Agashe Sir Ppt

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ISLAMIC BANKING

By

Mohsin Sayyad



DEFINITION:ISLAMIC BANKING

Islamic banking refers to a banking activity that

is consistent with Islamic law (Sharia¶h)

principles and guided by Islamic economics.

In particular, Islamic law prohibits usury , the

collection and payment of interest, also

commonly called riba.



The foundation of Islamic bank is based on1) the Islamic faith

2) Islamic Law or the Shariah in all of its actions

and deeds.

What is Shariah ?

refers to the "way" Muslims should live or the

"path" they must follow.



Principles of Islamic banking

The absence of interest-based (riba)

transactions;

The avoidance of economic activities involving

oppression (zulm) The avoidance of economic activities involving

speculation (gharar);

The introduction of an Islamic tax, zakat;

The discouragement of the production of goods

and services which contradict the Islamic value

eg sell alcohol or pork.



Principles of Islamic Banking

Fund owner should share both the risk and the

return with the users of the fund.

This will be charged differently in business

activities based on trading, leasing or the

partnership basis.



Why ISLAMIC BANKING?

The total worldwide Muslim population is about

1.57 billion or 23% of world population.

Total fund base of over USD 1 trillion.

To attract FII and FDI from GULF countries.

Increasing awareness about Sharia¶h

principles among the people.



International OverviewInternational Overview

The size of Islamic Financial Industry is growingannually @ 15% per annum.

75 countries have Islamic Banking Institutions.

-Muslim countries such as Bahrain, UAE,Saudi Arabia, Malaysia, Brunei and Pakistanetc;

-Non-Muslim countries such as USA, UK,

Canada, Switzerland, South Africa, China and Australia etc.



Because of the efforts taken by

-Accounting and Auditing Organization for

Islamic financial institution (AAOIFI)

- Islamic Financial service board(IFSB)

its recognized by IMF, World Bank.

40 % Islamic bank clients are non muslims.



Leading foreign Banks have opened

Islamic Banking windows or subsidiariessuch as:

±Standard

Chartered Bank

± Citibank

± HSBC

± ABN AMRO

± UBS



Islamic Banking distinguishes fromConventional Banking in four (4) basicprinciples:

Interest Free Transactions.Risk SharingAsset & Service BackingContractual Certainty( Gharar free contracts)



Modes of Islamic

Finance Murabaha (Cost Plus)

Ijarah (lease, rent or wage )

Ijarah -Wal-Iqtina

Musharakah

Musawamah

Istisna'a

Bai Muajjal

Mudarabah (Profit Sharing)

Bai Salam



1)Murabahah (Cost Plus)

-When a firm wishes to purchase something using aloan, firm tells the bank after having negotiated the pricewith the equipment manufacturer.

The bank then buys the equipment and the borrower buys it back from the bank at some later date, for theprice that includes a markup for the bank.

Price can be paid in installments.



5)Musawamah

Price is bargained between seller (Bank) andthe buyer without any reference to the price paid

or cost incurred by the former.

same as Murabahah except seller in this is notobliged to reveal his cost.

Both the parties negotiate on the price.

Suitable for single huge transaction.

Used where it is not possible for bank to tellnumber of minute details.



2) Ijarah :-

means lease, rent or wage.

the Bank makes available to the customer the use of

service of assets / equipments such as plant, office

automation, motor vehicle for a fixed period and price.

Customer is liable for loss to asset due to his negligence,

but cannot be made liable for loss caused by factors

beyond his control.

Used for things which can be hired but their corpus is not

consumed. Goods like candles, cotton, fuel etc.are

exempted.



3) Ijarah-Wal-Iqtina (hire purchase)

Islamic bank provides equipment, building, or other assets to the client against an agreed rental.

At the end of the lease period, the ownership in the assetwould be transferred to the lessee.

4)Musharakah (joint venture)

Where a bank may join another entity to set up a joint

venture..

Both parties participate in various aspect of project. Profit and loss are shared in a pre-arranged fashion.

The bank may withdraw gradually after an initial period.



)Istisna'a (Construction finance)

Bank enters into a contract with the customer requestingthe financing to execute a construction project such

- office building ,

- private residence, or

- an apartment building, roads etc.

the bank usually will appoint a contractor.

the bank provides the funds for materials and wages

At completion the customer pays the bank the full

³Istisna´ amount including the bank profits.



7)Bai muajjal (Credit Sale)

Letters of credit where the bank will import of an itemusing its own funds for a client,

profit is shared from the sale of this item or

Bank may ask for mark up price.

8)Bai salam :

A contract in which advance payment is made for goods to

be delivered later on.

The seller undertakes to supply some specific goods to

the buyer at a future date in exchange of an advance pricefully paid at the time of contract.

The objects of this sale are goods and cannot be gold,

silver, or currencies based on these metals.



9)Mudarabah (Profit Sharing)

In this Islamic banking lends money to a business.

- Rather than charging that business interest on the loan ittakes a share in the profits that are derived from theinvestment.

The deposite is treated as an equity investment inwhatever activity the bank uses the capital for.

- Thus the depositer receives a share in the profit from thebanks investment according to an agreed ratio.



Differences Between Islamic Bank

and Conventional

CONVENTIONAL BANKS

1. The functions and

operating modes of

conventional banks arebased on fully manmade

principles.

2. The investor is assured

of a predetermined rate of

interest.

ISLAMIC BANKS

1. The functions and

operating modes of

Islamic banks are basedon the principles of

Islamic Shariah.

2. In contrast, it promotes

risk sharing between

provider of capital

(investor) and the user of

funds (entrepreneur).



3. It aims at

maximizing profitwithout anyrestriction.

4. It does not dealwith Z akat.

3. It also aims at

maximizing profit butsubject to Shariahrestrictions.

4. It serves as a Z akat Collection Centre and

they also pay out their Z akat.



5. Lending money andgetting it back with

compounding interest isthe fundamental functionof the conventionalbanks.

6. It can charge additionalmoney (penalty andcompounded interest) incase of defaulters.

7. For early settlement,bank fee is charged or norebates are given.

5.Participation inpartnership business is

the fundamental functionof the Islamic banks.

6. The Islamic banks have

no provision to chargeany extra money from thedefaulters. Only smallamount of compensationand these proceeds isgiven to charity.

7. Rebates are give for earlysettlement at the Bank¶sdiscretion.



8. For interest-based

commercial banks,

borrowing from themoney market is

relatively easier.

9. The status of aconventional bank, in

relation to its clients,

is that of creditor and

debtors.

8. For the Islamic

banks, it must be

based on a Shariahapproved underlying

transaction.

9. The status of Islamic

bank in relation to its

clients is that of

partners, investors

and trader, buyer and

seller.



REASONS FOR NON IMPLEMENTATION

1. RBI can¶t act as a lender because it charges

interest.

2. Can¶t interact with conventional banks based

on principles of interest.

3. Payment of interest on deposits acc. To sec 21of Banking Regulation (BR) Act.




4. Ijarah (for home finance):- Islamic bank owns

the asset & hold the title, but sec. 9 of BR act

prevents bank from any sort of immovable

property other than private use.

5. Tax procedures:- interest is passive income

and profit is earned income. Both are treated

differently.




6. Project finance & SME credit: sec 5 & 6 of BR

act indicate form of business a banking company

can undertake & does not allow any kind of profit

sharing and partnership contract- basis of

Islamic Banking



REFERENCES

Understanding Islamic Finance by

Muhammad Ayub

www.islamic -banking .com

http://www.iba.org.in

http://economictimes.indiatimes.com

indianportfolio.com

http://www.business-standard.com www.financialexpress.com



TH ANK YOU

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