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)