Misgiving, rationale, philosophy of islamic banking

1. Misgivings, Rationale, Philosophy & Special
Characteristics of Islamic Banking
Presented by
Md. Fariduddin Ahmed
Advisor
Export Import Bank of Bangladesh Limited
Former
Managing Director & Chief Executive Officer
Export Import Bank of Bangladesh Limited
Islami Bank Bangladesh Limited

2. Prepared by Forkan
 Misgivings and Criticism
Islamic Banking is in vogue for about 4 decades; yet
there still exist many misgivings in the minds of the
customers and general public at large. Some of
such misconceptions and criticisms are noted below:
1.Islamic Banking receive interest in different
name. Some people view there is no difference
between interest and profit.
2.Percentage and Fixed rate: Percentage is
mathematical/ statistical expression. Fixed rent like
rent of house, fixed price shops are not
impermissible.
Misgivings and Rationale ...... of Islamic Banking
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3. Prepared by Forkan
 Misgivings and Criticism
3. Islamic and Conventional banking operations are
similar in nature. Banking function are almost
same but principles are different.
4. Allowing fixed percentage of profit to the
depositors like conventional banks.
Conventional Banks follow ex-ante principles
while Islamic Banks practice ex-post principles in
determining, calculating and distributing profit.
Misgivings and Rationale ...... of Islamic Banking
3

4. Prepared by Forkan
 Misgivings and Criticism
5. Islamic Banks do not share the loss/risk.
In Islamic financing system there are mechanism
like -
a) Profit sharing and loss bearing
b) Profit and loss sharing
c) Selling of commodities at a markup Profit
d) Advance buying of goods
e) Rent sharing
Misgivings and Rationale ...... of Islamic Banking
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5. Prepared by Forkan
 Misgivings and Criticism
6. Fixation of profit of Islamic Bank for the
investment client is like the Conventional Bank.
It’s not true. It differs form mode to mode of
investment, nature & type of business, risk
elements, operating cost stricture etc. of a Bank.
7. Fixing same percentage of profit/ rent in all
commodities/assets
8. Imposing compensation to the investment
defaulters of Islamic Bank is similar to penal
interest/ compound interest of conventional
Bank.
Misgivings and Rationale ...... of Islamic Banking
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6. Prepared by Forkan
 Misgivings and Criticism
9. Islamic Banks have to transact with central
banks and conventional foreign Banks.
10.Islamic banks obtain mortgages/ securities
against investment like the conventional banks.
Misgivings and Rationale ...... of Islamic Banking
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7. Prepared by Forkan
 Rationale, Philosophy & Special
Characteristics of Islamic Banking
1.00 The Objectives of Islamic Economy:
The Objectives of and Islamic economy are as
under:
1.01 To establish Adl (justice), to attain Hasanah
(good) and Falah (welfare) in this life and the
life hereafter.
1.02 To establish Ihsan (gracious conduct or
kindness) in economic affairs.
1.03 To establish Maroof (proper or good acts,
institutions) in economic life.
1.04 To eliminate Munker (evil, wrong or injurious
practices from economic life)
Misgivings and Rationale ...... of Islamic Banking
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8. Prepared by Forkan
 Rationale, Philosophy & Special
Characteristics of Islamic Banking
1.05 To free the humanity from un-wanted
burdens and shackles and to make life easier
for them.
1.06 To achieve maximum economic growth.
1.07 To maximize employment to ensure proper
distribution of wealth in the society.
1.08 To achieve universal education.
1.09 To encourage cooperation in the society.
1.10 To favoring the weaker sections of the society
to establish them in life.
Misgivings and Rationale ...... of Islamic Banking
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9. Prepared by Forkan
 Rationale, Philosophy & Special
Characteristics of Islamic Banking
2.00 The Objectives of Islamic Banks :
The objectives of Islamic Banks are to
promote, foster and develop the application
of Islamic principles in the financial sector in
such a manner that it help achievement of
the above objectives of the Islamic Economy.
Misgivings and Rationale ...... of Islamic Banking
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10. Prepared by Forkan
 Rationale, Philosophy & Special
Characteristics of Islamic Banking
3.00 Concept of Islamic Banking :
General Secretariat of the OIC defined Islamic
Banking as “An Islamic Bank is a financial
Institution whose statutes, rules and
procedures expressly states its commitment
to the principles of Islamic Shariah and to the
banning of the receipt & payment of interest
on any of its operations.”
Misgivings and Rationale ...... of Islamic Banking
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11. Prepared by Forkan
 Rationale, Philosophy & Special
Characteristics of Islamic Banking
4.00 Philosophy of Islamic Banking :
4.01 Riba (Interest ) is prohibited.
4.02 Gharar (uncertainty/ambiguity prohibited.
4.03 Maiser (Gambling) prohibited.
4.04 Conducting Shariah permissible businesses
and services only.
Misgivings and Rationale ...... of Islamic Banking
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12. Prepared by Forkan
 Rationale, Philosophy & Special
Characteristics of Islamic Banking
5.00 Special Characteristics/distinguishing features
/superiority of Islamic Banking.
5.01 Risk Sharing :
No predetermined rate of return.
Sharing the end result of the business.
Loss arising out of Mudaraba business is
entirely borne by the Shahib-Al-Maal.
5.02 Emphasis on Productivity, not on Credit
Worthiness:
 Dominant consideration not on collateral.
 Emphasis on soundness of the project.
Misgivings and Rationale ...... of Islamic Banking
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13. Prepared by Forkan
 Rationale, Philosophy & Special
Characteristics of Islamic Banking
5.03 Moral Dimension
Islamic value oriented system. Full
compliance of Shariah. No finance for wine/
tobacco/casino/pork production or trading.
5.04 Equity :
 Justice to all parties
 Riba is unjust
5.05 Allocative Efficiency :
 Productivity of the project.
 Finance goes to high productive project
even if credit worthiness is lower.
Misgivings and Rationale ...... of Islamic Banking
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14. Prepared by Forkan
 Rationale, Philosophy & Special
Characteristics of Islamic Banking
5.06 Stability of the Banking system:
Mudaraba & Musharaka ensures stability.
5.07 Growth:
Promotion & innovation Entrepreneurship
development.
6.00 Mechanics of Islamic Banking :
6.01 Principles of mobilization resources:
Al-Wadeah
Al-Mudaraba
Misgivings and Rationale ...... of Islamic Banking
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15. Prepared by Forkan
 Rationale, Philosophy & Special
Characteristics of Islamic Banking
6.02 Principles of utilization of resources
 BAI- MECHANISM
Bai-Murabaha (Murabaha to the purchase
orderers)
Bai-Muajjal
Bai-Salam and parallel Salam
Bai-Istisna and parallel Istisna
 SHARE MECHANISM
Mudaraba
Musharaka
Misgivings and Rationale ...... of Islamic Banking
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16. Prepared by Forkan
 Rationale, Philosophy & Special
Characteristics of Islamic Banking
 IJARA/ LEASING MECHANISM
Ijara
Hire purchase (Ijarah Muntahia Bittamleek)
Hire purchase under Shikatul Meelk (Hire
Purchase Musharaka Mutanaqisa - HPMM)
 Direct Investment
 Investment Auctioning etc.
 Quard
 Quard Hassan etc.
Misgivings and Rationale ...... of Islamic Banking
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17. Prepared by Forkan
 Rationale, Philosophy & Special
Characteristics of Islamic Banking
Misgivings and Rationale ...... of Islamic Banking
17
Conventional banking Islamic banking
1. The functions and operating modes
of conventional banks are based on
man-made principles.
1. The functions and operating modes of
Islamic banks are based on the
principles of Islamic.
2. The investor is assured of a
predetermined rate of interest.
Shariah.2. In contrast, it promotes risk
sharing between provider of capital
(investor) and the user of funds
(entrepreneur).
3. It aims at maximizing profit without
any restriction.
3. It also aims at maximizing profit but
subject to Shariah restrictions
4. It does not deal with zakat and does
not pay any zakat
4. In the modern Islamic banking
system, it has become one of the
service- oriented functions of the Islamic
banks to collect and distribute zakah. It
pays zakat.
Conventional Banking versus Islamic Banking

18. Prepared by Forkan
 Rationale, Philosophy & Special
Characteristics of Islamic Banking
Misgivings and Rationale ...... of Islamic Banking
18
Conventional banking Islamic banking
5. Lending money and getting it back
with interest is the fundamental
function of the conventional banks.
5. Participation in partnership business
is the fundamental function of the
Islamic banks
6. Its scope of activities is narrower
when compared with an Islamic bank
6. Its scope of activities is wider when
compared with a conventional bank. It
is, in effect, a multipurpose institution.
7. It can charge additional money
(compound rate of interest) in case of
defaulters..
7. The Islamic banks have no provision
to charge any extra money from the
defaulters.
8. In it very often, bank’s own
interest becomes prominent. It makes
no effort to ensure growth with equity.
8. It gives due importance to the public
interest. Its ultimate aim is to ensure
growth with equity.
Conventional Banking versus Islamic Banking

19. Prepared by Forkan
 Rationale, Philosophy & Special
Characteristics of Islamic Banking
Misgivings and Rationale ...... of Islamic Banking
19
Conventional Banking versus Islamic Banking
Conventional banking Islamic banking
9. For interest-based commercial
banks, borrowing from the money
market is relatively easier.
9. For Islamic banks, it is comparatively
difficult to borrow money from the
money market.
10. Since income from the advances is
fixed, it gives little importance to
developing expertise in project
appraisal and evaluations.
10. Since it shares profit and loss,
Islamic banks pay greater attention to
developing project appraisal project
appraisal and evaluations.
11. Conventional banks give greater
emphasis on credit-worthiness of the
clients.
11. Islamic banks, on the other hand,
give greater emphasis on the viability of
the projects.
12. The status of a conventional bank,
in relation to its clients, is that of
creditor and debtors.
12. The status of Islamic bank in
relation to its clients is that of partners,
investors and trader
13. A conventional bank has to
guarantee al its deposits.
13. Strictly speaking, an Islamic bank
cannot guarantee all its deposits.

20. Thanks for your
Co-operaTion
Allah Hafez