Islamic Banking (2)

8/3/2019 Islamic Banking (2)

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Islamic BankingIslamic Banking

Presented ByPresented By

Shiv BahadurShiv Bahadur Subhash KumarSubhash Kumar

Deepak SinghDeepak Singh Rounak Seth Rounak Seth

Subrat Kumar MohantySubrat Kumar Mohanty


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Islamic BankingIslamic Banking

??


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TheThe firstfirst instanceinstance ofof IslamicIslamic bankingbanking camecame intointo thethe picturepicture inin EgyptEgypt inin 19631963..

TheThe pioneeringpioneering effortsefforts byby AhmadAhmad ElEl NajjarNajjar broughtbrought thisthis bankbank intointo existence,existence,

whosewhose keykey principleprinciple waswas profitprofit sharingsharing (non(non--interestinterest basedbased philosophyphilosophy ofof ShariahShariah))..

TheThe firstfirst bankbank explicitlyexplicitly basedbased onon ShariahShariah principlesprinciples waswas establishedestablished byby thethe

OrganizationOrganization ofof IslamicIslamic countriescountries (OIC)(OIC) inin 19741974,, calledcalled IslamicIslamic DevelopmentDevelopment BankBank

(IDB)(IDB)..

FirstFirst privateprivate bankbank comingcoming intointo existenceexistence inin Dubai,Dubai, thethe globalglobal industryindustry hadhad moremore

thanthan 5050 suchsuch banksbanks inin thethe samesame countrycountry.. MostMost banksbanks werewere aa resultresult ofof privateprivate

initiatives,initiatives, whereaswhereas thethe firstfirst concreteconcrete governmentgovernment initiativeinitiative waswas takentaken byby thethe

IranianIranian government,government, whenwhen inin 19851985 nono bankbank waswas permittedpermitted toto givegive oror taketake interestinterest..


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The new, wider spectrum of Islamic finance covers not only banking activitiesThe new, wider spectrum of Islamic finance covers not only banking activities

but also capital markets, capital formation and other financial instruments andbut also capital markets, capital formation and other financial instruments and

intermediaries.intermediaries.

The biggest change in terms of adaptability came in 1991 when the AccountingThe biggest change in terms of adaptability came in 1991 when the Accounting

and Auditing Organization for Islamic Financial Institutions (AAOIFI) wasand Auditing Organization for Islamic Financial Institutions (AAOIFI) was

established to advise on Islamic finance standards all over the world. Later,established to advise on Islamic finance standards all over the world. Later,

the development of uniform standards was supported by other organizationsthe development of uniform standards was supported by other organizations

such as Islamic Financial Services Board (IFSB) in Malaysia in 2002.such as Islamic Financial Services Board (IFSB) in Malaysia in 2002.


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The primary objectives of Islamic Economic System are as under.The primary objectives of Islamic Economic System are as under.

Equal Distribution of wealthEqual Distribution of wealth

Social justiceSocial justice

These objectives can never be achieved in Interest/Riba based economic systems.These objectives can never be achieved in Interest/Riba based economic systems.

Islamic banks are present in more than 70 countries in the world .Islamic banks are present in more than 70 countries in the world .

Total number of Islamic banks in the world are 320+Total number of Islamic banks in the world are 320+

Total size of Islamic Banking In terms of Assets isTotal size of Islamic Banking In terms of Assets is $$1 trillion.1 trillion.

Its growing with the rate of 15 % year on year.Its growing with the rate of 15 % year on year.


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Trading or Bai Mode

Partnership or Share Mode

Leasing / Ijarah Mode


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Bai Murabaha

Bai Salam Istisna a

Trading o

r

Trading o

rBai Mode:Bai Mode:

Mudaraba Musharaka

PartnershipPartnershipMode :Mode :

Leasing

Hire purchaseIjarah Mode:Ijarah Mode:


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IslamicBanking

Conventional

Banking

Functions and

operations arebased on Shariah

principles

Functions and

operations arebased on fully man

made principles


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Islamic

Banking

Conventional

Banking

CreditorCreditor DebtorDebtorRelationshipRelationship

Partners, investor andPartners, investor and

traders, buyer ortraders, buyer orseller relationshipseller relationship

Aim at maximisingAim at maximisingprofit but subject toprofit but subject toSharia'h restrictionsSharia'h restrictions

Aim at maximisingAim at maximisingprofit without anyprofit without any

restrictionsrestrictions


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Islamic

Banking

Conventional

Banking

Based on money trading.Based on money trading.Money is a medium ofMoney is a medium of

exchange and not aexchange and not acommodity, its sale andcommodity, its sale andpurchase is prohibited inpurchase is prohibited in

IslamIslam

Encourage assetEncourage asset--basedbased

financing and based onfinancing and based oncommodity tradingcommodity trading

No right of profit if there isNo right of profit if there isno risk involved. Theno risk involved. Theprofit and loss sharingprofit and loss sharing

depositor may lose moneydepositor may lose moneyin case of loss.in case of loss.

It is almost risk freeIt is almost risk freebanking and depositor hasbanking and depositor hasno risk of losing its moneyno risk of losing its money

because interest isbecause interest isguaranteed.guaranteed.


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IslamicBanking

Conventional

Banking

Islamic banks "bear theIslamic banks "bear therisk" when involve inrisk" when involve in

any transaction.any transaction.

Practices arePractices areconcerned withconcerned with

"elimination of risk""elimination of risk"


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THE ROLE OF ISLAMIC BANKING IN

ECONOMIC DEVELOPMENT

IN EMERGING MARKETS

The Debt Burden

Contradictions

TheThe multilateralmultilateral banksbanks promotepromote thethe borrow/invest/export/repayborrow/invest/export/repay developmentdevelopment

modelmodel

Yet,Yet, notnot oneone developingdeveloping countrycountry hashas gonegone intointo debtdebt withwith thethe IMFIMF andand WorldWorld BankBank

andand subsequentlysubsequently paidpaid itit offoff

TheThe typicaltypical responseresponse toto budgetbudget andand tradetrade deficitsdeficits inin thethe developingdeveloping worldworld isis anan

austerityausterity programprogram--yetyet thethe worldsworlds biggestbiggest debtordebtor andand holderholder ofof thethe biggestbiggest tradetrade

deficitdeficit doesdoes notnot followfollow thisthis adviceadvice

TheyThey argueargue thatthat debtdebt financefinance isis acceptableacceptable ifif projectsprojects areare selfself--liquidatingliquidating


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The Islamic solution to the problems we face is based on an entirely differentThe Islamic solution to the problems we face is based on an entirely different

philosophy from the profit maximization fixation of the capitalist systemphilosophy from the profit maximization fixation of the capitalist system

Once when Muslims adhered to the rules of Allah, the world was characterizedOnce when Muslims adhered to the rules of Allah, the world was characterized

by peace and justice not riba and a debt burdenby peace and justice not riba and a debt burden

The very objective of the Shariah is to promote the welfare of the people which liesThe very objective of the Shariah is to promote the welfare of the people which lies

in safeguarding their faith, their life, their intellect, their posterity and their property.in safeguarding their faith, their life, their intellect, their posterity and their property.

Whatever ensures the safeguard of these five serves public interest and is desirable.Whatever ensures the safeguard of these five serves public interest and is desirable.


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Zakat; levy on income and wealthZakat; levy on income and wealth

SadaqahSadaqah

Economic ConsequencesEconomic Consequences

Economic wellEconomic well--being and full employmentbeing and full employment

Optimum rate of growthOptimum rate of growth

SocioSocio--economic justiceeconomic justice

Equitable distribution of income and wealthEquitable distribution of income and wealth


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Equity financing and a profit & loss sharing basis does not change the level ofEquity financing and a profit & loss sharing basis does not change the level of

uncertainty but it does relieve the burden of interest from the balance sheetuncertainty but it does relieve the burden of interest from the balance sheet

Risk is allocated more equitably in the Islamic finance systemRisk is allocated more equitably in the Islamic finance system

In the interest based business, the borrower makes most of the gains from aIn the interest based business, the borrower makes most of the gains from a

positive outcome but must bear the risk of loss alonepositive outcome but must bear the risk of loss alone

Economist Tobins view is that in an interest-free economy, the rate of return

on capital will be higher than in interest based economy as in the PLS or

equity capital, investors seek investments with higher return


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Effects of Islamic Banking

on the Economy

Better integration of the real and financial sectors of the economy

Better business ethics banks will only entertain economically viable financing

requests .

Islamic banks will stay away from financing prohibited activities e.g. producing

alcohol etc

ThereThere willwill bebe greatergreater transparencytransparency inin theirtheir transactionstransactions withwith clientsclients depositorsdepositors

asas wellwell asas fundfund--seekersseekers--duedue toto compliancecompliance withwith thethe avoidanceavoidance ofof GGhararharar

(ambiguity)resulting(ambiguity)resulting inin clearclear contractscontracts forfor everyevery transactiontransaction..


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Islamic Banking (2)

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