WHAT IS IslamicBANKING?
Concept, Instruments Issues, Theory and Practice
mohammad ali main
iqra University may 7-11,20138
This presentation includes:
What is Islamic banking? Basic functions An Introduction to Islamic
financing techniques. Practices of Islamic Banking and
Finance Observations on some common
misconceptions.
What is Islamic banking?System of banking or
banking activity that is consistent with the principles of Islamic Law (Shariah)
Its practical application through the development of Islamic Economics
Clarification on Nomenclature
Islamic Banking is known by several names: Interest free banking (Iran)
PLS Banking (Pakistan)
Islamic Banking (Gulf)
Special Finance Houses (Turkey)
All expressions are used interchangeably.
Is it a contradiction in terms? Some people prefer Islamic Finance House instead of
Islamic bank. (Beit ul tamweel) while the mainconcept remain same
Basic functions:
Primary Objectives of Islamic Economic System
Equal Distribution of Money
Social Justice
Islamic financing techniques.
Shariah laws and values that comprehensively guide individuals’ in (ritual and non-ritual) life.
Dealings with haram (unlawful) services and commodities, such as gambling, liquors, etc. are prohibited.
Contracts should be based upon profit and risk sharing; and in the forms of buyer
1. Seller (Murabaha),
2. Lessor – leasee (Ijarah),
3. Partnership (Musharakah),
4. Debtor – Creditor (qard hasan) relationship.
Similarities between Islamic and contemporary banks
Same purpose: Financial intermediation
Same Objective: Profit
Successful Operation of Islamic banks has shown that financial intermediation is possible even without interest.
Mohammad Ali MIAN
DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING
Islamic Banking
1) Functions and operations are based on Shariah principles
Conventional Banking
1)Functions and operations are based on fully man made principles
Mohammad ALI mian
DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING
Islamic Banking
2) No right of profit if there is no risk involved. The profit and loss sharing depositor may lose money in case of loss.
Conventional Banking
2) It is almost risk free banking and depositor has no risk of losing its money because interest is guaranteed.
Mohammad Ali Mian
DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING
Islamic Banking
7) one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out
their Zakat.
Conventional Banking
7) It does not deal with Zakat.
Difference In Products
Current Account Saving Accounts Investment Acc Special Invest.
Acc
ISLAMIC BANKING
Murabaha Musharakah Mudarabah Ijarah Qard Hasan
contemporary banks
Social and Moral Norms
Should not indulge in Riba
Should not involve Gharar
Should not indulge in fraudulent behavior
Should not coerce Should assure
fairness to all parties.
Should not resort to morally reprehensible practices such as cheating, bribing, fraudulent practices.
AVOIDANCE OF GHARAR
Definition of Gharar: any bargain in which the result of it is hidden. cheating in business) and ghabn
ADVANTAGES OF Islamic Banking Over Contemporary banks
Interest free loan Islamic teaching and Shariah Knowledge on Islam and religious
environment in the city Financial position of Asosiates rises Economic benefits and better
facilities. ISLAMIC BANKING REPLACES
INTEREST RATE WITH PROFIT AND THAT IS ALL.
PRESENT SCENE Islamic Banks in the Government Sector
Pakistan, Sudan, Iran
Islamic Banks in the Mixed Sector
- Malaysia
Islamic Banks in the Private Sector
Gulf
Non Banking Financial Institutions
Al Ameen [ Bangalore, India]
Islamic Financing by standard Commercial Banks in the Domestic Sector
Saudi British, NCB, Saudi American, Misr Bank
Islamic financing by Commercial banks in the foreign sector.
Islamic Banks established by multinational Banks
Citibank, HSBC Amanah Bank,
Other Classifications
Islamic Banks in the Government Sector
Pakistan, Sudan, Iran Islamic Banks in the Mixed Sector
Malaysia Islamic Banks in the Private Sector
Gulf Non Banking Financial Institutions Islamic Financing by standard
Commercial Banks
Financing Techniques Musharakah Finance Both the Bank and the customer contributes
towards the capital of the enterprise Under a “diminishing” musharakah, the
customer buys out the bank's share over a period of time.
The customer and the bank share in the profits according to the agreed proportions, which may be different from the proportions of capital contributed. Any losses of the enterprise will be borne by the customer and the bank according to their capital contributions.
Responding Islamic Banks
1. Jordan Islamic Bank (1979)
2. Faisal Islamic Bank, Egypt (1977)
3. Islamic Bank for Western Sudan (1981)
4. Tadamon Islamic Bank, Sudan (1981)
5. Qatar Islamic Bank (1983)
6. Islamic Bank International Denmark (1983)
7. Islamic Bank, Bangladesh (1983)
8. Sudanese Islamic Bank, Sudan (1983)