Sharia banking

1. SHARIA
BANKING
IBS GURGAON

2. WHAT DOES ‘ SHARIA’ MEANS ?
 Sharia is an Islamic religious law which is not only
related to religious relations but also related to day
– to – day life of Islam

3. WHAT IS ISLAMIC BANKING ?
 This kind of banking is based on Sharia law and
mainly two principles:
(a)sharing of profit and loss
(b)prohibition of the collection and payment of interest
by lenders and investors

4. HISTORY
 Islamic Banking is based on Islamic Commercial
Law, which was founded over 1400 years ago
 Modern Islamic Banking grew due to the desire of
Muslims to fashion all aspects of their life in
accordance with principles of their faith
 In 1975, history was created when Dubai Islamic
Bank (DIB) became the first modern
commercial Islamic bank in the world. Before this,
customers had no choice but to use
conventional banks for all their financial
requirements

6. PRINCIPLES
OF
ISLAMIC BANKING?
 Islamic financial model works on the basis of risk
sharing
 1. Freedom to contract
 2. Freedom from price control
 3. Entitlement to equal, adequate and accurate
information.
 4. Freedom from Riba( interest)
 5. Freedom from Gharar ( Risk)
 6. Avoid hoarding
 7. Avoid selling forbidden (Haraam) items

7. TERMINOLOGIES OF BANKING
 Ijara is a leasing agreement whereby the bank buys
an item for a customer and then leases it back over
a specific period
 Ijara-wa-Iqtina is a similar arrangement, except
that the customer is able to buy the item at the end
of the contract

8.  Mudaraba offers specialist investment by a financial
expert in which the bank and the customer shares any
profits
 Musharaka is a investment partnership in which profit
sharing terms are agreed in advance, and losses are
pegged to the amount invested

9. CHALLENGES IN ISLAMIC BANKING
Islamic bank has grown in large no. of
countries the world.
 PLS modes shift the direct risk of Islamic banks to
their investment depositors.
 Provide funds through their PLS facilities especially
in Mudarabah contract.
 Lack of risk-hedging instruments.
 Hold large proportion of assets in reserve accounts.

10. ISLAMIC V/S CONVENTIONAL BANKING
 Only one buyer and seller
in the transaction process
 Practices are concerned
with bear the risk , when
any transaction takes
place
 They bear all the liability
involved in transaction
from the consumer
 Many buyers and sellers
are involved
 Practices are concerned
with elimination of risk,
any transaction takes
place
 They do not take the
liability only get the
benefit by the interest
from the consumers
ISLAMIC BANKING
CONVENTIONAL BANKING

13. HOW DO BANKS MAKE MONEY WHEN THERE
IS NO INTEREST INVOLVED ?
 Profit and loss sharing contracts : The Islamic bank
pools investors' money and assumes a share of the
profits and losses
 Partnership and joint stock ownership :
(a) Declining-Balance Shared Equity:
(b) Lease-to-Own
(c) Installment (Cost-Plus) Sale

14. ADVANTAGES
 It assists in financial inclusion
 Reducing the impact of harmful products and
practices
 It promotes the principle of financial justice
 Encouraging stability in investments
 Accelerating economic development

15. DISADVANTAGES
 While competing with conventional banks, the basis
of Islamic banking makes the proposal unattractive
to deposit holders under Modarabah
 Banks have to recruit highly competent persons in
evaluating each proposal or project before entering
into any partnership

16.  Gestation period of three to five years in
generating profits from the business will discourage
deposit holders in blocking funds in Modarabah
accounts
 Financial fraudulent will help in manipulating profit
figures

17. EXAMPLE : DUBAI ISLAMIC BANKING
 DIB is a public joint stock company, and its shares
are listed on the Dubai Financial Market
 The bank currently operates 62 branches in the
UAE

19. LIST OF SUCH BANKS
 Amana Bank Sri Lanka
 Bank of Whittier USA
 Jaiz Islamic Bank Nigeria
 Dubai Islamic bank Pakistan LTD
 Yemen Islamic bank
 Qatar Islamic bank
 Bahrain Islamic bank
 Syria Islamic bank

20. CHALLENGES FACED BY BANKING
 Building the capacity to manage the increasing
uncertainties generated by financial innovation
 The effective implementation of financial safety
nets and effective coordination
 Increase and highly complex financial and
economic integration associated with globalization

21. CONCLUSION
 Businesses have to open their books so Islamic
banks can verify performance
 Investors are sharing the risk with the companies
 Islamic finance is a centuries-old practice that is
gaining recognition throughout the world