essentials of islamic banking and finance iqra university gulshan campus irshad ahmad aijaz

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

Essentials of Islamic Banking and FinanceIQRA University Gulshan Campus

IRSHAD AHMAD AIJAZ [email protected]

Current banking and financial Current banking and financial systemsystem


Contents of the lectureContents of the lecture

Current financial and Banking System:– Economic system;– Financial Markets;– Financial intermediation;– Banking system;

Possibility of Islamization of banking;


ContentsContents

Introduction; Economic system;

– Sectors of economy; Financial Markets;

– Components of financial markets; Financial intermediation;

– Types of financial intermediaries; Banking system;

– Role of banks in economy;– Interest based banking;– Qualities of banking system;

Islamic bank – is it possible? Question and answers


IntroductionIntroduction

Resources (natural or man-made) available to human being are limited but wants (desires) are not limited and everyone wants to achieve the best;

Every person in a society has different types of 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 of these wants with in available

resources is the art which is called economics;– So economics is an art of management of unlimited wants

within limited resources. The system in which efforts are made to achieve these targets is called 'Economy';


Economic systemsEconomic systems

Any economy deals with issue of changing resources into products;

The products either perform as mean to produce more products or a satisfactory mean to needs of human being;

Three types of experiments in economics are there:– Market economy:

An economy without almost any control on anything;

– Planned economy: An economy with some controls put by the government;

– Mixed economy: This economy is neither a full fledged free market nor it depends on pure

planned economy; Under this concept an economy has mixture of freedom and planning;

The first model of economy is famous with name of capitalism; The second one is known as socialism; The third one is known as mixed economy;


Sectors of economySectors of economy

All types of economies focus on management of sectors of economy in different ways and methods;

There are many theories belong to sectors of economy; The famous description is of 'five sector model'; A sector may be defined as a part of the economy where the

participants are engaged in a similar type of economic activity;

The five-sector model describes the operation of the economy and the linkages between the main sectors in the economy:– Individuals (Consumers);– Businesses (production and manufacturing);– Financial institutions (supply of money and finance);– Government (as a regulator – taxation and controlling function);– International Trade (the rest of the World);



Individuals:– This sector consists of all individuals in the economy. These

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 a reward for supply resources such as labour and enterprise to firms, individuals receive incomes – rent, wages, interest and profit.

Businesses:– This 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 using them to produce and sell goods and services;

– Individuals and businesses are interdependent.



Financial Institutions:– This sector consists of all those institutions that are engaged in

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

– Financial institutions are needed for individuals and firms to be able to undertake saving and investment. They perform the function of mobilizing savings for investment;

Government:– The 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;


Factors of economyFactors of economy

There are four factors of economy according to capitalist approach;

These are:– Land;

Fixed assets that produce something;

– Labour;Human capital;

– Capital;Money and other forms of capital;

– Entrepreneur;Owner and master;

These factors produce 'products and services'; Every factor gets what is due to it;


Economic SystemEconomic System

ECONOMY

Goods Services

Products

Land CapitalLabor Enterprise

Factors of production

Product MarketFactor Market


Economic SystemEconomic System

Market activities determine the price. Demand and supply are the decisive factors for pricing;

Both types of market have different norms and ways of operations;

Product market

Services

Cloth

Manufactured goods

Food

Shelter

Rental

Health

Education

Factor market

Capital Labor

Loan

Equity

Employment

Financial Market Non-financial enterprises


Financial marketsFinancial markets

The market that deals in “financial assets” is called Financial Market;

Asset means “any possession that has value in exchange”;

So a Financial Market is a market where financial assets are exchanged;

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.

FinancialAssets


Classification of financial marketsClassification of financial markets

Classification by nature of claim:– Debt Market;– Equity Market;

Classification by maturity of claim:– Money market – less than one year life market;– Capital market – greater than 1 year life market;

Classification by seasoning of claim:– Primary market;– Secondary market;


Financial intermediation;Financial intermediation;

Financial intermediation is an act of institution, firm or individual who mediates between two or more parties in a financial context;

Financial context means facilitating the channeling of funds between lenders and borrowers indirectly;

The savers (lenders) give funds (deposit) to an institution (such as a bank), and that institution gives those funds to spenders (borrowers);

Typically the first party is a provider of a product or service and the second party is a consumer or customer;

This may be in the form of loans or mortgages;


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 through Financial intermediaries

Fundssupply

Private Businesses

Organizations


Financial intermediary and its typesFinancial intermediary and its types

A financial intermediary is an institution, firm or individual who mediates between two or more parties in a financial context which means channeling of funds between lenders and borrowers indirectly;

Following 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;


Role of banks in economyRole of banks in economy

Exchange of financial assets on behalf of customers; Exchange of financial assets of their own assets; Receive deposits and provide safety; Provide investment device for market participants; Provide platform for small savers; Channelize idle wealth of society; Assist in settlement of claims; Provide cash management services; A tool for government for minatory control;


Qualities of banking systemQualities of banking system

Channelize idle wealth of society;– An individual can also participate in economy;

Assist in settlement of claims;– Provide services for members of society;– Check and payment instruments;– Ease in payments;

Provide cash management services;– No need for keeping books in home;

A tool for government for minatory control;– Hoarding and inflation control;


Conventional banking systemConventional banking system

BANKDEPOSITORS CUSTOMERS

STRUCTURE OF CONVENTIONAL BANK


Interest based bankingInterest based banking

BANKDEPOSITORS

LEND

CUSTOMERSINTEREST

LEND

INTEREST

Financial activities of a conventional bank

Receive deposit on interest; And give money on interest;


Possibility of Islamization of banking system.Possibility of Islamization of banking system.

Banks receive money from one side and give to other side;

Any possibility for this in Islam? See nest slide:


Possibility of Islamization of banking system.Possibility of Islamization of banking system.

ISLAMIC BANKDEPOSITORS

Participate in business•Mudarabah;•Musharakah

CUSTOMERS1.Profit in trade2.Rent in rental;3.Share in profit in participation;

STRUCTURE OF ISLAMIC BANK

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

Share in profit


Problems and issues in existing financial system;Problems and issues in existing financial system;

Interest; Gambling; Excessive uncertainty; Non-Islamic business; No obedience to Islamic rules of business;


Questions?Questions?

essentials of islamic banking and finance iqra university gulshan campus irshad ahmad aijaz

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