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ISLAMIC BANKING SYSTEM
SHOULD BE ESTABLISHED IN
THE ECONOMY
PREPARED BY :
SYNTHIA FERDOUS SHAHREEN
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INTRODUCTION
Islamic banking provides services to it
customers free from interest, and the
giving and taking of interest have
prohibited in all transaction. Islam bans
Muslims from taking or giving interest
(the Arabic term for which is Riba), and
this prohibition makes an Islamicbanking system differ fundamentally
from a conventional banking system.
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What is Islamic Banking?
Islamic Banking is interest free Asset Based
banking governed by the principles of
Islamic Shariah
It is not restricted to Muslims only.
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ISLAMIC SHARIAH
Islamic shariah is not a set of codified laws but aseries of principles derived from five separatesources:
(1) The Holy Quran;
Allah has permitted trade & has prohibitedriba
Al Baqarah 275-
(2) The practice and teachings of Prophet
Muhammad, known as the sunnah;(3) Comparisons of similar issues if a clear-cut
judgment cannot be found in the Quran orsunnah (practice known as qiyas);
(4) The judgment of scholars through reasoningand lo ic called i tehad and
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What is Riba?
Riba is the surplus income which thelender
receives from the borrower in excess ofthe principal amount .
Why is Riba Prohibited? Riba is unfair
Riba is exploitative
Riba is unproductive
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The Basic principles of Islamic
Banking/Finance(ICARE)
Interest Free Transactions
Contractual Certainty
Asset & Service BackingRisk Sharing
Ethical Banking
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Musharakah (Joint venture)
In the context of business and trade,Musyarakah refers to a partnership or a joint
business venture to make profit. Profits made
will be shared by the partners based onan agreed ratio which may not be in the same
proportion as the amount of investment
made by the partners. However, lossesincurred will be shared based on the ratio of
funds invested by each partner.
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(Hire purchase)
1) You pick a car you would like to have.
2) You ask the bank for Ijarah of the car, pay the depositfor the car and promise to lease the car from the
bank after the bank has bought the car.
3) Bank pays the seller for the car.
4) Seller passes ownership of the car to the bank.
5) Bank leases the car to you.
6) You pay Ijarah rentals over a period.
7) At end of the leasing period, the bank sells the car to youat the agreed sale price.
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Islamic products and services offered by 300+ FinancialInstitutions around the world
United States: 20- Al Manzil Financial Services- American Finance House- Failaka Investments- HSBC- Ameen Housing Cooperative
Germany: 3- Bank Sepah
- Commerz Bank- Deutsche Bank
Switzerland:6
UK: 26(primarily branchesof Gulf and glo
bal banks)- HSBC Amanah Finance- Al Baraka International Ltd- Takafol UK Ltd- The Halal Mutual InvestmentCompany-J Aron & Co Ltd (GoldmanSachs)
-Britain Islamic Bank
Bahrain: 26- Bahrain Islamic Bank- Al Baraka- ABC Islamic Bank- CitiIslamic Investment Bank
Malaysia: 492 - Pure Islamic Banks(Bank Islam, Bank
Muamalat)Rest - conventional banks
Saudi Arabia: 10- Al Rajhi
- SAMBA- Saudi Hollandi- Riyadh Bank
UAE: 9- Dubai Islamic Bank- Abu Dhabi Islamic Bank
- HSBC Amanah
Qatar: 4- Qatar Islamic Bank- Qatar International Islamic
Kuwait: 5- Kuwait FinanceHouse
Iran: 8
Egypt: 7
- Alwatany Bank of Egypt- Egyptian Saudi Finance
Indonesia: 4
Sudan: 9
Pakistan: 5
India: 3Bangladesh:3
Turkey: 7- Faisal FinanceInstitution- Ihlas FinanceHouse
Yemen: 5Planning to go for IslamicBanking
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Difference between Islamic and
Conventional Modes of Finance
Bank ClientMoney
money + money (interest)
Conventional
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Difference between Islamic and
Conventional Modes of Finance
Bank Client
GOODS &
SERVICES
MONEY
ISLAMIC
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Difference between Conventional
Banks & Islamic Banks
1. The functions and operating modes ofconventional banks are based on fully manmade
principles.
The functions and operating modes of Islamicbanks are based on the principles ofIslamic Shariah.
2. In the Conventional bank the investor is assured ofa predetermined rate of interest.
In contrast, Islamic bank promotes risk sharingbetween provider of capital (investor) and the userof funds (entrepreneur).
3. Conventional bank does not deal with Zakat.
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4. Lending money and getting it back withcompounding interest is the fundamental functionof the conventional banks.
Participation in partnership business is thefundamental function of the Islamic banks. So wehave to understand our customers business very
well.
5. The status of a conventional bank, in relation to itsclients, is that of creditor and debtors.
The status of Islamic bank in relation to itsclients is that of partners, investors and trader,buyer and seller.
6.Since income from the advances is fixed, it giveslittle importance to developing expertise in project
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IMPORTANCE of ISLAMIC
BANKING
Proper Justice:
Modern banking, based on interest and biased in
favors of the capitalists and rich.Islamic Banks operate on Islamic principles of profit
and loss sharing and other approved modes ofInvestment. It strictly avoids interest which is theroot of all exploitation and is responsible for large
scale inflation and unemployment.This will lead to a just distribution of income andwealth, mutual cooperation, equal opportunity,balance economic growth and development, andothers.
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Social Welfare
It lay down certain regulations for the maintenance ofequity such as distinction between lawful and
unlawful means of income, right of free enterprisefor individuals and right to keep the lawfully earned
wealth.The discouragement of the production of goods and
services which contradict the Islamic value (haram)When money is lent out on the basis of interest, more
often that it leads to some kind of injustice. The first
Islamic principle underlying for such kind oftransactions is deal not unjustly, and ye shall notbe dealt with unjustly
n n n r r
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ow o s am c an s an an s rewartheir depositors since payment of interest
is not allowed?
In Shariah, there are many ways to share profit or returnsbetween a bank and its customers. For example, in adeposit product, profits from a deposit arrangement will beshared between a bank and its depositors based on anagreed ratio and paid as dividends.
Shariah also allows a bank to give hibah (gift) to its depositorsas it deems fit.
Why there is no Loss in Islamic Banking ? Taking risk does not imply that loss must occur in a
transaction or business. They go for a project and business having minimum risk.
Different portfolio choices with Islamic Bank.
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What will be the solution incase of
mortgage or default?
In an Islamic mortgage transaction, instead ofloaning the buyer money to purchase theitem, a bank might buy the item itself from
the seller, and re-sell it to the buyer at aprofit, while allowing the buyer to pay thebank in installments. However, the bank'sprofit cannot be made explicit and therefore
there are no additional penalties for latepayment. In order to protect itself againstdefault, the bank asks for strict collateral.
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PROGRESS of ISLAMIC
BANKINGIslamic Banking or Islamic Finance is one of the fastest
growing sectors in the global financial industry. Indefiance of the credit crunch, the global islamicfinance market has grown about 15% in each of thepast 3 years and is now worth about $700 billion
worlwide. Outstanding global and domestic Islamic sovereign
& Corporate Sukuk exceeded US$50 billion in 2006,US$82 billion in 2007 and expected to surpassUS$150 billion by 2010.
Currently, there are nearly 300 Islamic banks andfinancial institutions worldwide and its assets arepredicted to grow to $1 trillion by 2013.
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CONCLUSIONIslamic banking is Riba free and trade oriented
banking system. Islamic banking is based on profitand loss
sharing mechanism.
Now the most of the conventional banks are willingto Islamic banking network. The commercialbanks are also opening the new separate branchesof Islamic banking under separate head. Due toglobalization the Islamic banking network hasmoved to the other Muslim and non-Muslim
countries such as UK, USA, Canada, Malaysia,Spain, Qatar, Kuwait, Iran etc. this also proves thatIslamic banking system will be flourished in
future over the world. The expansion of this is theonly reason that it is interest free .
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