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.