. </li></ul><ul><li>Facility Approved </li></ul>Bank Client
    14. 15. MURABAHA <ul><li>Stage One (b) for Murabaha financing </li></ul><ul><li>Client and bank sign an agreement to enter into Murabaha. </li></ul><ul><li>Murabaha Facility </li></ul><ul><li>Agreement </li></ul><ul><li>MOU </li></ul>Bank Client
    15. 16. MURABAHA <ul><li>Promise stage </li></ul><ul><li>Stage One (c) for Murabaha financing </li></ul><ul><li>Client submit the purchase requisition to the bank. </li></ul><ul><li>Purchase requisition/ </li></ul><ul><li>Promise to the bank. </li></ul>Bank Client
    16. 17. MURABAHA <ul><li>Agency stage </li></ul><ul><li>Client appointed as agent to purchase goods on bank’s behalf </li></ul><ul><li>Agreement to Murabaha </li></ul><ul><li>Agency Agreement </li></ul>Bank Client
    17. 18. MURABAHA <ul><li>Agency stage Stage Two for Murabaha financing </li></ul><ul><li>Bank gives money to supplier through client’s account for purchase of goods. </li></ul><ul><li>Agreement to Murabaha Agreement of Purchase </li></ul><ul><li>Disbursement to the Supplier </li></ul>Bank Supplier Client
    18. 19. ISTISNA Islamic Mode Description Basis of Shariah Permissibility Istisnaá Sale on Order (Manufacturing Goods) Sunnah & Ijma’Conses
    19. 20. ISTISNA <ul><li>Istisna is the second exception where a sale is allowed of goods before they come into existence </li></ul><ul><li>It relates to goods that require manufacturing </li></ul><ul><li>If the manufacturer undertakes to manufacture goods with material available with the manufacturer </li></ul><ul><li>It is necessary for the Istisna transaction that price is fixed </li></ul><ul><li>And necessary specifications of the product are defined </li></ul>
    20. 21. ISTISNA <ul><li>The Istisna contract creates a moral obligation on the manufacturer But both parties may unilaterally cancel the contract before work starts After work starts, cancellation requires mutual consent. </li></ul>
    21. 22. SALAM Islamic Mode Description Basis of Shariah Permissibility Salam Commodity Sale (Agricultural Products in Advance) Quran, Sunnah & Ijma’Consensus
    22. 23. SALAM <ul><li>Salam was allowed by the Prophet (SAW) subject to certain conditions </li></ul><ul><li>The basic purpose was to meet the needs of small farmers </li></ul><ul><li>Who needed money to grow their crops And to feed their families till the time of harvest. </li></ul>
    23. 24. SALAM <ul><li>Since, after the prohibition of Riba </li></ul><ul><li>They could not borrow money on interest </li></ul><ul><li>Hence they were allowed to sell their agricultural products in advance. </li></ul>
    24. 25. SALAM <ul><li>Salam is where the seller undertakes to supply some specific goods to the buyer </li></ul><ul><ul><li>At a future date </li></ul></ul><ul><ul><li>Against an advance price, fully paid at spot </li></ul></ul><ul><li>Hence, the price / Payment is in Advance </li></ul><ul><li>But the supply is deferred </li></ul>
    25. 26. IJARAH Islamic Mode Description Basis of Shariah Permissibility Ijarah Leasing Quran, Sunnah & Ijma’Consensus
    26. 27. IJARAH <ul><li>Ijarah is a term of Islamic Fiqh Literally, it means “To give something on rent” </li></ul><ul><li>The term “Ijarah” is used in two situations </li></ul><ul><li>It means ‘To employ the services of a person on wages’ e.g “A” employs “B” to work at his office, and pays him salary for his work </li></ul><ul><li>“ A” hires a porter at the airport to carry his luggage </li></ul>
    27. 28. IJARAH <ul><li>2. Another type of Ijarah relates to paying rent for use of an asset or property </li></ul><ul><li>The 2nd type of Ijarah is relevant to our discussion </li></ul><ul><li>This Ijarah is analogous to the English term “Leasing” </li></ul>
    28. 29. IJARAH <ul><li>Rules governing Ijarah are similar to the rules governing sale </li></ul><ul><li>Because in both cases something is transferred from one person to another </li></ul><ul><li>The only difference is: </li></ul><ul><li>In case of sale, title of property is transferred to Buyer </li></ul><ul><li>In case of Ijarah, title remain with the Lessor </li></ul><ul><li>Only the use of the property is transferred to Lessee </li></ul>
    29. 30. MUSHARAKAH Islamic Mode Description Basis of Shariah Permissibility Musharakah Joint Venture Profit Sharing Quran, Sunnah & Ijma’Consensus
    30. 31. MUSHARAKAH <ul><li>Derives from “Shirkah” </li></ul><ul><li>Literal Meaning – Sharing </li></ul><ul><li>In the context of business, it means partnership in a venture Such that the participants share the profit & loss </li></ul><ul><li>In modern banking, Musharakah can provide a viable alternative to interest-based transactions </li></ul>
    31. 32. MUSHARAKAH <ul><li>Interest determines a fixed rate of return </li></ul><ul><li>Return in Musharakah is based on actual profit & loss </li></ul><ul><li>Interest-bearing transaction–Financier cannot suffer loss </li></ul><ul><li>Musharakah transaction -Financier can suffer loss </li></ul>
    32. 33. MUSHARAKAH <ul><li>Basic rules of Musharakah </li></ul><ul><li>Distribution of profit: </li></ul><ul><li>The ratio of profit distribution should be agreed at the time of execution of contract </li></ul><ul><li>Otherwise contract is void </li></ul><ul><li>The Profit Sharing will be according to agreed ratio. </li></ul><ul><li>Loss must be shared strictly according to Capital. </li></ul>
    33. 34. MUDARABAH Islamic Mode Description Basis of Shariah Permissibility Mudarabah Trustee Profit Sharing Quran, Sunnah & Ijma’Consensus
    34. 35. MUDARABAH <ul><li>This is a kind of partnership where one partner gives money to another for investing in a commercial enterprise. </li></ul><ul><li>The investment comes from the first partner who is called “Rab-ul-Mal” (Investor) </li></ul><ul><li>The management and work is an exclusive responsibility of the other, who is called “Mudarib” (Working Partner) </li></ul><ul><li>Profit is shared as per agreed ratio </li></ul><ul><li>In case of Mudarabah all losses are borne by Rab-ul- Mal </li></ul>
    35. 36. MUDARABAH <ul><li>Types of Mudarabah </li></ul><ul><li>Al Mudarabah Al Muqayyadah (Restricted Mudarabah) </li></ul><ul><li>Al Mudarabah Al Mutlaqah </li></ul><ul><li>(Unrestricted Mudarabah) </li></ul>
    36. 37. MUDARABAH <ul><li>Authority of Rab-ul Maal </li></ul><ul><li>Rab-ul-Mal has authority to: </li></ul><ul><li>a)  Oversee the Mudarib’s activities and </li></ul><ul><li>b) Work with Mudarib if the Mudarib consents. </li></ul>
    37. 38. MUDARABAH <ul><li>Different Capacities of the Mudarib </li></ul><ul><li>Ameen (Trustee): The money given by Rabb-ul-maal (investor) and the assets required therewith are held by him as a trust. </li></ul><ul><li>Wakeel (Agent): In purchasing goods for trade, he is an agent of Rabb-ul-maal. </li></ul><ul><li>Shareek (Partner): In case the enterprise earns a profit, he is a partner of Rabb-ul-maal who shares the profit in agreed ratio. </li></ul>
    38. 39. MUDARABAH <ul><li>4 . Zamin (Liable): If the enterprise suffers a loss due to his negligence or misconduct, he is liable to compensate the loss. </li></ul><ul><li>5 . Ajeer (Employee): If the Mudarabah becomes Void due to any reason, the Mudarib is entitled to get a fee for his services. </li></ul>
    39. 40. MUDARABAH <ul><li>Termination of Mudarabah </li></ul><ul><li>Mudarabah can be terminated any time by either of the two parties by giving notice. </li></ul><ul><li>If Mudarabah was for a particular term, it will terminate at the end of the term. </li></ul><ul><li>Termination of Mudarabah means that the Mudarib cannot purchase new goods for the Mudarabah. However, he may sell the existing goods that were purchased before termination. </li></ul>
    40. 41. Islamic banking turns to Afghanistan <ul><li>After the success of Islamic banking in Pakistan, local banks want to steer towards Afghanistan which is a rapidly emerging market for the financial industry. </li></ul>
    41. 42. Islamic banking turns to Afghanistan <ul><li>Experts related to the industry ,they said Islamic banking and insurance have shown significant progress in recent years in Pakistan, compared to conventional banks. </li></ul><ul><li>Now, it is time for Pakistan’s banks to enter the fast emerging market of Afghanistan and lead the banking sector in Islamic banking. </li></ul>
    42. 43. Islamic banking turns to Afghanistan <ul><li>Afghanistan and Pakistan have a strong potential for Islamic banking </li></ul><ul><li>Afghanistan is interested in Islamic banking but it lacks human resources and technical expertise. </li></ul><ul><li>We can utilize our potential in Afghanistan </li></ul>
    43. 44. What distinguishes Islamic banking from conventional banking?
    44. 45. Documents <ul><li>“ Conventional Banks deal in Documents” </li></ul><ul><ul><ul><li>Transaction Documents (“Loan Creation”) </li></ul></ul></ul><ul><ul><ul><li>Security Documents </li></ul></ul></ul><ul><li>“ Islamic Banks deal in Goods and Documents” </li></ul><ul><ul><ul><li>Transaction (Process) Documents (“Debt Creation”) </li></ul></ul></ul><ul><ul><ul><li>Security Documents (similar) </li></ul></ul></ul>
    45. 46. Basic Difference between Islamic and Conventional Modes of Finance Conventional Mode Bank Client money money + money (interest)
    46. 47. Basic Difference between Islamic and Conventional Modes of Finance Islamic Transaction Bank Client Goods & Services money
    47. 48. Conventional Vs Islamic Economics Difference in Factors of Production <ul><li>Conventional Islamic </li></ul><ul><li>Land Land </li></ul><ul><li>Labour Labour </li></ul><ul><li>(+Entrepreneur) (incl. Entrepreneur) </li></ul><ul><li>Capital </li></ul>Capital Conversion
    48. 49. Key Misconceptions
    49. 50. “ Islamic banking looks the same as conventional banking” A halal meat and haram meat may look exactly the same but one is permissible while the other is not Key Misconceptions
    50. 51. “ A fixed rate of return is not permitted under Islamic Shariah” <ul><li>Fixed return does not make a transaction halal or haram </li></ul><ul><li>For example: </li></ul><ul><ul><li>Profit on trading </li></ul></ul><ul><ul><li>Rent on property </li></ul></ul>Key Misconceptions
    51. 52. Onus Shifts!! Client Halal Restaurant Halal Abattoir/ Butcher Client Islamic Bank Shariah Advisor Onus Onus Onus Onus
    52. 53. <ul><li>ANY QUESTION? </li></ul>?
    53. 54. <ul><li>Jazakumullah! </li></ul>
    54. 55. Thank You CENTER OF ISLAMIC BANKING & ECNOMICS Head Office:   192- Ahmad Block, New Garden Town , Lahore, Pakistan  Ph: +92-42-35913096-8, 35858990, 38407850  Fax: +92 -42-35913056 E-mail :  [email_address] Web: www.alhudacibe.com

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