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7/30/2019 An Overview of Ib Sep 11
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
Islamic Finance
An introduction
7/30/2019 An Overview of Ib Sep 11
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
Conventional system
Consumer credit no more confined to poor
No more meeting of excegenciesCreation of money
Financing of govt. budget deficit
Borrowing to repay old debts
Roll overs in business finances
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
Islamic system
PLS or trading
Actual assetsEconomic impact--- development oriented system
Better risk sharing system
Legal frame work
Pakistans experience
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
Pakistans experience
Prior 1980
1980s1990s
Relaunch in 2000s
Present status
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
Islamic Banking
An Overview
7/30/2019 An Overview of Ib Sep 11
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
ISLAMIC BANKING
Emerging as a viable alternative to conventionalbanking
Strong demand
Huge funds
New institutions Need time to developMany questions: Are they really Islamic, can theysustain?
Comparison of the two systems
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
CONVENTIONAL BANKING -----FI
Mobilizing Funds (deposits) on the basis ofcreditor/ debtor relationship and providing capital toentrepreneurs by way of creditor/ debtor relationship
These modes can be:
Loans and advances of various maturities
Not in accordance with shariah
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
CONVENTIONAL BANKING
Risk of default on the asset side and liability side
Risk mitigation measures for bothPrudential regulations and other policy guidelines
No divine restrictions regarding economic performance.Supervision by the central bank for mitigating risk aswell as channeling credits into desired sectors and to
fulfill economic objectives. Integration with monetary
and fiscal policies.
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
ISLAMIC BANKING-- MAIN FEATURES
The Islamic Financial Institutions
have to keep in mind the Quranic
injunction that all capital belongs to
God and is to be used for the good of
societyMan as His Vicergent is bound to
obey His commandments in entire
life including business and
economics
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
ISLAMIC BANKING--UNDERLYING THEMEProhibition of interest in all transactions.
Legitimate and halal profits
Capital should be directed into halal channels
Hoarding is not permissible in any form
Not to create monopoly on the societys resources.Basic need to get rid of the debt ridden society
Investments to contribute in the development ofnational resources and serve whole community.
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
ISLAMIC BANKING -THE GUIDING PRINCIPLES
No Interest.
Transformation of the debtor-creditor relationship intosome kind of partnership. Profit /loss sharing
Application of Islamic principles in trade and finance.Trading of assets.
All transactions in accordance with Islamic law.
Prohibition of Gharar
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
ISLAMIC BANKING --FI
Mobilizing Funds on the basis of modaraba /Musharika and providing capital to entrepreneurs by
way of different modes in accordance with shariah
These modes can be :
Investment modes
Trade related modes
Qarz-e-Hasan
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
INSTRUMENTS FOR MOBILISING FUNDS
Current accounts/ Trust accountsSavings accounts/ Investment accounts
Term Deposits / COIIs, MCs
Short term transactions b/w banks/ (in futurefor IBs)
Shareholders
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
INSTRUMENTS FOR UTILISING FUNDS
Musharaka (Investment mode)Mudaraba do
Murabaha ( Trade mode )
ljara do
Salarn do
Istisna do
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
ISLAMIC BANKING
Risk of default on the asset side and liability side
Risk mitigation measures for bothPrudential regulations and other policy guidelines
Supervision by the central bank for mitigating risk aswell as channeling credits into desired sectors and tofulfill economics objectives. Integration with monetary
and fiscal policies.
Divine restrictions regarding economic performance.
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Typical Balance Sheet of a CFI
Assets
Loans and advances
Lease Financing
Investments in Shares
Bonds, PTCs, etc.
FAs.
Liabilities& Equity
Deposits-Current,
Saving, Term etc
Share Capital
Reserves
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Typical Balance Sheet of an IFI
Assets
Modaraba Financing
Murabaha Financing
Musharaka Financing
Lease Financing
Investments in Shares
Bonds, PTCs, etc..
Equity & Liabilities
COIIs, MC etc
Share Capital
Reserves
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Typical balance sheet of a business enterprise
ASSETS Rs. inMillion
Land / Building 200
Plant & M/Cs 450
Inventions 150
A/CsReceivable
50
850
Financed
Through
Rs. inMillion
Share Capital 200
Long term loan * 450
Short term
loan**
Lease Fin. ***
100
25
Current Liab. 125
850
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Typical balance sheet of a business enterprise
ASSETS Rs. inMillion
Land / Building 200
Plant & M/Cs 450
Inventions 150
A/CsReceivable
50
850
Financed
Through
Rs. inMillion
Share Capital 200
Murabha /DM 450
Short term
murabaha/mush.
Ijarah
100
25
Current Liab. 125
850
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
Supporting Legal Framework
Taxation System
Education ,Training , Organized Research
Govt. Support
Paradigm ShiftChange management issue
Supervision and regulation
Market practices: portfolio structure
MAIN ISSUES
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
PLS vs. FI
Why and why not PLS
Why and why not FI
Practical solution
Actual practiceWhat should be the strategy
MAIN ISSUES
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
THREE MAJOR ACHIEVEMENTS
Financing the Halal business only
Assetbacked financing
Better risk Management as compared
to conventional banks is possible
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
Conclusion
Pakistans financial institutions could take a large share
of muslims savings, if they took the initiative of
developing asset and liability products on Islamically
accepted lines.
It has been conservatively estimated that currently
about US$ 100 billion are available with muslims
wanting to invest in Shariah Compliant instruments.
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INSTITUTE OF BUSINESS FINANCE
AND INDUSTRY
Conclusion
Islamic banking provides a viable alternative tointerest-based banking
Parallel banking systems for another decade or so.
Can be perused without waiting for the wholeeconomy to transform.
Its own separate identity is its strength.
Supply must follow Demand