3. current banking & financial system

8/6/2019 3. Current Banking & Financial System

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Essentials of Islamic FinanceEssentials of Islamic Finance IU Gulshan Campus,IU Gulshan Campus, Slide #Slide # 11

Essentials of Islamic Banking and FinanceIQRA University Gulshan Campus

IRSHAD AHMAD [email protected]

Current banking and financial systemCurrent banking and financial system


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Contents of the lectureContents of the lecture

Current financial and Banking System: E conomic system; Financial Markets; Financial intermediation;

Banking system;Po ssibility o f Islamizati o n o f banking;


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ContentsContents

Intr o ducti o n;Ec o no mic system; Sectors of economy;F inancial Markets;

Components of financial markets;F inancial intermediati o n; T ypes of financial intermediaries;Banking system; Role of banks in economy; Interest based banking; Qualities of banking system;Islamic bank is it p o ssible?Questi o n and answers


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IntroductionIntroduction

R es o urces (natural o r man-made) available t o human being arelimited but wants (desires) are n o t limited and every o ne wants t o achieve the best;Every pers o n in a s o ciety has different types o f wants and demands; If A wants a cup of milk at a time then B may wants a piece of cloth at the

same time and so on so forth;Management o f these wants with in available res o urces is the artwhich is called ec o no mics; So economics is an art of management of unlimited wants within limited

resources. T he system in which efforts are made to achieve these targets iscalled ' E conomy';


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E conomic systemsE conomic systems

A ny ec o no my deals with issue o f changing res o urces int o pr o ducts;The pr o ducts either perf o rm as mean t o pr o duce m o re pr o ducts o r asatisfact o ry mean t o needs o f human being;Three types o f experiments in ec o no mics are there:

Market economy:A n ec o no my with o ut alm o st any c o ntr o l o n anything; P lanned economy:

A n ec o no my with s o me c o ntr o ls put by the g o vernment;

Mixed economy:

This eco

no

my is neither a full fledged free market no

r it dependso

n pure planned ec o no my;Under this c o ncept an ec o no my has mixture o f freed o m and planning;

The first m o del o f ec o no my is fam o us with name o f capitalism;The sec o nd o ne is kn o wn as s o cialism;

The third o ne is kn o wn as mixed ec o no my;


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Sectors of economySectors of economy

A ll types o f ec o no mies f o cus o n management o f sect o rs o f ec o no my indifferent ways and meth o ds;There are many the o ries bel o ng t o sect o rs o f ec o no my;The fam o us descripti o n is o f 'five sect o r m o del';A

secto

r may be defined as a parto

f the eco

no

my where the participants are engaged in a similar type o f ec o no mic activity;The five-sect o r m o del describes the o perati o n o f the ec o no my and thelinkages between the main sect o rs in the ec o no my: Individuals (Consumers);

Businesses (production and manufacturing); Financial institutions (supply of money and finance); Government (as a regulator taxation and controlling function); International T rade (the rest of the World);


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Individuals: T his sector consists of all individuals in the economy. T hese individuals are

the owners of productive resources, and the consumers in our economy. Individuals supply factors of production (inputs) such as labour and

enterprise to businesses, which they use to produce goods and services. As areward for supply resources such as labour and enterprise to firms,individuals receive incomes rent, wages, interest and profit.

Businesses: T his sector consists of all the business firms engaged in the production and

distribution of goods and services (apart from financial services). It concerns

all their activities involved with buying factors of production and usingthem to produce and sell goods and services;

Individuals and businesses are interdependent.


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F inancial Instituti o ns: T his sector consists of all those institutions that are engaged in the

borrowing and lending of money, acting as the intermediaries betweenthose who save, and borrowers of money.

Financial institutions are needed for individuals and firms to be able toundertake saving and investment. T hey perform the function of mobilizingsavings for investment;

G o vernment: T he management of national needs and wants on macro level; It is involved in the satisfaction of collection (community) wants; It obtains the resources to do this through imposing taxes on the other

sectors of the economy;


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Factors of economyFactors of economy

There are f o ur fact o rs o f ec o no my acc o rding t o capitalist appr o ach;These are: Land;

F ixed assets that pr o duce s o mething;

Labour;H uman capital;

Capital;Mo ney and o ther f o rms o f capital;

E ntrepreneur;O

wner and master;These fact o rs pr o duce 'pr o ducts and services';Every fact o r gets what is due t o it;


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E conomic SystemE conomic System

ECONOMY

Goods Services

Products

Land CapitalLabor Enterprise

Factors of production

Product MarketFactor Market


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E conomic SystemE conomic System

Market activities determine the price. Demand and supply are thedecisive fact o rs f o r pricing;Bo th types o f market have different n o rms and ways o f o perati o ns;

Product market

Services

Cloth

Manufactured goods

Food

Shelter

Rental

Health

Education

Factor market

Capital Labor

Loan

Eq uity

Employment

Financial Market Non-financial enterprises


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Financial marketsFinancial markets

The market that deals in financial assets is called F inancial Market;A sset means any p o ssessi o n that has value in exchange;So a F inancial Market is a market where financial assets areexchanged;

Assets

Building

Land

Machinery

Loan

Bond

Share

Tangible Asset:Its value depends on particular

physical properties

Intangible Asset:It represent legal claims on some

future benefits.

Financial Assets


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Classification of financial marketsClassification of financial markets

Classificati o n by nature o f claim: D ebt Market; Eq uity Market;Classificati o n by maturity o f claim:

Money market less than one year life market; Capital market greater than 1 year life market;Classificati o n by seas o ning o f claim: P rimary market; Secondary market;


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Financial intermediation;Financial intermediation;

F inancial intermediati o n is an act o f instituti o n, firm o r individualwh o mediates between tw o o r m o re parties in a financial c o ntext;F inancial c o ntext means facilitating the channeling o f funds betweenlenders and b o rr o wers indirectly;The savers (lenders) give funds (dep o sit) t o an instituti o n (such as abank), and that instituti o n gives th o se funds t o spenders (b o rr o wers);Typically the first party is a pr o vider o f a pr o duct o r service and thesec o nd party is a c o nsumer o r cust o mer;This may be in the f o rm o f l o ans o r m o rtgages;


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Financial intermediationFinancial intermediation

Individuals

Companies

Trusts

1.Business2.Industry3.Individuals4.Governments5.Companies6.International trade7.etc. etc

Directly to these activities

1.Banks2.Insurance companies;3.Credit unions;4.Funds;5.Investment trust;

Supply of funds throughFinancial intermediaries

Fundssupply

Private Businesses

Organizations


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Financial intermediary and its typesFinancial intermediary and its types

A financial intermediary is an instituti o n, firm o r individual wh o mediates between tw o o r m o re parties in a financial c o ntext whichmeans channeling o f funds between lenders and b o rr o wers indirectly;F o llo wing are its types:

Financial intermediaries

Depository institution Non-depository institution

1.Banks;2.Saving associations;3.Loan associations;4.Credit unions;5.Credit societies;

1.Development banks;2.State banks;3.Insurance companies;4.Investment banks;5.Brokerage houses;


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Role of banks in economyRole of banks in economy

Exchange o f financial assets o n behalf o f cust o mers;Exchange o f financial assets o f their o wn assets;R eceive dep o sits and pr o vide safety;P ro vide investment device f o r market participants;

P ro vide platf o rm f o r small savers;Channelize idle wealth o f s o ciety;A ssist in settlement o f claims;P ro vide cash management services;A

too

l f o

r go

vernment f o

r minato

ry co

ntro

l;


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Qualities of banking systemQualities of banking system

Channelize idle wealth o f s o ciety; An individual can also participate in economy;A ssist in settlement o f claims; P rovide services for members of society;

Check and payment instruments; E ase in payments;P ro vide cash management services; N o need for keeping books in home;A t oo l f o r g o vernment f o r minat o ry c o ntr o l; H oarding and inflation control;


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Conventional banking systemConventional banking system

BANKDEPOSITORS CUSTOM ERS

STR UC T UR E OF CONVEN T IONAL BANK


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Interest based bankingInterest based banking

BANKDEPOSITORSLEND

CUSTOM ERSINTEREST

LEND

INTEREST

Financial activities of a conventional bank

Receive deposit on interest;

And give money on interest;


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P ossibility of Islamization of banking system.P ossibility of Islamization of banking system.

Banks receive m o ney fr o m o ne side and give t o o ther side;A ny p o ssibility f o r this in Islam?See nest slide:


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P ossibility of Islamization of banking system.P ossibility of Islamization of banking system.

ISLAMIC BANKDEPOSITORS

Participate in businessMudarabah;Musharakah

CUSTOM ERS1.Profit in trade2.Rent in rental;3.Share in profit inparticipation;

STR UC T UR E OF I S LAMIC BANK

1.Trade;2.Rental;3.Participation;4.Investment agency

Share in profit


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P roblems and issues in existing financial system;P roblems and issues in existing financial system;

Interest;G ambling;Excessive uncertainty;No n-Islamic business;

No o bedience t o Islamic rules o f business;


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Questions?Questions?

3. current banking & financial system

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