Towards a Better of Understanding ISLAM..
Focus on… Islamic banking
Presented by: alh. Remi Adeseun
September 11, 2011
Disclosures & Disclaimers…
Remi ADESEUN.. IS
A Passionate Muslim & Humanist
IS NOT An Expert in…
Banking, nor Shari’ah!
September 11, 2011
Approach…
Target Audience: Non-Muslims Muslims
Goal: Encourage Enquiry & Foster Understanding
Strategy: Provide Facts & Debunk Myths
September 11, 2011
Understanding Islam….
Islam Permissibility & prohibition Islamic view of life & wealth principles of Islamic banking Global perspectives Recommendations & Conclusion
September 11, 2011
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• Islam is not only a religion in the ordinary sense of the word, but indeed a complete system of life.
• Islam guides man in his relationship with God and gives him the norms which govern his temporal existence.
• Islam is concerned with the spiritual, political, social economic, moral and all other material aspects of the human being.
General Introduction
Basic Principles of Permissibility (HALAL) & Prohibition (HARAM) in Islam
The first rule established by Islam is that the things which Allah has created and the benefits derived from them are essentially for man's use, and hence are permissible halal .
Nothing is haram except what is prohibited by a sound and explicit evidence (either a verse of the Qur'an or a clear, authentic, and explicit sunnah-practice or saying- of Prophet Muhammad.)
If the evidence is not sound, as for example in the case of a weak hadith, or if it is not explicit in stating the prohibition, the original principle of permissibility applies.
Halal & Haram… Allah says: It is He who created all that is in the
earth for you.... (2:29) He has subjected to you, from Himself, all that
is in the heavens and all that is on the earth.... (45:13)
In Islam the sphere of prohibited things is very small, while that of permissible things is extremely vast.
There is only a small number of sound and explicit texts concerning prohibitions.
Prohibition is Due to Impurity and Harmfulness
It is the right of Allah, the One Who created human beings and bestowed innumerable gifts on them, to legalize or prohibit as He deems proper, and to place obligations and responsibilities upon them as He sees fit.
He makes things halal and haram for a reason, with peoples' well-being in view.
Accordingly, He has neither permitted anything except what is pure nor has He prohibited anything except what is impure.
What is economics?“To utilize the limited resources in a way that maximum needs and wants
are met to ensure the well being of all members of the human society.”
The four basic economic problems:1. Determination of Priorities2. Allocation of Resources (Land, Labor, Capital, Entrepreneur)3. Distribution of Income4. Development
We will compare how Capitalism, Socialism and Islamic Economic system addresses to these problems.
Economics & Its Problems
Comparison of Capitalism & Socialism
Capitalism Socialism
1. Determination of Priorities
2. Allocation of Resources
3. Development
• Every individual has unconditional right to participate in any business to maximize profits
• Concept of Selfish Interest
• Supply & Demand will determine the priorities.
• No individual has the right to participate in any business independently.
• State will determine the priorities as per the overall planning.
• Concept of collective interest.
• Market forces will decide where to invest resources
• Govt. will decide where to allocate resources
• Market forces will decide • Govt. will decide
Comparison of Capitalism & Socialism
Capitalism Socialism• Land - Rent• Labor - Wages• Capital- Interest• Entrepreneur- Profits
4. Distribution of Income
• Land – Rent fixed by Govt.
• Labor – Wages fixed by Govt.
.
Flaws of Capitalism
No bindings/ restrictions while maximizing profits.
Blindly follows market forces that creates exploitation of labor &
poor people.
No moral value limitations.
Monopolies & Cartels are created that exploit the society as a
whole.
Government & Industrialists join hands for unholy alliances
Flaws of Socialism
The other extreme of not even giving the natural freedom.
Perfect Planning is assumed by Govt. ?
Governments are assumed to be angels which can’t commit a
deliberate mistake.
Cannot work without forceful dictatorship.
What is Islamic Economics?
Islam is a complete way of life which gives guidance for Aqidah (Faith & Belief)
Ibadah (Worshipping our creator)
Akhlaq (Morals, Character & Ethics)
Mu’amalat (Dealings with Fellow Man)
Economic Activities fall under the purview of Mu’amalat. Informal Dealings
Formal, Contractual/Institutional Islamic Finance Banking
Insurance
Money Market
Carpital Market
Islam is a DEEN for well being.
Spiritual satisfaction.
MEANING AND CONCEPT OF SHARI’AH:Shari’ah= Aqidah+Ibadah+Akhlaq+Muamalat!
Islamic laws are also known as Shariah laws, sometimes
referred to as Islamic jurisprudence. The original meaning of the word Shariah or shar ‘is the
path or the road leading to the water’ and the verb shara’a literally means ‘to chalk out or mark out a clear road to water’.
In a religious sense, it means ‘the highway of good life’. In other words, Shariah is the way which directs man’s life
to the right path. The word Shariah also has its correlation with the word
“deen” which literally means ‘submission’ or ‘following’. The two primary sources Shariah are the Al-Qur’an and Al-
Sunnah.
Important Concepts in Islamic Economics:Considerations & Prohibitions
Islam encourages: the free market
economy Development of the
entire community & eradication of concentration of wealth
Partners share the risk of reward & loss
Money as a medium of exchange and not as a commodity by itself
Financing must be asset-backed and not money on money!
Everyone is allowed to trade as they like with exception of:
Riba (Usury/Interest)
Uncertainty (Gharar)
Gambling (Maisir) Unlawful
Products/Services Unlawful
Contracts
Islamic Economic System- The prohibitions & considerations
1. Divine Prohibitions:Islam has prohibited some economic activities that are not allowed at any time at any place.( Interest, Gambling, Gharar)
2. Govt. Restrictions:Islam allows Govt. to intervene where it feels appropriate , but these restrictions are temporary as per the need of the time.
3. Moral Considerations & Restrictions Maximum benefit in the life for hereafter.
Factors of Production of Production in Islamic Economic System
In Islam there are three factors of production1.Land 2. Labor 3. Entrepreneur
Entrepreneur & Capital is a single factor of production.
As interest is Haram hence the risk of profit & loss is with the capital.
Anyone investing capital must also take the risk of the investment.
Right to Wealth in Islam
In both Capitalism & Socialism the right to wealth is with those factors of production only that have taken part directly in the process of production.
Islam believes that the original ownership of everything is with Allah and without Allah’s “Taufeeq” no factor of production can produce anything.
ALLAH
Factors of Production
Secondary owners of wealth
Zakat, UshrWirasat, SadqaatQurbani,Khiraj
COMPREHENSIVE ISLAMIC FINANCIAL SYSTEM
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What is “Islamic Banking” ?
• Islamic banking is defined as “banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah”.
• Interest-free banking is a narrow concept denoting a number of banking instruments or operations which avoid interest.
• Islamic banking, the more general term, is based not only to avoid interest-based transactions prohibited in Islamic Shariah but also to avoid unethical and un-social practices.
• In practical sense, Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real services.
Why Islamic Banking?• In response to the needs of Muslim community
• Acts as a catalyst to fill the gap to mobilise funds for productive purposes, in particular for Muslim communities
• Significant untapped business potential
• Proven to be a viable financial intermediation channel in supporting economic growth
• Fulfils the demands of not only Muslims but non-Muslim population as well
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Distinctive features of Islamic finance
The most distinctive features of Islamic finance are;
the prohibition of interest, whether nominal or excessive, simple or compound, fixed or floating.
the prohibition of gambling; dealing only in lawful (halal) things
and; the elimination of uncertainty and
ambiguity (gharar) in business contracts.
Global Trends in Islamic Banking
Modern Islamic Banking is growing rapidly across the world Distinct Phases of Development in Islamic Banking:
Initiation (1960 through 1975): Oil Boom in this period was the biggest contributor leading to increased wealth and liquidity in the Gulf States and also in North Africa
Progress (1976 to the Early 1980s) Spread from the Gulf States to Malaysia and Europe
Growing Maturity (1983 to the Present)
Size of the Industry Over 300 Islamic Banks & Financial Institutions worldwide Estimated Assets of up to $750 billion Projected to grow to $1.6 trillion by 2012 Almost 25% of Islamic Financial Institutions operate in Non-Muslim
dominated/Western countries Dow Jones/FTSE Islamic Index
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ROLE OF BANK NEGARA MALAYSIA
BNM
Conventional financial system
Islamic banks
Takaful operators
Non-banking institutions
Money market Capital market
Customer
Islamic financial system
Conventional banksInsurance companiesNon-banking institutions
Money market Capital market
Malaysia Deposit Insurance Corporation
Dispute resolution Judicial
system KL Regional
Arbitration Centre
Financial Mediation Bureau
Supervisory objective
• Financial stability
• Consumer protection
- Separate clearing and settlement system
- Liquidity management
Specific monetary policy instruments
Islamic Banking Act 1983Takaful Act
BAFIA 1989Insurance Act 1996
ROLE OF CENTRAL BANK (MALAYSIA example)
MALAYSIA AT A GLANCE
•Population – 26.1 m• Muslim – 15.4 m (59%)• Religion
Malaysia is a multi-religious society and Christianity, Buddhism, Taoism, Hinduism and Sikhism are openly & freely practiced.
MALAYSIA AT A GLANCE
Islamic Banking Concepts
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Ijarah Thummah Bai’ (Hire Purchase)
Categories of Shariah principles
– Profit and loss sharing principles• Mudarabah• Musharakah
– Fees or charges based principles• Murabahah • Bai mu’azzal• Ijara• Ijara wa-iktina
– Free service principles• Qard hassan
– Ancillary principles.• Wadiah• Rahn
STAGES OF DEVELOPMENTRECOMMENDED: Gradual and pragmatic approach
.. significant milestones in building comprehensive and integrated Islamic financial system with diversity of players….
Milestones
Full-fledged Islamic banks, e.g. JAIZ
Conventional banks offering Islamic Banking window
Takaful Operators Takaful Operators
Islamic subsidiary
Islamic money markets
Institutional & Regulatory development
Product and marketdevelopment
Legal and Shariahframework
Enhancement of knowledge and
expertise
DEVELOPMENTAL FOCUS
RECOMMENDED: DEVELOPMENTAL FOCUS
ENABLING INFRASTRUCTURE
Legal Ensure legislation exists for Islamic banking
institutions to exist side-by-side with the conventional banks.
Establish Legal Redress Framework
Shariah Shariah governing committees
• National Shariah Advisory Council at Central Bank
• Shariah committee at Islamic financial institution
Regulatory Adopt international standards
IFSB (Islamic Financial Services Board) AAOIFI (Accounting & Auditing
Organisation for Islamic Financial Institutions)
RECOMMENDED: ENABLING INFRASTRUCTURE
Meeting the education needs of all levels of Islamic finance practitioners
Level of knowledge:Elementary
Focus:Short training courses to meet industry’s needs
Level of knowledge:Intermediate & advanced
Focus:International professional certification and post-graduate programs
Focus:Leadership programs
Institutions of higher learning
Other training
providers
Human Capital Development in Islamic FinanceRecommended: Human Capital Development in Islamic Finance
• Islamic banking is founded on Shariah principles which express an explicit intention to meet the financial needs of participants with integrity and in a manner that is just, fair, trustworthy and honest, while ensuring a more equitable wealth distribution.
• Islamic banking upholds the principles of integrity, transparency, fairness and good corporate governance in financial dealings.
• "The ethical principle of which Islamic finance is based may bring bankers close to their clients in the true spirit which should mark every financial service..[Osservatore Romano, Vatican Official Newspaper, March 4, 2009. ]
• Good Communication between all stakeholders is key for success.
CONCLUSION:
This presentation has been made with utmost sincerity, even if limited knowledge, and with the greatest respect to the varying religious sentiments of the audience. The author therefore craves God’s forgiveness & the indulgence of the audience in the event of any unintended error.