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Islamic Banking concept and its importance in todays world
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I S L A M I C BA N K I N G
b yN A U S H A D S u l t a n Ta l u k d a rA S L A M P A R V E Z
Rules• Islam's shariah law, taken from the Qur'an and
the Sunnah.
• Making money out of money is contraryto Islamic law
• Moderation
“Oh Children of Adam! Beautify yourselves for every act of worship, and eat and
drink (freely) but do not waste. Verily, He does not love the wasteful”.
• Wealth should directed in the 'Halal' (religiouslyacceptable) way
ISLAMIC BANKING PRACTICES
1. Deposit Accounts
2. Mode of Financing
ISLAMIC BANKING PRACTICESDeposit Accounts
1.1) Current Account
1.2) Savings Account
1.3) Investment Account
ISLAMIC BANKING PRACTICES
Mode of Financing
2.1 Investment Financing
2.2 Trade Financing
2.3 Lending
ISLAMIC BANKING PRACTICES
Investment Financing
2.1.1 Musharaka – Joint Venture
2.1.2 Mudarabha- Profit Sharing
2.1.3 Financing on the basis of an Estimated
rate of return
ISLAMIC BANKING PRACTICES
Trade Financing
2.2.1 Leasing
2.2.2 Hiring Purchase
2.2.3 Sell-and- Buy-Back
The Purpose of Shariah (Islamic law)
To promote the welfare of the people which lies on:
Safeguarding of their faith Their life Their intellect Their posterity and Their Wealth
Ethical banking
Impact of 9/11 – Reverse Capital Flight
◦ Perception of hostile climate in many Western jurisdictions, in particular, the United States, led to repatriation of dollars by Arab investors to Middle Eastern banks
◦ Islamic banks, along with conventional banks in the region, benefited from this reverse flight of capital
◦ Increase in Oil Prices Led to Dramatic Increase in Liquidity in the Gulf
Conventional Bank as lender
C SB1. Loan 2. Cash Payment
4. REPAYMENT(Principal + interest)
3. The Thing
Islamic Bank as Trader
B C S1.Cash Payment
2. The Thing3. The Thing
4.Deferred Payment*
B- Bank C-Client S-Seller
*cash price+ bank margin
“Riba” in “The Quran”
“That which you give as interest to increase the peoples wealth increases not with God;
but that which you give in charity, seeking the goodwill of God, multiplies
manifold”(chapter-30:verse 39)
Two types of ‘Riba’ to be avoided
Riba al-NasiyahRiba al Nasiyah defined as: “any excess compensation over and above the principal which is without due consideration.”
Riba al- FadlRiba al- Fadl means the excess which is taken in exchange of specific homogenous commodities, such as selling gold with another gold, whereby one has more “weight” than the other
Queries on “Theories of Islamic Banking”
Is there any scope for banking business in Islamic Economy?
Are Islamic Banks able to surpass the shari’ah rule prohibiting riba?
Should Islamic Bank act as traders?
Criticism with respect to Islamic Banking
Excessive murabahah mode of transaction neglecting other legitimate financing
Utilization of interest rate for fixing profit margins
Indifference towards the social aspect of financing
Lack of positive response to the requirements of governmental financing
Failure of Islamic banks to establish co-operation among themselves
ISLAMIC BANKING WINDOW OR FULL-FLEDGED ISLAMIC BANKS
• Islamic banking windows
– Refers to conventional banks that offer Islamic banking products and services using their existing infrastructure, including staff and branches
• Full-fledged Islamic bank
– Refers to a bank dedicated to the offering of Islamic banking products and services
– In Malaysia, a number of these banks are set up as a subsidiary to conventional banks
• Operations and management are clearly separated between the subsidiary Islamic bank and the parent conventional bank
Full Fledged Islamic Banks
International banks offering Islamic window banking
.
Reach and richness
Niche presence
Mainstream relevance
Conceptual exploration
Engaging with regulators
Reach and richness
Islamic finance industry is developing a global reach…
Factors triggering Euro Crisis and how Islamic banks got spared ?
FACTORS CONVENTIONAL BANKS
ISLAMIC BANKS DESCRIPTION
Speculations YES NO One of the triggers of global financial crisis
Invest in toxic assets
YES NO -do-
Fully asset backed financing
NO YES Assisted to shield from global financial crisis
Use of Profit andLoss Sharing
NO YES -do-
Debt Selling andBuying
YES NO One of the triggers of global financial crisis
Dependent onSubprime Mortgages
YES NO Subprime mortgages triggered financial crisis
Faith involved in investing
NO YES Prime factor that helped shield global financial crisis
Conclusion
Islamic finance and conventional finance are
quickly converging in the globe.
As conventional investors gain more comfort
with Islamic structures, cost differential between
Islamic products and conventional products
have almost disappeared
As a result, Islamic products may be more
practical because they appeal to both Islamic
and conventional investors