Sharia banking
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Transcript of Sharia banking
SHARIA BANKING
IBS GURGAON
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
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
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
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
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
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
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.
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
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
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
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
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
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
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
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
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
Thank you !