Islamic banking

Introduction to the topic
Islamic banking

Outline of the presentation
• History of islamic banking
• Pakistan and islamic banking
• Introduction to bank
• Principles of islamic banking
• Islamic Financial Accounting Standards
• Islamic financial transaction terminology
• Islamic laws on trading
• Implementation of Islamic banking
• Islamic modes of financing
• Difference between islamic and commercial banking
• Objections on islamic banking
• Conclusion

History of Islamic Banking
• Islamic capitalism
• Currency: the gold dinar
• Early economic concepts and techniques
Modern Islamic History:
• Institutional involvement 7o’s
Dubai Islamic Bank 1975

Pakistan and Islamic banking
• Departmental Objectives:
• Rules and Regulations for Islamic
banking in pakistan

Introduction of the Bank
Meezan Bank
Incorporated on January 27, 1997
Strategy
Growth
Shareholders & Shariah Board
Technology

Introduction of the presenters
• Behzad karim khan “Branch Manager”
Chawk shaheedan branch Multan Pakistan
• Khurram shehzad “Assisstent Manager”
Chawk shaheedan branch Multan Pakistan.
• Shehzad butt “ Manager Operation”
Chawk shaheedan branch Multan Pakistan.

•Because Islam forbids simply lending out
money at interest ( Riba), Islamic rules on
transactions (known as Fiqh al-Muamalat)
have been created to avoid this problem.
•The basic technique to avoid the prohibition is the sharing of
profit and loss, via terms such as :
1. profit sharing (Mudharabah)
2. safekeeping (Wadiah)
3. joint venture (Musharakah)
4. cost plus (Murabahah)and
5. leasing (Ijara).

“Murabahah”
•In an Islamic mortgage transaction, instead of
loaning the buyer money to purchase the item, a
bank might buy the item itself from the seller, and
re-sell it to the buyer at a profit, while allowing
the buyer to pay the bank in installments.
•The bank's profit cannot be made explicit and
therefore there are no additional penalties for
late payment.
•The goods or land is registered to the name of
the buyer from the start of the transaction.

“EIjara wa Eiqtina”
•It is similar to real estate leasing
•sell the vehicle at a higher-than-market price
to the debtor and then retain ownership of the
vehicle until the loan is paid.

“Musharaka al-Mutanaqisa”
•The bank and borrower form a partnership
entity, both providing capital at an agreed
percentage to purchase the property.
•The partnership entity then rents out the property
to the borrower and charges rent.

•The bank and the borrower will then share the
proceeds from this rent based on the current
equity share of the partnership.
•If default occurs, both the bank and the
borrower receive a proportion of the proceeds
from the sale of the property based on each
party's current equity.

•Islamic banking is restricted to Islamically
acceptable transactions, which exclude those
involving alcohol, pork, gambling, etc.
•In theory, Islamic banking is an example of
full-reserve banking, with banks achieving a
100% reserve ratio.

“Shariah Advisory
Council/Consultant”

•Shariah Supervisory Board (SSB) to advise them
and to ensure that the operations and activities
of the banking institutions comply with Shariah
principles.
•A number of Shariah advisory firms have now
emerged to offer Shariah advisory services to the
institutions offering Islamic financial services.

“…In Meezan Bank”
•Meezan Bank has extensive experience and
expertise in developing and advising on the
creation of Shariah-compliant financial products
and services.
•The main objective of Meezan Bank’s Islamic
Financial Advisory function is to assist Financial
Institutions develop Islamic banking alternatives
by sharing our expertise, research and success
stories.

•This function works under the guidance of
Shariah Supervisory Board which comprises of
renowned Islamic Scholars from both Pakistan
and abroad.
•Successful implementation of the Islamic
Banking model rests upon the principles of
Islamic Shariah.
•A world-renowned Shariah Supervisory Board
and a highly qualified and experienced in house
Shariah Advisor are fundamental aspects of the
Bank's core.

“Members of the Board”
1. Justice (Retd.) Muhammad Taqi Usmani (Chairman)
2. Dr. Abdul Sattar Abu Ghuddah
3. Sheikh Essam M. Ishaq
4. Dr. Muhammad Imran Ashraf Usmani (Shariah Advisor)
The primary role of this Board is to maintain
and further strengthen this commitment and to ensure
strict Shariah-compliance in all areas of the Bank's
operations.

“Islamic Financial Accounting
Standards”

•The Institute of Chartered Accountants of
Pakistan issues Islamic Financial Accounting
Standards (IFAS) for Islamic Mode of financing.
•IFAS 1 (issued in 2005) concerns Musharakah
and Mudarabah. While, IFAS 2 (issued in 2007)
relates to Ijarah.

“Meezan Islamic Institution Deposit
Account (MIIDA) “
•With MIIDA, any IFI now has the opportunity to manage excess
liquidity in an immediate and profitable manner by maintaining a
checking account with Meezan Bank.
•MIIDA works on the principle of Mudarabah under which the
customer is an Investor (Rab-ul-Maal), and the Bank is the
Manager (Mudarib) of the funds deposited by the customer.

•The original word used for usury was Riba, which
literally means “excess or addition”.
•The criticism of usury in Islam was well established
during the lifetime of the Islamic prophet Muhammad
and reinforced by several verses in the Qur'an dating
back to around 600 AD.
•A school of Islamic thought which emerged in the 19th
Century, led by Sir Sayyed, argues for an interpretative
differentiation between usury, or consumptional lending,
and interest, or lending for commercial investment
(Ahmed, 1958).

Islamic Financial Transaction
Terminology

Bai al Inah
• Agreement b/w customer and financer
• On spot purchase
• Payment in Installments

Bai Bithman Ajil
• Sale of good
• Deffered Payment
• Agreed Profit ratio

Bai Mujjal
• Credit sale
• Contract

Mudarabah
• Special partnership
• Comertial enterprise
• RUB Ul MAAL and MUDARIB

Murabahah
• Sale of goods
• Price include profit margen
• FIXED INCOME LOANS

Musawamah
• Negotiation of selling rate
• No Obligation to reveal other cost

Bai salam
• Contact
• Advance payment
• Later delivory

• In Wadiah, a bank is deemed as a keeper and
trustee of funds. A person deposits funds in
the bank and the bank guarantees refund of
the entire amount of the deposit, or any part
of the outstanding amount, when the
depositor demands it.

Hibah
Hibah usually arises in practice when Islamic
banks voluntarily pay their customers a 'gift' on
savings account balances, representing a portion
of the profit made by using those savings account
balances in other activities.

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.

Types of Ijarah
• Ijarah thumma al bai'
• Ijarah-wal-iqtina

Ijarah thumma al bai'
The first contract is an Ijarah that outlines the
terms for leasing or renting over a fixed
period, and the second contract is a Bai that
triggers a sale or purchase once the term of
the Ijarah is complete.

Ijarah-wal-iqtina
• A contract under which an Islamic bank
provides equipment, building, or other assets
to the client against an agreed rental together
with a unilateral undertaking by the bank or
the client that at the end of the lease period,
the ownership in the asset would be
transferred to the lessee.

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

Qardul Hassan
• This is a loan extended on a goodwill basis,
and the debtor is only required to repay the
amount borrowed.

Sukuk
• Sukuk is the Arabic name for financial
certificates that are the Islamic equivalent of
bonds. However, fixed-income, interest-
bearing bonds are not permissible in Islam.

• Insurance by combining the risks of many
people enables each individual to enjoy the
advantage provided by the law of large
numbers.

Wakalah
• This occurs when a person appoints a
representative to undertake transactions on
his/her behalf, similar to a power of attorney.

The main concept in Islam and the
most obvious and strict rule is as in the
verse
“ALLAH hath permitted sale and forbidden Riba.”

WHAT IS RIBA
• Riba is just any loan that includes an interest in any way. A
concept in Islamic banking that refers to charged
interest.It is forbidden under Sharia, Islamic religious law.
• Also known as “USURY”

Money in the Islamic view has just
three resources
• Farming
• Hunting
• Extracting raw materials from the earth

OTHER ISLAMIC LAWS
• No lying or cheating about the product that you are selling.
• Pay salaries to workers as soon as he finishes his job or even
before his sweat dries!
• Company decisions has to be taken and approved by all
company partners not just by most of them
• The Qur'an prohibits gambling (games of chance involving
money) &gharar

REPORT OF COUNCIL
• In 1977 council of islamic idealogy was charged with the
responsibilty of bringing about islamic economic &banking system.
• Pannel of experts submitted its report to the council in feburary
1980.
• The report stated that,
1-Real alternative to interest in an islamic system is p&loss sharing
deposits and qarz-e-hasna.
2-Government have to carry a through appraisal&reforms of tax
system for interest free banking system.

3-Council suggested following methods for interest free banking
system
(a) Leasing
(b) Service charges
(c) Hire purchases
(d) Special facilities
4- Report also included suggestions regarding commercial
banks,credit institutions and insurance companies.

CRITICISM ON THE REPORT
• Many experts and scholars did critisism on the ground that
•
• Council has taken a superficial view of confronting problems.
• Stategies are remarkable but there are serious hurdles to make
them practiceable.
• Some experts were of the point of view that some plans and
schemes are not fully in accordance with islamic principles.

IMPLEMENTATION OF
ISLAMIC BANKING
• Following are the stages involved in the implementation of
Islamic banking.
• STAGE-1
• Interest was first eliminated from July 1979 from the
transactions of NIT ,HBFC, ICP AND SBFC.
• STAGE -2
• From first January 1981,profit and loss sharing saving and
term deposits were introduced by commercial banks in place
of simple saving and fixed deposits scheme.

• STAGE-3
• In August 1981,HBFC was allowed to provide finance on rent
sharing basis for house building.Students were allowed Qarz-
e-Hasna without interest.
• STAGE-4
• In 1983,hire purchases system of financing was introduced

• STAGE -5
• From july 1,1984 to December 31st,1984 all banks in the
country were to make finance available on the basis of
Islamic modes of financing in addition to the existing
interest based system
• STAGE -6
• From Janauary 1985,all types of finances provided by the
bank to the governments and their agencies were
permissible on Islamic basis only.

• STAGE-7
• From April 1985,all types of finances provided by the banks to
all clients were to be on Islamic basis only.
• STAGE-8
• From july 1985,all deposits were to be on the basis of
participation in profit and loss of banks except current account

Islamic Modes of Financing.
• 1.) LOANS FINANCING BY LENDING
• 2.) TRADE RELATED MODES OF FINANCING
• 3.) INVESTMENT MODE OF FINANCING

1.)LOANS FINANCING BY LENDING
• a.) Interest Free Loans With Service Charges.
• The banks are permitted to lend funds free of interest.
• They are to recover only the actual service charges from the
user of the funds .
• The maximum service charges permissible to each bank is
determined by the state bank of Pakistan.

1.)LOANS FINANCING BY LENDING
• b.)Qarze Hasna
• Under the Qarze Hasna scheme interest free loans
are granted to the students who do not have
sufficient means to pursue their education.
• The students are given interest free loans for carrying on the
studies both with in Pakistan and outside the country .
• For repayment of the loan are grace period
of two years is granted after competition
of studies

2.) TRADE RELATED MODES OF FINANCING
• a.) Mark Up or Bai Muajjal
• The mechanism of financing on the bases of mark up is as follows:-
 The customer contacts the bank for financing the purchase of goods .
 The bank purchases the required goods and sales these to him on the
price mutually agreed between the bank and the customer .
 The agreed price which is based on bases of the banks cost plus a
profit margin of the bank (mark up).
 The payment can be made by customer in lumpsum or in installments
over a specific period of time.

2.) TRADE RELATED MODES OF
FINANCING
• b.) Ijarah or Leasing
• Usufruct of an asset is passed to other party against
a periodic rent payment
Process of Ijaarah
The customer approaches the Bank with a request
for financing and enters into a promise to lease
agreement.
• The Bank purchases the item required for leasing
and receives title of ownership from the vendor
• The Bank makes payment to the vendor
• The Bank leases the asset to the customer after
execution of lease agreement.
• The customer makes periodic payments as per the
contract.

2.) TRADE RELATED MODES OF
FINANCING
• c.) Istisna,a
• It is a contractual agreement under which a bank provides
finance for the manufacturing of goods and commodities .
• Istisna’a can be used for providing the facility of financing the
manufacture or construction of houses, plants, projects,
building of bridges, roads and highways.

3.) INVESTMENT MODE OF
FINANCING
a. Musharaka
• Musharaka is “a joint enterprises
formed for conducting business.
• All parties share in the capital.
• All parties share profits as well as
losses.
• Profits are distributed as per agreed
ratio.
• Loss is borne by the parties as per
capital ratio.
• Every partner is agent of other.

3.) INVESTMENT MODE OF
FINANCING
b.MUDARABA
• Partnership where in one partner provides the funds for another to invest in a commercial
enterprise.
• The investment comes from the “Rabb-ul-Maal”(Investor).
• The management and work is an exclusive responsibility of the “Mudhaarib”
(WorkingPartner).
• Venture may for a fixed period or purpose.

3.) INVESTMENT MODE OF FINANCING
• c. Participating Term Certificate(PTC):
• It is a method of financing which includes Fixed investment especially for balancing,
modernization and expansion of the existing industrial units.
• d. Equity Participation:
• It means sharing risks and rewards of the ownership in a business.
Under this mode of investment, the bank purchases the shares
of public company at market price.

Meezan Bank….Best Islamic Bank
• Meezan Bank’s Islamic Banking is geared towards providing comprehensive and
innovative financial solutions to their clients.
 1.Working Capital Finance Solutions ( for short term financing
requirements)
 2.Project Financing, Expansion Solutions (for medium and long term
financing requirements)
 3.Term Certificates (Riba-free Term Deposit Certificates)
 4.Alliances , Trade and Participating Trem Certificate
 5.Different Schemes of Meezan Bank

Working Capital Finance Solutions
( for short term financing requirements)
• Murabaha and Istisna are designed to meet working capital requirements.
• Murabaha : Meezan Bank purchases the commodity and sells it after
adding an agreed profit. Thus, it is not a loan given on interest - it is sale of
a commodity on a deferred price.
• Istisna’a Istisna Finance is used to cater for the working capital
requirements of a business involved in the manufacturing of goods.

Project Financing, Expansion Solutions
(for medium and long term financing requirements)
Diminishing Musharakah : Meezan Bank and the customer participate in the joint
ownership of an asset. Ownership of the asset is divided into a number of units and
the customer periodically purchases these units from the bank over a specified
period. Over time, the customer purchases all units owned by the bank, making him
or her the sole owner of the asset.
• Ijarah : In contrast to diminising Musharakah, it is based on the provision of the
tangible assets on rental basis for an agreed period of time.
• Meezan Bank’s Car Ijarah unit provides car financing based on the principles of Ijarah
and is free of the element of interest.

Trade Related Services and Alliances
• Trade Related Services
• A complete range of products and services for importers
and exporters are available. Based on various modes of
Islamic Finance, the solutions have been designed to suit
the needs of their customers.
• Alliances
Meezan Bank has alliances and trade will Halal industries.
• When a particular offer is given to Meezan Bank by any company then
Proper research is conducted by the Meezan Bank to know all necessary
information of industry and then Board gives the permission to do
business with this particular company or not.

Outline of the presentation
• History of islamic banking
• Pakistan and islamic banking
• Introduction to bank
• Principles of islamic banking
• Islamic Financial Accounting Standards
• Islamic financial transaction terminology
• Islamic laws on trading
• Implementation of Islamic banking
• Islamic modes of financing
• Difference between islamic and commercial
banking
• Objections on islamic banking
• Conclusion

Term certificates
Meezan bank provides a complete
range of short term and long term
deposit certificates with the flexibility
of monthly , quarterly ,semi-annual ,
and annual returns

Types of certificates:-
1. Certificate of Islamic investment
2. Meezan amdan certificate
3. Monthly mudarabah certificate
4. Dollar mudarabah certificate

1.Certificate of Islamic investment
• Investment can made for 3 months, 6 months , 1
years, 2 years ,3 years and 5 years.
• Profit payment options are monthly, quarterly , or
at maturity
• Minimum investment required for quarterly and on
maturity payment is 50,000 and for monthly profit
payment is 200,000

2.Meezan amdan certificate
• Minimum investment required is 100,000
• Minimum investment required for widows and senior
citizens is 50,000
• Investment can made for 5 ½ years and 7 years
• Profit payment is made at monthly basis

3. Monthly mudarabah certificate
• Minimum investment required is 100,000
• Monthly profit payment will be made to your
meezan bank account

4. Dollar mudarabah certificate
• Minimum investment required is USD 10,000
• You can invest your US dollar for period ranging from
3 months, 6 months, 1 year and 3 years
• Profit payment will be made either at maturity or on
a six-monthly basis

DIFFERENCE between Islamic and Commercial
Banking
Islamic Banking
1) Functions and
operations are based on
Sharia’h principles
Conventional Banking
1)Functions and
operations are based on
fully man made principles

Difference between Islamic and Commercial
Banking
Islamic Banking
2) Promote risk-sharing
between provider of
capital (investor) and user
of funds (entrepreneurs)
2) Investor is assured
of pre-determined rate
of interest

Difference between islamic and conventional
banking
Islamic Banking
3) Aim at maximising
profit but subject to
Sharia'h restrictions
3) Aim at
maximising profit
without any
restrictions

Objections on Islamic Banking
• Financing on fixed rates of profits?
• Fixed profits in diff modes of financing. Whats the
differrence between lending in islam and loans in
commercial banking?
• Money is the commodity. Then why it can not be
lended and earn an over profit in shape of rent while
other commodities i-e car, house can earn the same?
• Islamic banking is non valid because
it deals with commercial based SBP?

What we have told you
Recommendations
• increase the number of banks

Islamic banking

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