Introduction to islamic banking and conventional banking

THE TWO BANKING SYSTEM

ISLAMIC (SOCIAL) BANKING

VS

CONVENTIONAL BANKING INTRODUCTION & APPLICATION PRACTICE- OPERATIONS- CONDITIONS

YOUSUF IBNUL HASAN PROGRAM CONSULTANT ISLAMIC BANKING & APPLIED FINANCE

IQRA UNIVERSITY

PAKISTAN

u s u f h a s a n @ h o t m a i l . c o m

8/27/2014 Yousuf Ibnul Hasan,

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Conventional Bank

These institutions are limited to the monetary affairs and to the monetary markets with a

purpose to gain monitory benefits in rightly or wrongly.

Islamic Banks

A financial institution with Islamic norm and directive as defined for the betterment of

socioeconomic development as the benefit of the society, with the commercial viability of the

monetary affairs, ventures and transaction in gaining and disposal of basic need & resources.


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Islamic Bank is the Partner of its

Participator who is taken as Depositor in

Conventional Banking.

Islamic Bank keeps all matter in

transparent with its participator and share in

Financing & profit at pre agreed RATIO of

Investment & Profit & not on the application

of RATE on principal & interest like in the

Conventional Banking.

Islamic banking is a banking in TRUST


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Purpose of Banking

Islamic Banking offers its services that lead to

Socio Economic Development of a community,

country, region, continent and the world.

Conventional Banking serves the economic

development without keeping the social

contribution and base for individual growth rather

to the community development


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• The purpose of the conventional banks is to make earnings on each transaction and services that they execute or provide.

• Serve the positive role exclusively and in particular to economic development.

• Provide services as an ultimate goal or targets to earn of the growth of their own institution.

• Materialization is an individual passion to trade in funds and become wealthy through their customers and community.


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• Offer for the development in the best interest of their own institution at first and community as secondary.

• Working is nontransparent and client cannot inquire on the affairs of the fund.

• Share on earnings through investment do not have capital investment of the bank where as interest is taken on priority.

• Money lending or deposit by fixing the rate of return similar as buying & sale deal.

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• Return on monetary transaction are guaranteed.

• Lending is covered by way of collateral, either in material or in monetary value.

• Use of money lending does not have any particular reason to consider.

• Actively play vital role in the economic development, but avoid socioeconomic elements due to lack of interest.


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• Overheads of conventional banks do not have any limitations and any amount could be the use of the depositors funds to meet the expenses.

• Appraisal & assessment of the facility or transaction pertain to lending or borrowing mostly carry out on the proper information.

• Criteria of assisting clients in marketing activities and the development of the inter bank clientele relationship


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• Concept of commodity trading activities unseen in the banking operations. However money trading is the main purpose of income.

• Legal documentation for banking services are prepared stereo type to safeguard the bank’s interest.

• Exploitation of the fund owner.

• Operators of banks emphasizes more wealth, more domination and extreme exploitation.

• Economists did not find a way to get rid of the bad effects because the community could not avoid the bank’s services.


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• Moves resources and lend these resources on fixed return to those who need funds for their business or personal utilization.

• Lending remains only to generate income, rightly or wrongly.

• The objective is to earn interest in buying and selling the money and keeping the cut in between to the sale and purchase of money in addition to the bank profitability.

• Act as Post Office, Middlemen or Commission Agent in buying and selling of funds.


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ISLAMIC BANKING & FINANCE HOUSES

• Operates on the values of socio economics with the determination of the economic development of the community without exploitation and greed.

• Lead to eliminate bad practices and its effects in commercial banking which are practiced and seen in the conventional banking system.

• Keep close to the need of the investor and user of funds with the aim to participate rather to act as regulators.



• Mobilize resources and invest by way of financing on profit and loss sharing basis.

• Aim to assist the user in healthy venture that serve the economic with aim as socioeconomic growth in the community.

• Purpose of financing is to give financial assistance with intentions of progress of a community,

• Emphasis on decrease the inflation and normalizing the prices through financing techniques and modes.

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• Help in the production of commodities useable and consumable and appreciably make profit without exploitations.

• Role in the economic life is common and comprehensive with transparent results.

• Beneficial objective is to establish the socioeconomic growth of the communities.

• Gaining profit is not a primary goal of their institution, but develop means of capital structuring to project and transaction with

socio priorities.



• Investment of funds are prohibited for the commodities and activities that develop negative effect on the community life.

• Returns on investments are based on competence and on transparency through participation of fund manager & the fund user.

• Rule out in extending financial involvement

Without the Islamic aspect of the nature of the transaction, which should not hold opposing views to the binding of the Shariah.



• Financial activities that are classified as RIBA activities are avoided

• Products and services through money and commodity for useable and consumable are considered as forbidden which damage the mankind in and restricted by Islam and all other practicing religions.

• Acts & deed pertain to non transparency such as earning & distribution of profit between the bank & client are considered as unethical and immoral monetary affairs.



Distinctive dealing with the Islamic Banks

• Dealings in Islamic Banks are the top of magnificent principles and high beliefs.

• Significant without any doubt is the prohibition of Riba in all forms that is in receiving or giving with the intent of stopping its bad effects.



The merits that follow the prohibition of

dealing usury are as follows:

• Directing efforts towards the development by means of investments.

• Relationship between the economic development and the socio economic development.

• Revival of the rule of Zakat, Sadqat, Alms, Charity, Donation, Qard-e-Hasana and its sound economic and Islamic function.

• Growth in the socioeconomic rather to just an economic activity.

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Effects on the Operations of the Islamic Banks

• Putting Allah’s order of prohibiting usury in implementation of banking activities.

• Realizing justice in economic activities and put a stop to exploitation on the financial needs for economic and commercial activities.

• Revealing the element of human work in banking activities as a source of income.

• Eradicating contradictions between believing and practical application in Islamic communities.



• The rule to measure the work and the production as a source of profit and increase of capital.

• Linking the individual customer with the Islamic directives towards the economic and commercial importance of money and efforts.

• Finding practical substitute to stop on the Rate of Interest charged on Principle and introduce Ratio on investment participation in the banking transaction either in deposit participation of in financing.

• Realizing chances of work and make the most of the potentials and capacities.



• Giving social support by contributing by Alms, Donations, Financial Aids considered as spreading the unification, affection, eliminating selfishness, greed, self-importance, discrimination, jealousy, injustice, cruelty and humiliation in the social and economical life of the community.

• Using funds of Alms, Donations, Financial Aids is the confirmation to the management for countless number of economic problems and fighting poverty alleviation from the community.



The forces behind Islamic Banks in achieving their objectives

There are two pillars which may be considered substantial to establish the way towards the Islamic Bank and to realize its goals in the promotion of socioeconomic

life of the community

These pillars are

Human Elements & Economics Policies



• The human element is the administrative body that manages the operation of the bank in the supervision and guidance of the GOVERNOR

• The governing authority is assisted by the board of directors and personnel who are professionals in their field of trade.

• Authority should preferably be a Muslim with complete faith and understanding to the Islamic values and injunctions guided by the Holy Quran and Shariah Rules of economic and commercial matters.

• Conversant with Rules, Policies, Functions & Ideas of Islamic banking services & operations.

• Capable to administer & make use ability as an honest, professional before being a man of implementation.



• Necessary to be specialized in the field of banking, investment, financing and commercial trading operations.

• Combines the characteristic with the governor as the expertise of the members of the board of directors and know how to make efforts in Human Resource Development, putting the right man on the right job and able to form a team of professional workforce of administrators, executives and worker.



• Guide and develop effective, premeditated policies in the subject of Finance, Investment, Administration, Human Resource, Local & International, Economic, Commercial, Trading, Social & legal affairs, Organization set-up and Regulatory affairs to guide the administrative body and to lead the team in the best ways of projecting the Aims, Objectives, Goals, Effects and importance of Islamic Banking in the community life.

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Distinctive dealing in Islamic Banks

• Dealings in Islamic Banks must be on out- standing principles and in high beliefs for services and operations.

• Significant without any doubt for prohibiting of Riba in all forms in dealing for banking services with clear target to stop bad effects.

• Leads to socioeconomic development rather to remain in economic development.



Merits to follow the prohibition on dealing RIBA in Islamic Banks

• Directing efforts towards the development by means of investments that develop socioeconomic activities.

• Relationship between the economic development & socio economic development.

• Revival of the rule of Social Development along with commercial activities by using Alms, Donations, Zakat and Sadqat for its effective and positive economic and Islamic functions



Effects on the Operations of an Islamic Banks

• Putting Allah’s order of prohibiting usury in execution.

• Realizing justice and preventing exploitation.

• Revealing the element of human work in banking activities as a source of income.

• Eradicating contradictions between believing and practical application in Islamic communities.



• Sovereignty of measurement of work and production, as a cause of profiting and increasing of capital.

• Linking individuals by Islamic directives.

• Finding practical substitute instead of the rate of interest.

• Realizing chances of work and exploiting the potentials and

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• Giving Alms, Donation, Charity, Zakat through banking is considered spreading of the alliance, affection, cooperation, participation, support and sincerity by wiping out selfishness and jealousy from community life.

• Using funds of Alms, Donation, Charity, Zakat guarantees the cure for countless number of economic problems and combating poverty.

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Financial resources of Islamic Bank

• Savings Accounts • Deposited Funds for Investments • Deposits • Current Accounts • Alms, Donation, Charity, Zakat and its

money should be spent in their rightful channels

• Participatory Profit through Riba free modes of financings by application of RATIO according to participation and not the application of RATE on principle



• Inter Islamic Banks relations

• Parallel Sale & Purchase of Currency & Commodities

• Advisory Service on financial transaction

• Lead Syndicate and Consortiums as manager of the transactions



Islamic Banks target area of investment fund management

• Firstly: Direct investment: As establishing companies or organizations which perform a certain economic activity commercial, industrial or agricultural

• Secondly: Investment by participating with others in projects as follows:

1. Capital of the project, buying shares of other companies or sharing in the capital of certain projects.



Participation Modaraba Contract in certain transactions by paying the whole capital or a part of it.

Participation ends in ownership as communication projects and buildings.

Profitable operations: by enabling individuals or authorities to obtain required commodities in case of needed prices.



• Thirdly: Lending without interest in certain cases.

• Fourthly: Using alms funds and specialize them in Islamic collaboration.

– The right function of alms fund is to enable the poor man to enrich himself so that there may be a fixed source of income to spare him the need to help.

– If the resources of alms and their collections increase, then may be used in establishing enterprises and factories.



Restrictions for Islamic Banks in the practice of lending

• Actual interest credit or debit – does not differ from usury prohibited by the holy Quran.

• Discounting commercial bills in return for interest does not differ from usury prohibited by the Holy Quran.

• Only legal form of loan is the best loan without interest.

• Islamic Bank can restore the actual expenses, which are spending for the service and management of the loan.



• Authorized to be proxy in collecting debts and commercial bills in return for a wage or a commission is lawful.

• Allowed transferring commercial bills is lawful, that is transferring debts from one entity to another, i.e. from the entity of the transferor to the transferee in the bank accounts and registers only.

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Legal frame of Islamic banks compared to Conventional banks

• Legality of depositing and the consent of the owner to the bank to keep his funds in return for a wage or a commission.

• Legitimacy of a wage or a commission in return for work or service.

• Authority of hiring a stated utility in return for a stated compensation as hiring assets or Stockyards.



• The bank can restore actual expenses, as telephone, telegram, post etc. In addition to his wage or commission unless it is agreed that the wage or commission includes them.

• The bank can buy or sell foreign currencies on behalf of his clients and in return for a commission (of exchange) on condition that it should be handed by hand.

• The bank can act as fund manager and earn part of profitability as management fee.



• The bank can accept work “joint hiring” or Outsourcing as when it is required for the operation of pre-agreed and pre-defined fee or wages through contract..

• The bank can buy, sell & issue financial Certificate, Sukuk, Shares and collect their dividends in return for a fee or commission.

• The bank can issue Promissory Note on behalf of its participation Partner.

• The bank can issue Documentary Credit by using its name on behalf of its participator.



Islamic banking for various conventional services

The bank can perform mediation works &

being representative in return for fee.

The bank can functions consolation works,

Financial expertise and economic studies in

return for fee.

The bank can be a negotiator, arbitrator,

assets, evaluator, marketing representative,

relationship affairs on behalf of its

client on cross border locations. 8/27/2014

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The bank is authorized to manage

private funds in return for a wage or

commission.

The bank can participate, monitor

manage funds under the guardianship of

the bank according to guardianship

conditions in return for a remuneration or

commission.



Fee and Charges of Islamic banks on Banking Services to Clients

• The bank is permitted to ask for direct expense on services and transaction to achieve an operation by itself.

• The bank can participate in charges and cost for services at actual in the case of financing as financing is made available for

participation



• The bank as fund manager for depositors bank cover wages for employees, utilities and using of equipment, etc. through charging Management Fee from the gross profit earn on fund management.

• The bank charges are informed to the client prior to establishment of the relationship.

• The Bank is eligible for Management Fee as well as part of the profit from the fund management as Modarib to the transaction.

• The bank can participate at a RATIO in capital through financing in syndicate financing or a kind of financial to make profit.



• The bank is not authorized to deduct any amount from the client account at its discretion and need written authority.

• All charges and fees that banks require should be notified to the client prior to the transaction.

• The bank in case of financing in form accrued and expected cost and expenses at actual that may arise during the transaction and these expenses and charges are taken as the cost of the transaction.



• Any question or clarification please do write on

[email protected]

• Anyone desire to use it for teaching purpose or for research is

allowed to do so and can have extracts from the text of

presentations.

• The detail explanation to each sentence shall be available

shortly in my book:

Islam in Economics, Finance & Banking

Thankyou



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Introduction to islamic banking and conventional banking

Economy & Finance

Transcript of Introduction to islamic banking and conventional banking