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Introduction to Islamic economics and finance system


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Introduction to Islamic economics and finance system

  2. 2. Monetary World Disregarded The Islamic Finance In The Beginning Of Its Birth. In 20th Century Islamic Finance Is Applied As Parallel System With New Dimensions Scope, Benefits With A Unique Classification To The System As
  3. 3. Islamic Finance Islamic Jurisprudence Islamic Economic System Islamic Banking Islamic Takaful
  4. 4. Riba Free Financial System Movement for Islamic finance was accused in the beginning of its birth in 1956 by Economists, Bankers Jurists & Monetary Pundits, as a program of Islamic Fundamentalists, that is initiated to unite a funding source for international terrorism & linked the first Social Bank to a movement which was gaining momentum against the then Egyptian government during the period of 1958-65 which was also the growing period of Islamic Financial System.
  5. 5. ISLAMIC FINANCIAL SYSTEM Importance , Approach, Scope & Benefits to Socio Economic Growth Today rationality of Islamic Finance, its concept, power & values are changing banking & finance as the world’s fastest developing capital market. It is sad to observe that international press still projecting Islam as an orthodox religion where Islam brings out most modern lifestyle and Monetary system for the world that have effective solution for all economic crises. In reality, Muslims are devoted people and peace lovers, following a very dynamic system that lead to socio economic growth instead of economic growth.
  6. 6. All the Myths, Mysteries, Magnificent, Develop a Question What is Islamic Economics & Finance ? Simply this is a System that develop Man, Money & Commodity Into Participation & Cooperation For all socio economic activities and to gain the resources to satisfy the needs
  7. 7. Islamic Economics is the theory. Islamic finance is the application Both are applied in accordance to Islamic Jurisprudence and in the guidance of Holy Quran. Whereas Shariah is the practice on the guidance of Holy Quran Prophet Muhammad (PBUH)
  8. 8. Introduction to Islamic Economic System Islamic Economics is a system that identify Available Resources blessed by Almighty Allah to the Mankind. How these resources are distributed, utilized & consumed by man keeping the importance of Social Justice. Seeking best of these resources through Participation and Cooperation by applying knowledge, experience, ability and efforts through the power of pen and book, granted by Almighty Allah. In recognition and confirmation of the men’s status on earth As “Unique among all Creations” & appointing man as “Custodian” to all the resources, that Almighty Allah owns solely, exclusively and absolute.
  9. 9. APPLICATION Islamic Economics is a complete System for Political, Social, Traditional, Commercial, Financial, Business & Economic affairs for Islamic & Non Islamic communities without Discrimination, with Freedom of Choice, Act and Speech but within defined limits.
  10. 10. ORIGIN OF ECONOMICS CONCEPT The creation of Adam & the creation of Eve, from the ribs of Adam is the allocation of Genders to two human bodies. The role of these two genders as specified Men to be Responsible & Women to be Obligatory to Cooperate & Participate in achieving maximum benefits from the Blessings of Allah. Both genders were empowered with Senses Need, Want & Desire that lead to Act, Acquire & Acceptance for their basic needs Employing best of their Efforts & Abilities *
  11. 11. Human mind having power to think, act, achieve and integrated with these senses. is the supremacy to convert planet “The Earth” into “The World” World was given a unified system of lifestyle Socio Economics System. Socio Economics System develop community for People People develop geographical boundaries around their community & organize themselves into Nation *
  12. 12. Those Nations accepted Allah as Almighty & Absolute Holy Messengers as Guide Books of Revelation as Manuals of System “DEEN”. Thus These Nations Declaring themselves as * Muslim Ummah.
  13. 13. Definition Of Islamic Economics “Any activity that has a commercial, economical & financial purpose within priorities of social benefit to mankind is classified as Islamic Economics System that has foundation in this classification leads to socio- economic development rather * just economic development.”
  14. 14. Islamic economics is an independent system having a separate identity & effective economic policies to benefits humanity with Social Justice by covering individual interests at Private, Public, Material as Sacred and identify human lifestyle for Earning, Expenditure, Business, Relationship, Right and Duties Responsibility, in Legal frame. Islamic economics emphasis in the Unity, Faith Discipline, Moral & Ethical Values, Equality, Love, Transparencies, Cooperation & Sharing in all the Economics, Business, Social and Commercial affairs for and in the best interest of humanity. *
  15. 15. 4 Principles Islamic Economic System All wealth belongs to Almighty Allah. Man is the trustee of the wealth. Hoarding Wealth of wealth is prohibited. must be in circulation. *
  16. 16. Islamic Economic Believes Does not accept theories for Scarcity of Resources and declare availability of unlimited resources attach to extreme of Human Efforts. Do not accept Inflation and link resources as Seasonal Products to be consume within the season of its production for maximum benefits. It identify holding of wealth & resources as a causes to the origin of crimes in the society. It declare money as Medium of Exchange in Volume * against the Value of commodity and services.
  17. 17. Islamic Economic
  18. 18. Three Factors of Production. These factors execute all economic activities keeping the socio economics growth as priority in exploring, generating and producing all the resources to satisfy all human needs, wants and desires and develop affordability level of common man. *
  19. 19. Man, Money & Commodity develop the exchange system that put money to act as bridge between two system classified as Lending and Borrowing Financing and Participation Lending Pricing money with the Rate applied on Principle with time value declaring Value of money as commodity Financing Participation of Man’s ability to use the Money to multiply, divide, subtract and add by exercising the money for specific purpose with socio economics and commercial reasons. *
  20. 20. Riba in Factors of Production Riba Al Nassia: Money increase in principle volume by using the compounding method without any economic activity. Riba Al Fadai: Commodity trading & exchange of without valuing the commodity in exchange against volume of Money as in Barter Trade or using unfair means of trade. * .  Riba Al Garrar: Human acts for self benefits
  21. 21. Islamic Shariah identify Riba in all Economic Affairs Any earning, income, profit or benefits being earned, taken or received through wrong means, bad intentions, shady practices or wicked participation. Such earning, income, profit or benefits are classified as RIBA. Such receivables and acts are not only treated as is immoral, unethical, unjustified commercial, economical, financial, political, social, cultural & traditional practice and activity to gain benefit at individual, collective or institutional level but furthermore threat to socio economic life of society. The above receivables and acts leads to crimes, develop cruelty & exploitation, create self- importance & monopoly, discrimination, * inflation & convert pluralistic community into singular society.
  22. 22. Impact of Riba on Financial Affairs? Riba is as a combination of evil and sins. Riba is bad practice to earn & gain. Riba bring instability in the community life. Riba is the source of inflation. Riba create classes in the society. Riba create injustice in seeking the rights. Riba is non transparent economic activity. Riba is the most hated practice in Islam Riba is the social crime Riba develop scarcity of resources against unlimited needs *
  23. 23. Interest is a Category Of Riba Fix rate of principle amount charged in excess without risk, efforts, activity, in guaranteed success with fixed period making determining with forced return in Interest. This return, income, earning on fixed term & fixed percentage on principal amount is a price of money whereas money is an medium of exchanges in volume against value of goods and services Principle X Rat X Time / 100 = Interest *
  24. 24. Financing outcome Profit Profit is a success result on financing achieve by using Principle Finance, deducting from Proceeds of Sales & Services, realizing Gross Profit, deducted by Cost of Transaction, declaring Net Profit which realize “as free from all liabilities of the transaction” Appraisal, Precaution, Trust, Confidence, Experience, Knowledge, Purpose, Will & Sprit are business ethics that act in realizing profit on the * transaction.
  25. 25. APPLICATION OF PROFIT Principle- Sales=Gross Profit -Cost= Net Profit / Ratio Of Participation Investors Participation Ratio Profit Investor A 100,000 10 7.00 Investor B 200,000 20 14.00 Investor C 300,000 30 21.00 Investor D 400,000 40 28.00 Capital 1,000,000 At Ratio of Investment 10: 20: 30: 40 Capital invested Less Sales Proceeds Gross Profit Less Cost Net Profit 1,000,000 (1,100,000) 100,000 (30,000) 70,000 *
  26. 26. DEFINITION OF FINANCING Finance is an intermediary source of money in volume in exchange of the values for ability, commodity, equity & property in production, manufacturing & trading. Financing makes the volume of money to support for specific purpose within specific period, in between person to person, person to institution or institution with group or institution on an * understanding to share the results of transaction in profit and loss.
  27. 27. Continued… Financing develops the ownership, support the entrepreneurship, line-up the procurement, production, distribution, consumption and the utilization in participation & cooperation between skill & capital on the basis of profit & loss at maturity. Financing is use of money by one who owns it and other who has an ability to use it for a common purpose to make profit by participation and cooperation. Financing is the act of money without the concept of * liability, collateral or the guarantee. Its origin is investment and its end is ownership.
  28. 28. Difference Of Financing & Lending Financing Lending is liability and not the participation. Financing Lending is Equity and not the Liability is made and Loan is given is secured and financing is support. Financing is an investment and loan is facility. Lending cannot be financing until it is agreed on Profit and o loss sharing  Financing cannot be a loan till return is guaranteed. Lending * is given at a price of money on application of Rate
  29. 29. Continued… Financing Lending has to be secure by external factor of collateral Financing Lending cannot be made until the user is able to use it leads to inflation and liquidation Financing Lending is securitized within its own system is given against the confirmation of guarantee. Financing Lending outcome to be profit, shared in an agreed Ratio. ends at ownership increase liability, cost and decrease the net worth * Financing increase the capital base as well net-worth Financing is an act of money which is classified as the opposite to lelending.
  30. 30. Term "Islamic finance” appeared in 1960’s from Northern African Region, Egypt by the establishment of First Social Bank, to clean Money as EQUITY, Man in ABILITY, Commodity for NEEDS from Riba through by using the Participation & Cooperation for achieving maximum resources by employing the Human Knowledge, Efforts, Experiences & Reputation for all commercial and noncommercial purposes in socio economic activities, project or transactions in satisfying the human needs. *
  31. 31. Early Islamic era rejected lending of money as it involve pricing of money by applying RATE on Principle Amount by confirming results GUARANTEED which is SHIRK Financing is taken as Equity for all Socio Economics Ventures through Input Method SUKUK Issuance, Subscription & Contribution of Monetary Resources to Structure Capital for Output methods through Modaraba ………….Ability Financing Morabaha……… Commodity Financing Ijarah………Property (Asset) Financing Musharka. Equity/ Venture Financing
  32. 32. FINANCE Appreciates work ethic, wealth distribution, Social & Economic justice. Defines role of the state, responsibilities & duties of the citizen. Established absolute prohibition of payment or receipt of fixed & guaranteed returns. Encourages entrepreneurship Discourages speculative behavior Emphasizes sanctity of contracts * Enforce rules for handling economic, social, political, and cultural characteristic of Islamic societies
  33. 33. Risk Indicator & Perimeters for Financing Application of 12-P for pre-financing activities 1.Person who is financing to whom? 2.Purpose 3.Project 4.Period for which financing is work out? for which financing is required? for which finances to stay as financing? 5.Product that develop through financing? *
  34. 34. Continued… 6. Process to be use for financing? 7. Price volume of finance require? 8. Place locations where finance shall be utilize? 9. Participation, relation & responsibilities 10. Pact terms & condition between participators? 11. Professionalism repute, ability, experience, knowledge * 12. Perfectness at all levels of methods and operations ?
  35. 35. Islamic Finance Growth In Six Decade In Mid of 19th Century Northern African Region saw the Islamic Financial System up-and-coming parallel against the running Conventional System in the monetary world Egypt is the pioneer of Islamic Finance and so far Egypt has the highest volume of contribution in the development of Islamic Finance System which is now recognized by the 21st Century’s bankers, Jurists Economists, Bankers and all those who are link to Money Business. *
  36. 36. Egypt Influence on financial system Finance from Egypt penetrated in the other regional countries and number of personalities enter as researchers, scholars, Advocator, professors, jurists and economist in the Islamic Financial Movement . Egypt now has 14 Islamic banking licenses and several Islamic finance windows, with approximately 120 Billion Egyptian Pounds of assets in Egypt's Islamic banking industry out of Total assets of the entire banking sector are about 1.3 Trillion Pounds, according to Egypt Central Bank. *
  37. 37. Pakistan participation In 1977 Pakistan Military Dictator General Zia-ul-Haq on the advice of Mr. Moazzam Ali one of the pioneering source took the initiative in converting Pakistan economic system into ZERO Rate of Interest. The then President of Pakistan ask Counsel of Islamic Ideology to draft recommendations which drafted a remarkable report on Islam and Finance in contribution of over 400 leading Pakistan and international reputed personalities as contributors to the assignment for almost * three years.
  38. 38. Birth of Modaraba in 19th Century The report presented at Finance Committed of OIC which was declared as one of the most authentic documents covering Islamic Economics, Finance, Banking, Takaful and Jurisprudence . In 1984 in guidance of report Pakistan moved Modaraba Ordinance & declared Modaraba Financing as NBFI (Non Banking Financial Institution) in Pakistan with the vision to develop SME role in economy. SME penetrated in the international monetary market as * solution for economic crises due to Riba Free & Transparent way for Ability support through Capital.
  39. 39. Egyptian Scholar Dr. Ahmed Al Naggar Credit goes to Egyptian Economist and Scholar Dr. Ahmed Al Naggar & his associates for their tiring efforts to develop infrastructure for the Islamic Finance. In 1963 Dr. Ahmed Al Naggar, made the pioneering efforts in establishing a saving bank which was based on profit-and loss sharing at Egyptian town of Mit Ghamr.  In 1972, this Mit Ghamr Savings project became part of Nasr Social Bank which expanded to establishment of 9 banks in Egypt till 1976. Dr. Naggar organize the first International conference on Islamic Banking and Islamic Economic in 1978 to start the program of awareness for leading personalities of Islamic countries which agreed to form a platform Human Resource Development on the Islamic Finance
  40. 40. Institutionalize Support International Institute of Islamic Banking & Islamic Economics (IIIB&E) was established in Cairo, Egypt in the mid of seventy in 19th Century for Human Resource Development on Islamic Economics & Finance. To bring the Islamic Finance Houses under single umbrella, International Association of Islamic Banking (IAIB) with Headquarter in Heliopolis Cairo was formed and initial Membership was taken by Egypt, Pakistan, Sudan, Turkey, United Kingdom, UAE, Saudi Arabia, Malaysia, Iran, Morocco, Algeria, Senegal, Niger and then with passage of time Kuwait, Bahrain, Qatar, Oman and Indonesia enter into the club. All * what mention above was the achievement of Egyptian Scholar Dr. Ahmed Al Naggar & his team
  41. 41. Islamic Finance Institutions In 1974 on the request of IAIB, the Organization of Islamic Countries (OIC) OIC took the IAIB proposal to shape it in Islamic Development Bank (IDB) to be operated on Shariah principles for intergovernmental activities in providing funds for development projects running into member countries with Headquarter in Saudi Arabia Dubai Islamic Bank established in 1974 was the second Big achievement after IDB. The beginning of 80’s saw a tremendous growth in Islamic Banking and Finance when two groups entered in Islamic* Finance namely DMI Group and Al-Baraka Group.
  42. 42. North African Region In the mid of 80’s in the 19th Century Algeria entered into the Islamic Finance with the introduction of one Banks affiliated with Egypt and Tunisia and 2nd bank affiliate to an Islamic Bank of Bahrain. With the two bank in thirds Northern African country entered into Islamic Financial System after Egypt and Tunisia. By the end of 1999 Islamic Finance reach to almost all the five continents and their member countries. Conventional bank started introducing Islamic Banking & Finance window at their institutions. *
  43. 43. Tunisia After a secular rule, Tunisia's government aims to develop Islamic banking and central bank plans to Allow the banks to operate "Islamic windows" to segregate money from conventional operations. Tunisia adopted Islamic Finance in late 70’s by establishing 2 offshore Banking & 1 Financial House In 2010 Bank Zitouna establish in banking community for domestic market with active financing in real estate projects under Musharka, equipments on Ijarah and Trade Finance Morabaha for commodity & stock. .
  44. 44. Morocco … In 1990 IDB, Central Bank of Morocco and Bank AlMaghrib hosted a conference on Islamic finance which was the initiative to bring change in the banking sector. In 2007 Morocco began introducing Islamic banking products in through Moroccan Central Bank by allowing certain types of Islamic financial products in response to growing consumer demand. To mobilize Islamic financial products a draft bill with was place before parliament for approval. It will add a chapter to the Morocco's Banking Law, providing a set of regulations on all Islamic finance products. *
  45. 45. Continued… Moroccan government finally detailed how it intends to develop Islamic finance in the country and enter into project under Islamic mode of financing. Kenitra Power Plant Project a 300 MW worth $180.05 was structured as an Installment Sale (Morabaha). Water Supply Expansion project in Taza Province through an Ijarah Istisnah facility worth US$37.83 million. *
  46. 46. Libya… Libyan government under the previous regimen have always been to keep the financial matter isolated from the international monetary markets. In the last part of previous regime there have been moves to open up the largely state owned banking system but political turmoil did not allowed to do so. Recently Gumhouria Bank had declared its intention to establish an Islamic banking subsidiary which will add Libya as member in Islamic Financial Market .
  47. 47. Trade Financing in Northern Africa Morocco has been the largest beneficiary of trade finance facilities from the IDB at ID1.67 billion (US$2.38 billion), followed by Algeria with ID1.49 billion (US$2.13 billion), and Egypt with ID1.38 billion (US$1.97 billion). In February 2012, Egyptian Financial Services Authority support the issuance of Sukuk in the country. A legislations has also passed in support to developed Sukuk market in Egypt which is most likely be facilitated by the parliament. Other countries in the north such as Morocco, Libya, Algeria and Tunisia have also slowly but surely begun to open up the markets to Islamic finance, with draft legislations and tax exemptions for the issuance of Sukuk on * the agenda, especially following the change in political regimes in Libya and Tunisia. Nazneen Haleem for Islamic Finance Journal August 2012
  48. 48. Islamic Finance Development in Global Aspect      International Banks that took initiative in introducing Islamic Windows Between 80’ & 90’ Citigroup HSBC Deutsche Bank UBS Standard Chartered Bank
  49. 49. Equity Participation to structure Capital Base an opportunity to common saver Sukuk Islamic finance actively enter into Sukuk issuance for some of the key projects in Gulf Department of Civil Aviation, Dubai: $1 Bil Qatar: $700 mil Pakistan: $600 mil Malaysia: $600 mil Bahrain: $79.5 mil German State of Saxony-Anhalt: €100 mil Islamic Development Bank: $400 mil World Bank: $200 mil
  50. 50. Islamic Finance In Project
  51. 51. Islamic Finance Conclusion Islamic finance and conventional finance are quickly come together in the Gulf region for single purpose. As conventional investors gain more comfort with Islamic structures, cost differential between Islamic products and conventional products have almost disappeared As a result, Islamic products may be more practical because they appeal to both Islamic and conventional investors
  52. 52. Issuers, public & private, may consider tapping the Islamic capital markets as Islamic finance is asset-based industry and business can fit with the structures developed in Islamic finance. High-liquidity of Islamic banks & Islamic investment funds, issuers who tap this market may be able to obtain relatively favorable pricing relative to the conventional market
  53. 53. Almighty Allah is the Creator of this life & makes man, custodian to all the blessings for humanity. Man’s determination towards Almighty Allah overcomes all & guides man to the right path. It is also impossible for the Muslims to raise the community in prosperity or the awareness that evilness can show the way to advancement, going against the prohibitions of Almighty Allah. *
  54. 54. Prime Importance for mankind Almighty Allah prohibited any object or any act that is harmful to mankind that creates instability, bring injustice, become injurious to human life and considered as unconstructive to Socio Economic System that leads to Islamic Finance. *