Introduction to islamic banking rama raju


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Introduction to islamic banking rama raju

  1. 2. Introduction To Islamic Banking A Direction to the human on a “right path” for good life…..! By P V V Rama Raju President & CEO
  2. 3. <ul><li>General Introduction. </li></ul><ul><li>The Islamic Economic System </li></ul><ul><li>The economic philosophy of Islam vis-à-vis interest </li></ul><ul><li>Distribution of wealth. </li></ul><ul><li>What is Islamic Banking ? And Why is Islamic Banking. </li></ul><ul><li>What is RIBA – it’s prohibition </li></ul><ul><li>Regulations and Legal framework. </li></ul><ul><li>Shariah Principles. </li></ul>Contents – Course Objectives <ul><li>Relationship with Religion and Banking. </li></ul><ul><li>Shariah Laws in Islamic Banking </li></ul><ul><li>Sources and Application of funds under Islamic Banking. </li></ul><ul><li>Various Islamic banking products </li></ul><ul><li>Various International Islamic Financial Institutions. </li></ul><ul><li>Conclusion. </li></ul>
  3. 4. <ul><li>Islam is not only a religion in the ordinary sense of the world, but also a complete system of life. </li></ul><ul><li>While other religious codes provide general guidance only for the relation between man and his Creator, </li></ul><ul><li>Islam guides man in his relationship with God and gives him the norms which govern his temporal existence. </li></ul><ul><li>Islam is concerned with the spiritual, political, social economic, moral and all other material aspects of the human being. </li></ul>General Introduction
  4. 5. General Introduction contd…. <ul><li>Every social system has its own economic system. </li></ul><ul><li>Islam being a comprehensive and distinct social system, possesses a corresponding economic system of its own. </li></ul><ul><li>Islamic economics is fast developing into a different and distinct paradigm of economics . </li></ul><ul><li>Therefore, a number of Islamic financial institutions have been emerging in various Muslim as well as in some non-Muslim countries. </li></ul>
  5. 6. The Islamic Economic System <ul><li>One of the forms of capitalism, which has been flourishing in non-Islamic societies, is the interest-based investment. </li></ul><ul><li>There are normally two participants in such transactions. One is the investor who provides capital on loan and the other Manager who runs the business. </li></ul><ul><li>The investor has no concern whether the business runs into profit of loss, he automatically gets an interest (Riba) in both outcomes at a fixed rate on his capital. </li></ul><ul><li>Islam prohibits this kind of transactions and the Holly Prophet (pbuh) enforced the ruling, not in the form of some moral teaching, but in the form of law of land. </li></ul>
  6. 7. The economic philosophy of Islam vis-à-vis Interest <ul><li>The economic philosophy of Islam has no concept of Riba because according to Islam, Riba is that curse in society, which accumulates money around handful of people, and it results inevitably in creating monopolies, opening doors for selfishness, greed, injustice and oppression. </li></ul><ul><li>Deceit and fraud prospers in the world of trade and business. Islam, on the other hand, primarily encourages highest moral ethics such as universal brotherhood, collective welfare and prosperity, social fairness and justice. </li></ul><ul><li>Due to this reason, Islam renders Riba as absolutely haram and strictly prohibits all types of interest based transactions. The prohibition of Riba in the light of economic philosophy of Islam can be explained with the cost of distribution of wealth in a society. </li></ul>
  7. 8. Distribution of wealth <ul><li>The distribution of wealth is one of the most important and most controversial subjects concerning the economic life of man, which has given birth to global revolutions in today’s world, and has affected every sphere of human activity from international politics down to the private life of the individuals. </li></ul><ul><li>No doubt, Islam is opposed to monasticism, and views the economic activities of man quite lawful, meritorious, and some times even obligatory and necessary. </li></ul><ul><li>According to materialistic economics, “livelihood is the fundamental problem of man and economic developments are the ultimate end of human life” </li></ul>
  8. 9. Distribution of wealth – Contd …. <ul><li>The fundamental principle, which can help to solve the problem of the distribution of wealth, is the concept of “wealth” in Islam. </li></ul><ul><li>According to the illustration of the Holy Quran “wealth” in all its possible forms is a thing created by Allah, and is, in principle His “property”. </li></ul><ul><li>Allah delegates the right of property over a thing, which accrues to man, to Him. </li></ul>
  9. 10. History and Development <ul><li>Islamic banking generally aims to promote and develop the application of Islamic principles, law and traditions to the transactions of financial, banking and related business and commercial affairs. </li></ul><ul><li>It also promotes business and commercial activities that are acceptable and consistent within Shariah principles, safeguarding the Islamic communities and societies from activities which are forbidden in Islam. </li></ul><ul><li>An advantage of Islamic banking is that Islamic banks do not deal with loans (except for benevolent loans under Qardh Hasan ). </li></ul><ul><li>Instead, Islamic banking introduces the principles of Musharakah (partnership) and Mudharabah (profit sharing), which make the investments of Islamic banks depend on the usefulness and feasibility of the projects in which the money are invested. </li></ul>
  10. 11. History and Development …..Contd <ul><li>The main principles of Islamic banking are the prohibition of interest (usury) in all transactions, the undertaking of business and trade activities on the basis of fair and legitimate profit and the prohibition of monopoly and hoarding. </li></ul><ul><li>Nevertheless, it must be remembered that Islamic banks, like conventional banks, are profitable organisations. </li></ul><ul><li>Their aim is to gain profit but they are not allowed to deal with interest or to engage in any trade or business prohibited by Islam. </li></ul><ul><li>Whilst conventional banking is believed to have begun in the middle of the twelfth century, Islamic banking first emerged only in the late seventies and early eighties, although the history of Islamic banking activities can be traced back to the birth of Islam. </li></ul>
  11. 12. What is “Islamic Banking” ? <ul><li>Islamic banking is defined as banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah . </li></ul><ul><li>Interest free banking is a narrow concept denoting a number of banking instruments or operations which avoid interest. </li></ul><ul><li>Islamic banking, the more general term, is based not only to avoid interest-based transactions prohibited in Islamic Shariah but also to avoid unethical and un-social practices. </li></ul><ul><li>In practical sense, Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real services. </li></ul>
  12. 13. What is the philosophy of Islamic Banking ? <ul><li>The philosophy of Islamic banking takes and lead from Islamic Shariah. </li></ul><ul><li>According to Islamic Shariah, Islamic Banking cannot deal in transactions involving interest/riba (an increase stipulated or sought over the principal of a loan or debt). </li></ul><ul><li>Further, they cannot deal in the transactions having the element of Gharar or Maiser. </li></ul><ul><li>Moreover, they cannot deal in any transaction, the subject matter of which is invalid (haram in the eyes of Islam). </li></ul><ul><li>Operating within the ambit of Shariah, the operations of Islamic banking are based on sharing the risk which may arise through trading and nvestment activities using contract of various Islamic modes of finance. </li></ul>
  13. 14. Why “Islamic Banking and Finance ? <ul><li>There may be opposing views that “Islamic Finance” is in many ways very similar to (some times technical with) conventional finance. </li></ul><ul><li>Some may feel that this similarity is an attempt to dilute the Islamic teachings to simplify our lives, while others may feel that the Islamic legal distinctions between Islamic and regular finance are artificial means of creating an industry where none is needed. </li></ul><ul><li>It is also mentioned that the terms “Islamic banking” or “Islamic Finance” can be quite misleading given the many similarities between Islamic and conventional financial contracts. </li></ul><ul><li>“ Islamic banks” or “Islamic financial institutions” try to ensure that all their contracts adhere to Islamic legal requirements as well as state requirements. </li></ul>
  14. 15. Definition of Islamic Banking and Finance <ul><li>Islamic finance is an ethical and equitable mode of finance that derives its principles from the sacred law of Islam (the shari’ah ). </li></ul><ul><li>The Islamic bank basically implements a new banking concept in that it adheres strictly to the ruling of shari’ah in the fields of finance and other dealings”. </li></ul><ul><li>The foundation of Islamic banking is based on the Islamic faith. </li></ul><ul><li>All the actions and deeds of its practitioners are bound by the limits of Islamic law or the shari’ah. </li></ul>
  15. 16. Distinctive features of Islamic finance <ul><li>The most distinctive features of Islamic finance are; </li></ul><ul><li>the prohibition of interest, whether nominal or excessive, simple or compound, fixed or floating. </li></ul><ul><li>the prohibition of gambling; </li></ul><ul><li>dealing only in lawful ( halal ) things and; </li></ul><ul><li>the elimination of uncertainty and ambiguity ( gharar ) in business contracts. </li></ul>
  16. 17. Islamic Banking – Foundations <ul><li>Any predetermined payment over and above the actual amount of principal is prohibited. (prohibition of riba - interest). </li></ul><ul><li>The lender must share in the profits or losses arising out of the enterprise for which the money was lent. (profit and loss sharing) </li></ul><ul><li>Making money from money is not Islamically acceptable. Money must work as capital not as debt. </li></ul><ul><li>Gharar (uncertainty, risk or speculation) in transactions is prohibited. </li></ul><ul><li>Investment should be confined to products and services that are not forbidden. </li></ul>
  17. 18. What is meant by “RIBA” ? <ul><li>The word “Riba” means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money). </li></ul><ul><li>This definition of Riba is derived from the Quran and is unanimously accepted by all Islamic scholars. </li></ul><ul><li>Riba literally means an increase. Technically it is any increase (large or small, nominal or real) received on loan. </li></ul><ul><li>In Islamic jurisprudence it is defined as an increase in one of two homogeneous equivalents being exchanged without this increase being accompanied by a return . </li></ul><ul><li>Riba has been understood throughout Muslim history as being equivalent to interest paid on a loan. </li></ul>
  18. 19. Prohibition of RIBA <ul><li>In Islamic law riba is regardless of the purpose of a loan, forbidden because of four different revelations in the Quran: </li></ul><ul><li>First revelation underlines that “God deprives riba of all blessing” , </li></ul><ul><li>The second describes interest as the “unjust appropriation of others’ property , </li></ul><ul><li>The third discourages Muslims from interest for their own welfare, and; </li></ul><ul><li>Finally the fourth revelation urges Muslims to only ask for the principal sum when lending money. (The Holy Quran 2:275-80) </li></ul><ul><li>There are numerous traditions of the Prophet Muhammad (pbuh) which detail the prohibition of riba. Says the Prophet (pbuh) </li></ul><ul><li>Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt; like for like, hand to hand, in equal amounts; and any increase is Riba.” (Muslim) </li></ul>
  19. 20. Prohibition of RIBA …Contd <ul><li>The prohibition of riba essentially implies that the fixing in advance of a positive return on a loan as reward for waiting is not permitted in shari’ah. </li></ul><ul><li>It is a big source of gross inequalities of income. Interest transfers wealth from the poor to rich, increasing the inequality in the distribution of wealth. </li></ul><ul><li>Interest transfers income from the masses of depositors to the industrialists. This lead to the concentration of income and wealth in the society which is against the spirit of Islam. </li></ul><ul><li>Interest limits investment, while profit sharing increases it. </li></ul><ul><li>Interest on productive loan increases the cost of production. </li></ul>
  20. 21. Prohibition of RIBA …Contd <ul><li>According to modern view, interest is the ‘price of capital’. </li></ul><ul><li>Islam rejects this notion. Capital itself is not productive, and it is the application of human efforts to a stock of capital which generates output and income. </li></ul><ul><li>The reward of capital cannot be fixed in advance, unlike interest rates, but can only be determined proportionately </li></ul>
  21. 22. Prohibition of RIBA …Contd. <ul><li>In an interest based system the major criteria for the distribution of credit is the creditworthiness of the borrower. </li></ul><ul><li>In a profit sharing system, the productivity of the project is more important. Therefore, the finances go to more productive projects. </li></ul>
  22. 23. Legal Frame work and Regulations <ul><li>Islamic banks have to confirm to two types of law, Shariah and positive law. </li></ul><ul><li>While Shariah law is based on religious foundations, positive law is promulgated by the monetary authorities to safeguard public interest. </li></ul><ul><li>There is no uniformity in the laws followed by Islamic banks around the world. </li></ul><ul><li>In most Muslim countries, special laws have been passed prior to the establishment of Islamic banks and this law specifies the rules and regulations for the institutions which engages in banking businesses based on Islamic principles. </li></ul><ul><li>Since Islamic banks were established as private or public limited companies, the requirements stipulated in a country’s company laws are applicable to them. </li></ul>
  23. 24. INCORPORTAION OF ISLAMIC BANKS <ul><li>Islamic banks were incorporated as companies and these banks are either formed as private or public limited companies. </li></ul><ul><li>Generally, a private limited company is one which has: </li></ul><ul><ul><li>a limited number of membership, for example, minimum of two and a maximum of 50 members. </li></ul></ul><ul><ul><li>Restrictions on the right to transfer shares, and </li></ul></ul><ul><ul><li>Prohibition on public subscription of its shares. </li></ul></ul><ul><ul><li>Like other companies, Islamic banks have to have their own memorandum and articles of associations. The contents of these documents, however, vary from one bank to the other. </li></ul></ul>
  24. 25. LEGISLATION ON ISLAMIC BANKS <ul><li>A specific law refers to legislation enacted by the concerned regulatory authorities to govern a particular Islamic bank. </li></ul><ul><li>At present, Da Afghanistan Bank, banking regulatory authority of Afghanistan, and the Government of Islamic Republic of Afghanistan, have initiated steps for bringing specific Islamic Banking Legislation / Regulations. </li></ul><ul><li>In the times to come, Da Afghanistan Bank may come out with specific Islamic Banking Regulations in order to control and regulate the Islamic Banking practices in Afghanistan. </li></ul>
  25. 26. REGULATION AND SUPERVISION OF ISLAMIC BANKS <ul><li>It should be borne in mind that in the conventional banking system, there are five major goals for regulation. </li></ul><ul><ul><li>Ensuring a safe, sound and secure banking system. </li></ul></ul><ul><ul><li>Provide competition </li></ul></ul><ul><ul><li>Efficient allocation of credit with prudent norms </li></ul></ul><ul><ul><li>Customer protection </li></ul></ul><ul><ul><li>Basis for monetary policy. </li></ul></ul><ul><ul><li>Islamic banks, being part of the financial system, are also subject to the regulations and supervision of the monetary authorities of their respective countries. The tasks of regulating and monitoring a country’s financial system are normally given to the Central Bank of the country (Da Afghanistan Bank in Afghanistan). There are many similarities in terms of powers vested to central banks of Muslim countries in regulating and supervising Islamic banks. </li></ul></ul>
  26. 27. Shariah Principles <ul><li>Tawhid (the doctrine of the Unity of Allah ) is the basis by which the whole system of Islamic teachings pertaining to all aspects of life. </li></ul><ul><li>It provides the foundation of the economics of Islam. Muslim theologians have classified Tawhid into three parts: viz Tawhid uluhiyah’, Tawhid Asma’ wa’s sifat and Tawhid rububuyah . </li></ul><ul><li>Relevant to Islamic banking and finance is the Tawhid rububiyah which has two aspects. </li></ul><ul><li>One concerns the relationship amongst men themselves and the other, men’s relations to Allah . </li></ul><ul><li>It implies that Allah is the creator and that men are equal partners and brothers to other men. In other words, rububiyah (divinity) in a Muslim society is only for Allah. </li></ul><ul><li>According to this doctrine, no man has the right to claim a bigger share since he does not create or generate natural power independently. </li></ul>
  27. 28. Shariah Principles Contd… <ul><li>Basically, there are four sources of Islamic laws: </li></ul><ul><ul><li>The Qur’an </li></ul></ul><ul><ul><li>The Sunnah </li></ul></ul><ul><ul><li>The Ijma’ , and </li></ul></ul><ul><ul><li>The Qias </li></ul></ul>
  28. 29. The Qur’an <ul><li>From the Islamic perspective, the Qur’an embodies the divine law and is, therefore, superior to any man-made law. </li></ul><ul><li>The Qur’an in general draws the larger boundaries of the Islamic law within which all human actions can be confined. </li></ul><ul><li>It provides the framework within which humanity should structure their legal, social, economic, political and administrative system. </li></ul><ul><li>The Qur’an prohibits behaviour such as drinking of alcoholic beverages, engaging in games of chance, committing murder, stealing, committing adultery, exacting usury and worshipping anything or anyone other than God. </li></ul>
  29. 30. The Sunnah <ul><li>The Sunnah (or Hadith ) literally means ‘the path’, ‘the road’ or ‘the way of the Prophet Muhammad’ and is used to denote the Prophet’s action, deeds and utterances. </li></ul><ul><li>It explains and amplifies the principles of law embodied in the Qur’an and adds to it new legislations and sanctions which are considered important by the Prophet. </li></ul><ul><li>Muslims believe that the Sunnah is a source of law which supplements the Holy Qur’an. </li></ul><ul><li>Muslim scholars generally agree that accepting the Sunnah of the Prophet is a pre-requisite of being a Muslim. </li></ul>
  30. 31. The Ijma’ , <ul><li>Ijma ’ means the consensus of opinion. There are four types of Ijma ’, namely: </li></ul><ul><ul><li>the regular Ijma ’ of the companions of the Prophet (the highest authority) </li></ul></ul><ul><ul><li>the irregular Ijma ’ of the companions which represent the opinions of a few companions which are not repudiated by the rest. </li></ul></ul><ul><ul><li>The Ijma ’ of the mujtahids of the later ages on questions arising after the time of the companions of the Prophet.. </li></ul></ul><ul><ul><li>The Ijma ’ of the jurists of the later ages on a question about which there were differences of opinion amongst the companions. </li></ul></ul>
  31. 32. The Qias <ul><li>Qias means analogy. </li></ul><ul><li>As all rules are based on objectives and interests, such objectives and interests are causes for such rules. </li></ul><ul><li>When addressing a particular problem, the same rule to another problem where the causes for both were identical can be applied by analogy. </li></ul><ul><li>The Shariah is the legal aspect of Islam as understood from the four fundamental sources of the Islamic religion as mentioned above. </li></ul>
  32. 33. MEANING AND CONCEPT OF “ SHARIAH” <ul><li>Islamic laws are also known as Shariah laws, sometimes referred to as Islamic jurisprudence. </li></ul><ul><li>The original meaning of the word Shariah or shar ‘is the path or the road leading to the water’ and the verb shara’a literally means ‘to chalk out or mark out a clear road to water’. </li></ul><ul><li>In a religious sense, it means ‘the highway of good life’. </li></ul><ul><li>In other words, Shariah is the way which directs man’s life to the right path. </li></ul><ul><li>From the words ‘the right path’, therefore, came the meaning ‘law’. </li></ul><ul><li>The word Shariah also has its correlation with the word din which literally means ‘submission’ or ‘following’. </li></ul>
  33. 34. MEANING AND CONCEPT OF “ SHARIAH” <ul><li>Shariah is the ordination of the Way and its proper subject is God, whereas din is the following of that Way and its subject is man. </li></ul><ul><li>Therefore, as far as Qur’anic idioms go, one may speak of Shariah and din interchangeably. </li></ul><ul><li>According to Muslim belief, the concept of Shariah is not only to govern man in the conduct of life in order to realise the Divine Will, but covers all behaviour-spiritual, mental, physical. </li></ul><ul><li>Therefore, Shariah principles are more than law, covering the total way of life including faith and practices, personal behaviour, legal and social transactions. </li></ul><ul><li>In other words, in the Muslim religion of Islam, Shariah is a comprehensive principle of a total way of life. </li></ul>
  34. 35. MEANING AND CONCEPT OF “ SHARIAH” <ul><li>On the root of Islamic banking and finance, Islam is perceived as consisting of three basic elements namely, Aqidah , Shariah and Akhlaq. </li></ul><ul><li>Aqidah concerns all aspects of faith and belief of a Muslim in Allah and His will. </li></ul><ul><li>Shariah as mentioned earlier is concerned with all forms of practical actions by a Muslim manifesting his faith and belief. </li></ul><ul><li>Akhlaq covers all aspects of Muslims behaviour, attitude and work ethics with which he performs his practical actions. </li></ul>
  35. 36. MEANING AND CONCEPT OF “ SHARIAH” <ul><li>Practical aspects of Shariah affecting the daily life of a Muslim can be further divided into two, namely Ibadat (relation between God and man) and Muamalat (relationship between man and man). </li></ul><ul><li>Ibadat is concerned with the practicalities of a Muslim’s worship of Allah in the context of man-to- Allah relationship, </li></ul><ul><li>whereas Muamalat is concerned with the practicalities of his mundane daily life, in the context of various forms of man-to man relationship. </li></ul><ul><li>The Islamic banking system, therefore, being part of economic activities is linked to Shariah principles through Muamalat. </li></ul>
  36. 37. Relationship between the Banking system and Religion within Islam: <ul><li>In other words, a significant segment of Muamala t is the conduct of a Muslim’s economic activities within his economic system. </li></ul><ul><li>within this economic system is the banking and financial system within which he conducts his banking and financial services. </li></ul><ul><li>Thus Islamic banking and finance, being part of a Muslim’s economic activities, is a Muslim’s link to Muamalat , to Shariah , to Islam , and finally to Allah . </li></ul><ul><li>This is the foundation of the purpose or the root of Islamic banking and finance. </li></ul><ul><li>Within the Islamic scheme of life and Shariah framework, Islam imposes its ‘ akkam’ (laws) representing norms or values on its believers. </li></ul><ul><li>These laws or values are not man-made but ordained by Allah . </li></ul><ul><li>These laws are derived from the sources of Sharia h, the two primary sources being the Al-Qur’an and Al-Sunnah. </li></ul>
  37. 38. SHARIAH LAWs IN ISLAMIC BANKING SYSTEM <ul><li>As stated above, the objective of Shariah is to construct life on the basis of virtues and to cleanse it of vices. </li></ul><ul><li>Shariah is, therefore, expected to provide not only the right path but also to govern all activities of the Muslims toward the betterment of the whole community. </li></ul><ul><li>In reality, however, instead of being governed by the Shariah , Muslims are constantly bound by customary and positive laws. </li></ul><ul><li>The emergence of Islamic banking in the 1960s and 1970 served as an impetus for the reestablishing of the Shariah in commercial activities. </li></ul><ul><li>This was largely because banking laws in all Muslim countries were conventional banking laws or interest based laws. </li></ul><ul><li>But then, interest is prohibited by Qur’an and the Hadith. </li></ul><ul><li>In order to allow Islamic banks to operate, governments of Muslim countries commissioned Muslim jurists to promulgate laws which are applicable to this new style of banking. </li></ul>
  38. 39. SHARIAH LAWs IN ISLAMIC BANKING SYSTEM <ul><li>In the process of reestablishing Shariah law in banking, it was inevitable for Muslim jurists to refer to the primary source of Shariah i.e the Qur’an and Hadith . </li></ul><ul><li>The Qur’an , however, being primarily a book of religious and moral principles and exhortations, is not a legal document. </li></ul><ul><li>With regards to Islamic banking, the Qur’an has given clear and implicit guidelines that its operations should be free from any element of interest. </li></ul><ul><li>As an ordinary business entity, the Islamic bank is expected to conform to the rules and guidelines given by Qur’an . </li></ul>
  39. 40. SHARIAH PRINCIPLES USED IN ISLAMIC BANKING <ul><li>Muslim jurists and scholars have suggested a number of Shariah principles to be adopted by Islamic banks in delivering their products and services. </li></ul><ul><li>Among the most widely used Shariah principles recommended by these scholars are mudarabah, Musharakah, murabahah, bai-mua’zzal, ijara wa-iktina, qard hassan, wadiah and rahn </li></ul>
  40. 41. Categories of Shariah principles <ul><ul><li>Profit and loss sharing principles </li></ul></ul><ul><ul><ul><li>Mudarabah </li></ul></ul></ul><ul><ul><ul><li>Musharakah </li></ul></ul></ul><ul><ul><li>Fees or charges based principles </li></ul></ul><ul><ul><ul><li>Murabahah </li></ul></ul></ul><ul><ul><ul><li>Bai mu’azzal </li></ul></ul></ul><ul><ul><ul><li>Ijara </li></ul></ul></ul><ul><ul><ul><li>Ijara wa-iktina </li></ul></ul></ul><ul><ul><li>Free service principles </li></ul></ul><ul><ul><ul><li>Qard hassan </li></ul></ul></ul><ul><ul><li>Ancillary principles. </li></ul></ul><ul><ul><ul><li>Wadiah </li></ul></ul></ul><ul><ul><ul><li>Rahn </li></ul></ul></ul>
  41. 42. General Principles of “ Shariah ” <ul><li>Islamic banks, being institutions founded on Islamic doctrines, confirm to Islamic rules and regulations known as Shariah laws which consist of ibadat and muamalat . </li></ul><ul><li>As Islamic banking business mobilizes material resources and are part of economic activities, Islamic banks are governed by Shariah through the components of muamalat . </li></ul><ul><li>The Shariah governing the operations of Islamic banks originate from four sources, that is, the Qur’an, Hadith, Ijma and Qiyas . </li></ul><ul><li>The Quran and Hadith are the primary sources of Shariah , whilst Ijma and Qiyas are secondary sources which are only applied when no solution on the matter in question is found in the primary sources. </li></ul><ul><li>Since Islamic banking is relatively new, Muslim countries have yet to promulgate complete sets of Shariah laws to govern the entire Islamic banking system. </li></ul>
  42. 43. General Principles of “ Shariah ” <ul><li>In most countries, the only Shariah component in Islamic banking law is the prohibition of interest in the operation of Islamic banks. </li></ul><ul><li>Instead of interest used in conventional banks, Islamic banks adopt principles such as profit-loss sharing (example, mudarabah and Musharakah ), fees or charges based (example, murabahah , bai-mua’zzal, ijara wa-iktina) , free service (example, qard hassan ) and ancillary principles (example wadiah and rahn ). </li></ul>
  43. 44. Islamic Banking Source of Funds( Liabilities ) <ul><li>Shareholders’ equity (contract: al-Musharakah or joint venture on profit sharing). </li></ul><ul><li>Customers’ deposits in current accounts (contract: Al Wadiah Yad D hamanah or guaranteed custody). </li></ul><ul><li>Customers’ deposits in savings accounts (contract: Al-Wadiah Yad Dhamanah or guaranteed custody) </li></ul><ul><li>Customers’ deposits in general investment accounts (contract: Al-Mudharabah or trustee profit-sharing). </li></ul><ul><li>Customers’ deposits in special investment accounts (contract: Al-Mudharabah or trustee profit-sharing) </li></ul>
  44. 45. Islamic Banking Application of funds ( Assets ) <ul><li>Statutory reserve (contract: Al Wadiah Yad Dhamanah o guaranteed custody) </li></ul><ul><li>Liquidity requirements (contract: Al-Qardh Al-Hassan or benevolent loan. </li></ul><ul><li>After meeting the statutory reserve requirements and holding the required level of liquid assets, the Islamic bank is free to apply the remainder of their funds for banking operations. The various types of financing facilities include: </li></ul><ul><li>Project financing (contract: Al-Mudharabah or trustee profit-sharing) </li></ul><ul><li>Project financing (contract: Al-Musharakah or joint venture profit sharing) </li></ul><ul><li>Financing the acquisition of assets (contract: Al-Bai Bithaman Ajil or deferred instilment sale) </li></ul><ul><li>Financing the use of services of assets (contract: Al-Ijarah or leasing) </li></ul>
  45. 46. Islamic Banking Application of funds ( Assets ) <ul><li>Loan syndication services (contract: Al-Ujr or fee) </li></ul><ul><li>Securitization and debt-trading (contract: Bai-al Dayn or Debt-trading) </li></ul><ul><li>Trade financing: </li></ul><ul><ul><li>letter of Credit (contract: Al-Wakalah or agency) </li></ul></ul><ul><ul><li>letter of credit (contract: Al-Musharakah or joint venture profit-sharing) </li></ul></ul><ul><ul><li>letter of credit (contract: Al-Murabahah or deferred lump sum sale of cost plus) </li></ul></ul><ul><li>Letter of Guarantee (contract: Al-Kafalah or guarantee) </li></ul><ul><li>Working capital financing (contract: Al-Murabahah or deferred lump sum sale of cost plus) </li></ul><ul><li>Securitisation and Islamic Accepted Bill (IAB) (contract: Bai al-Dayn or debt-trading) </li></ul>
  46. 47. Islamic Banking various products Deposit products : Product / Services Applicable Islamic principles and concepts Savings Account Mudharabah / Wadiah yad Dhamanah Current Account Mudharabah / Wadiah yad Dhamanah General Investment Account (Term Deposits) Mudharabah Special Investment Account Mudharabah Specific Investment Account Mudharabah
  47. 48. Islamic Banking various products Financing (Loan) products : Product / Services Applicable Islamic principles and concepts Term financing Bai Bithaman Ajil Working capital financing Murabahah / Bai Bithaman Ajil Syndicate finance Istisna / Bithaman Ajil / ijarah thumma Bai Project financing Bai Bithaman Ajil / istisna / ijarah Plant & machinery financing Bai Bithaman Ajil/ istisna / variable rate ijarah Personal financing Bai Bithaman Ajil / Bai inah / Mudharabah Fixed asset financing Bai Bithaman Ajil Housing finance Bai Bithaman Ajil / Istisna / variable rate ijarah Industrial hire purchase Ijarah Thumma Bai Land financing Bai Bithaman Ajil Leasing finance Ijarah Cash line facility Bai inah / Bai Bithaman Ajil / Murabahah Computer financing Bai Bithaman Ajil Education finance Murabahah / Bai Bithaman Ajil / Bai inah Bridge finance Istisna / Bithaman Ajil Equipment finance Bai Bithaman Ajil Hire purchase Wakalah Benevolent loan Quard Hassan Block discounting Bai Dayan
  48. 49. Islamic Banking various products Trade Finance Product / Services Applicable Islamic principles and concepts Accepting Bills Murabahah / Bai Dayn Bank Guarantee Kafalah Export Credit refinancing Murabahah / Bai Dayn Letter of Credit Wakalah / Murabahah / ijarah / Bai Bithaman Ajil Shipping Guarantee Kafalah Trust Reciept Wakalah / Murabahah
  49. 50. Islamic Banking various products Treasury / Money Market Investment Product / Services Applicable Islamic principles and concepts Islamic Treasury bills Bai al-inah Negotiable debt certificates Bai Bithaman Ajil Foreign Exchange Ujr Commercial papers Murabahah Negotiable instrument of deposit Mudaharabah Government investments issues / certificates Bai al-Inah
  50. 51. Islamic Banking various products Banking Services Product / Services Applicable Islamic principles and concepts ATM services Ujr Cashiers Order Ujr Demand Draft Ujr Standing instructions Ujr Stock-broking services Ujr TT / Funds transfer Ujr Travellers Cheques Ujr Tele Banking Ujr
  51. 52. Islamic Banking various products Card Services Product / Services Applicable Islamic principles and concepts Debit Card Ujr Credit Card Bai Inah / Bai Bithaman Ajil Charge Card Quard Hasan
  52. 53. International Islamic Financial Institutions With the emergence of Islamic finance, some international financial institutions also have come on to the scene.
  53. 54. Islamic Development Bank (IDB) <ul><li>The Islamic Development Bank (IDB)-based in Jeddah Saudi Arabia- is a multilateral development bank serving Muslim countries. </li></ul><ul><li>The purpose of the Bank is to foster the economic development and social progress of member countries and Muslim communities individually and collectively in accordance with the principles of shari'ah. </li></ul>
  54. 55. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) <ul><li>AAOIFI is an Islamic international autonomous that prepares accounting, auditing, governance, ethics and shari'a h standards for Islamic financial institutions. </li></ul><ul><li>The objectives of AAOIFI include: </li></ul><ul><li>To develop accounting, auditing, governance and ethical thought relating to the activities of Islamic financial institutions. </li></ul><ul><li>To harmonize the accounting policies and procedures adopted by Islamic financial institutions through the preparation and issuance of accounting standards and the interpretations of the same to the said institutions. </li></ul><ul><li>To prepare, promulgate and interpret accounting and auditing standards for Islamic financial institutions. </li></ul>
  55. 56. Islamic Financial Services Board (IFSB) <ul><li>Established in Malaysia in November 2002. IFSB serves as an international standard-setting body for the regulatory and supervisory agencies that have an interest in ensuring the soundness and stability of the Islamic financial services industry. </li></ul><ul><li>It also strives to develop prudential standards in accordance with the unique features of Islamic financial institutions in coordination with the existing standard-setting bodies. </li></ul>
  56. 57. International Islamic Financial Market (IIFM) <ul><li>The International Islamic Financial Market (IIFM) aims to facilitate international secondary market trading of Islamic financial products and instruments by providing independent shari’ah enhancement and issuing guidelines for new products and instruments.” </li></ul><ul><li>The core product of IIFM is the shari’ah endorsement or enhancement of existing and new Islamic financial products and instruments which are offered by Islamic financial institutions, conventional banks with Islamic banking subsidiaries windows and so forth. </li></ul>
  57. 58. International Islamic Rating Agency (IIRA) <ul><li>The basic aim of the IIRA (Bahrain) is to support shari’ah compatible banks and mutual funds and help them penetrate the international market. </li></ul><ul><li>It rates Islamic banks and their financial instruments, sukuk, to help them offer 'credible products' in the international market. </li></ul><ul><li>It also provides complementary rating information on Islamic  banks to that produced by other rating agencies, including measures of their compliance with shari’ah law. </li></ul>
  58. 59. Liquidity Management Center (LMC) <ul><li>The LMC, established in Bahrain in 2002, seeks to develop an active secondary market for short-term shari’ah compliant treasury products. The key objectives of the LMC include: </li></ul><ul><li>to facilitate the creation of an interbank money market that will allow Islamic Financial Services Institutions (&quot;IFSIs&quot;) to effectively manage their asset liability mismatch; </li></ul><ul><li>to provide short-term liquid, tradable, asset-backed treasury instruments ( sukuks ) where IFSIs can invest their surplus liquidity. </li></ul>
  59. 60. Conclusion <ul><li>On the whole, the Islamic banking system is far from comprehensive. </li></ul><ul><li>It appears that the elimination of interest from the banking system remains top priority. </li></ul><ul><li>The main difficulties faced by Islamic Banks are the lack of Islam based investment opportunities. </li></ul><ul><li>Timely support and guidance of the regulatory authorities, Shariah board members and other Islamic scholars and jurists is the need of the hour in order to set the right path for the introduction of Islamic Banking in Islamic Republic of Afghanistan. </li></ul>
  60. 61. Khudah Hafez <ul><li>With the limited knowledge and other constrains, the above attempt had been made with utmost sincerity and high respect </li></ul><ul><li>to the religious sentiments. Hope, any little mistake / ignorance found in this attempt, could be excused as it is unintentional. </li></ul>By P V V Rama Raju President & CEO I sincerely convey my thanks for the noble opportunity to stand before learned dignitaries for presenting the little attempt on Islamic Banking before international banking experts.
  61. 62. 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: