2. Islamic banking system is a system which is
established
on the basis of the philosophy of Islamic laws (called
Shariah) and directed by Islamic economic.
According to the Shariah (Islamic law) the purpose of
Islamic banking emergence is to remove the
interest(Riba) from all the transactions and to purify
the financial system.
The prohibition of Interest (Riba) in the Holy Quran is
the main factor in the emergence of Islamic banking.
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3. Contd…
The Islamic banking is based on the profit and loss
sharing(PLS) system in which the investor shares the
risk and reward.
Basically the main reason behind the set up of Islamic
banking was the desire of Muslims community to make
or organize their financial transactions according to the
principles of Shariah (Islamic Law) and without any
involvement of interest (Riba) accomplish their
financial transaction.
Shariah also prohibits the trading in which financial
risk is involved because it is seen as a form of
gambling
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4. The Holy Prophet Muhammad said in his
speech regarding interest: Allah has
forbidden you to take interest; therefore,
all interest obligations shall henceforth be
forego.
According to the Islamic rules, interest
based transactions are not allowed and it is
the major characteristic of the Islamic
banking.
Two fundamental Islamic rules of Islamic
banking are the profit and loss sharing and
the restriction of the receiving and payment
of interest.
5. How the Islamic Banks Operate ?
Like the other conventional banks Islamic banks
funding comes from deposit on which they pay
no interest. They open the Profit and loss sharing
account (Mudarabah) and investment account
with a return decided by the bank’s profit.They
accept the deosit as mutual fund .They invest
their fund in productive sector and earns the
profit. Banks share the.Profit from the investmen
with the customers. Not only the profit they also
share loss if occur.
Islamic banks also issue bond(sukuk) in which
they pay a dividend rather than interest.
www.Islamicbanker.com
6. • First Islamic bank was established by Egypt named as Mit Ghamr
Saving Bank in 1963 .It offered two types of account :1) Saving
Account (Interest free) 2) Investment Account(Profit and sharing)
1963
• Oil boom in the 1970s triggered a rapid growth of Islamic financial
institutions
1970
• Establishment of the first Islamic bank (Dubai Islamic Bank in the UAE)
in 1975, as well as the Islamic Development Bank (IDB) in Saudi Arabia
1975
• First attempt in the West to establish Islamic banking was in Luxembourg
in 1978)
1978
• 1983 ( Malaysia) Bank Islam Malaysia Berhad was established.1983
• In August 2004, first non-muslim country issued license for Islamic
banking to the Islamic Bank of Britain.
2004
• By the year 2016 there are more than 300 banks and 250 mutual funds
around the globe complying with Islamic Principle.
2016
• Islamic bank’s capital grew from $200 billion in 2000 to close to $3
trillion in 2016.
2016
8. I. Murabaha
It is a contract of sale with a margin
price known and defined between
the buyer and the seller. It can be
direct: transaction between a buyer
and a seller, or indirect: the seller
gives the order and a third person
will be the intermediary between the
seller and the buyer. Islamic banks
could be the intermediary i.e. the
bank buys from the seller and resells
to the buyer with a margin price
previously agreed between the seller
and the buyer.
9. II. Ijarah
The Ijarah or leasing is a lease of
property with a promise of sale to the
tenant. It is a relatively new financing
technique which involves three main
actors:
The Renter who leases the property,
reserving the option of acquiring it at
the end of the lease
10. III. Salam
The Salam can be defined as a
contract of sale with deferred
delivery of goods. Contrary to
Murabaha, the bank does not act as
the seller of the goods but as a buyer
with cash payment of the goods that
will be delivered eventually by its
partner.4 The rule of the Shari ‘a in
principle prohibits any commercial
transaction in which the object is
nonexistent at the time of the
conclusion of such a transaction
11. IV. Istina’a
It is an enterprise contract in which one
party asks another to make or build for
him a product agreeing that payment
will be made in advance, periodically or
upon completion of such project. This
practice s very close to Salam but here,
the product will have to be made (as
opposed to being a finished good as in
the case of Salam). This form of
financing allows Islamic Banks to
finance constructions of houses,
buildings, and other commercial
structures
12. V. Musharaka
The musharaka is a partnership between
two parties or more in the capital of a
company, project or operation through a
distribution of profits (it can be loss or
gain) in agreed proportions. It is based
on the morality of the client, the
relationship of trust and the profitability
of the project operation.
13. Different Aspect of
Islamic Banking
Ongoing changes on the global economy,
individual seeking alternative financial
system and ethical investment transformation
Conventional Banking are also operating in
Islam
Regionally banks are divided into:
MENA,GCC, Non-GCC
Now, 300 full Islamic Banking are
operating
In 2013 it was USD 1.7 trillion and
expected to double till 2018, but look at this
growth i.e 6.7 trillion at 2016.
Source:www.islamicbanking.asia
14. Although Islamic commercial banks have
many products similar to those offered by
conventional banks, the two entities differ
conceptually.
One key difference is that conventional
banks earn their money by charging interest
and fees for services, whereas Islamic banks
earn their money by profit and loss sharing,
trading, leasing, charging fees for services
rendered, and using other sharia contracts of
exchange.
15. 1.THE OVERSIGHT OF A
SHARIA BOARD
A sharia board consists of Islamic
scholars who are qualified to give
opinions on Islamic business
contracts. In a commercial bank,
the board is also involved in
supervising bank operations to
make sure they comply with sharia
principles.You may wonder why a
bank needs a sharia board to
ensure its compliance with sharia
principles. If the basic distinction
between conventional and Islamic
banking hinges on interest, can’t
Islamic banks satisfy the
requirement by just making sure
none of their transactions involves
charging interest.Islamic banks and
other financial institutions must
comply
16. 2.CONCEPTS OF MONEY
AND THE BASIS OF
TRANSACTIONS
To say that Islamic banks are different
from conventional banks because the
former don’t charge interest is accurate,
but it’s only the tip of the iceberg. That
difference is just one of many ways that
the fundamentals of Islamic banking
differ from those of conventional
commercial banking.
17. 3.RELATIONSHIPS WITH
CLIENTS OR CUSTOMERS
The relationship between a customer
and an Islamic bank is completely
different; the debtor and creditor
relationship does exist at times in
Islamic banking. To understand the
relationship between the customer and
Islamic bank, you must know what
contract that relationship is based on.
18. 4.INVESTMENTS IN THE BANK
Investments in conventional commercial banks are based on
guaranteed principal and earning a fixed amount of income.
For example, say that a customer in a conventional bank
deposits $10,000 in a six-month term deposit. After six
months, the bank has a liability to pay back the customer the
principal plus the interest rate charged for six months. Even
if the bank lost the money in an investment, the bank is still
liable to pay back all the money due.
In Islamic banking, the concept of investment is different.
Although the customer deposits the money in order to earn
extra income for her savings, her principal and returns aren’t
guaranteed. Suppose the Islamic bank loses money because
of an unexpected business failure. In this case, the bank isn’t
liable to pay the money to its customer.
(Note: The failure of an investment isn’t very common in
Islamic banks because the banks are very concerned about
their customers and make their investment choices very
wisely. If they didn’t, they soon would have no customers at
all!)..Assets.docx
19. Islamic banks operate under the Shariah principles
(Islamic Law) and that is why Islamic banking is also
appreciated by the Muslim countries.
The main reason behind the appreciation of Islamic
banking is the prohibition of Interest in the financial
transactions.
In Pakistan, the growth rate of Islamic banking is at
very fast pace as compared to the other countries of
the world.
Fast growth and development’s reason of Islamic
banking is the role of central bank of Pakistan.
State Bank of Pakistan established a separate Islamic
Banking Department to support the Islamic banking to
make it as the first choice of the banking. Due to this
support Islamic banks capture
