lecture no.02 introduction of islamic banking and finance

7/27/2019 Lecture No.02 Introduction of Islamic Banking and Finance

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Introduction of Islamic

Banking and Finance

Abdur Rashid Mirza

University of Lahore

School of Accountancy and Finance

Lecture no.1

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Introduction of Islamic Banking

Islamic banking is interest free banking, inwhich there is no fixed rate of return.

Islamic banking is the banking system

which is run in accordance with the Islamiclaws and the Shari a` board; that guidesthe institutions. This Shari a` boardauthorizes the products that whether

these are Shari a` compliant or not. Islamicbanking is the banking that is guided byIslamic law ( Shari a`) principles and guidedby Islamic economics.

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In particular, Islamic law prohibits Interest, thecollection and payment of interest, also commonlycalled Riba in Islamic discourse. Islamic bankingalso finds its roots in Islamic finance and all type oftransactions are interest free and of risk sharing.

The interest is prohibited in Islamic ways ofbanking as it is also obvious from Quran. In Quran,prohibition regard fixed interest is also lead in SuraAl-Imran, Sura Al-Rum(39) , Al-Nisa(160-161) andAl-Baqarah(275-281) of Quran.

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Riba in Hadith

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Every loan that derives a

benefit (to the creditor)

is r iba.

This Hadith is reported by Hazrat Ali Radi-AllahuAnhu


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From Hazrat Abu Hurayrah (RA):

The Prophet, peace be on him,

said:"Riba has seventy segments,the least serious being

equivalent to a man committingadultery with his own mother."

(Ibn Majah)

What Hadith says about Riba?

IslamicBanking:TheCommonPerception&th

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Riba is illegal under Islamic law. Riba

refers to fixed rate of interest. Islamic

banking shows dramatic improvements

and developments in Pakistan. Islamic

banking is taken as national policy andit is supported but there exist dual

banking structure in the Muslim

countries.

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Mostly the banks ofconventionalsystem are also opening their

separate Islamic banking divisions

and branches.

The expectation of increase in growth of

networking of Islamic banking system is

increasing. The Islamic banking has

increased in terms of branches, deposits,

capital funds, sources.7



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Conventional Banks Islamic Banks

Time value is the basis for charging intereston capital

Profit on trade of goods for charging onproviding service is the basis for earningprofit

Interest is charged even in case theorganization suffers losses by using banksfund

Islamic bank operates on the basis ofprofit and loss sharing

While disbursing cash finance, runningfinance or working capital, no agreement for

exchange of goods & services is made.

The execution of agreements for theexchange of goods & services is a must.

Conventional banks use money as acommodity which leads to inflation

Islamic banking tends to create link withthe real sector of the economic systemby using trade related activities.

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ompar son etween onvent onaBanks and Islmaic Banks


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Conventional banks Islamic Banks

The investor is assured of a predetermined rate of interest

In contract it promotes risk sharingbetween provider of capital (investor) andthe user of funds (entrepreneur)

Lending money and getting it back withcompounding interest is the fundamentalfunctions of the conventional banks

Compounding calculation is strictlyprohibited under Islamic banking system

It can charge additional money incase ofdefaulters

The Islamic banks have no provision tocharge any extra money from thedefaulters.

Conventional banks invest their depositin interest based modes

Islamic banking only deals in Halal productsand services, all transactions must be in

SHARIAH COMPLIANCE

The status of a conventional bank, inrelations to its clients, is that of creditorsand debtors.

The status of Islamic bank in relation to itsclients is that of Partners, Investors, andTrader, Buyer and Seller.

A conventional bank has to guarantee of

all its deposits.

Islamic banks cannot guarantee of all its

deposits.

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ompar son etween onvent onaBanks and Islmaic Banks


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Establishment of IFSB (Islamic Financial

Services Board), IIFM (International Islamic

Financial Market) & Accounting and AAOIFI

(Auditing Organization for Islamic Financial

Institutions)

In Feb 1999, Dow Jones (USA Market Index)

introduced the Dow Jones Islamic MarketIndex (DJIM) of 600 companies worldwide

whose business complies with Islamic

Shariah laws.

Global Scenario

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According to TheBankers 2009 survey, the volume of theShariah Compliant Assets of the top 500 Islamic Financial

Institutions grew by 28.6% rising to US$822bn from $639in 2008 at a time when the top 1000 World Banks assetsslumped to 6.8% from 21.6% from the previous year.

The Shariah Compliant Assets are projected to grow to

US$1.60 trillion by 2012.

Sukuk (Islamic Bond) Issuance expected to hit US$200Billion by 2010

The opportunities to tap the surplus funds of oil richMuslim nations is strong as many non Muslim countriesare trying to tap it including, Japan, UK, Singapore,France, Hong Kong US, Germany, Australia, Thailand,etc.

Global Scenario.


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Governments of Bahrain,

Malaysia and now Pakistan

have issued Islamic Bonds

(Sukuk) in order to facilitate

Islamic Banks in managing

their liquidity.

Global Scenario.


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Major business schools such as Oxford,

and Harvard Durham has started post

graduate programs in Islamic Finance

Harvard University has developed a major

database by the name of Harvard Islamic

Financial Information Program (HIFIP) forIslamic Banking.

Global Scenario.

Islamic

Banking:TheCommonPerception&th

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Focus Areas

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Accessing NewMarket segments

through Islamicproducts

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http://images.google.com.pk/imgres?imgurl=http://www.merchantsmarketing.com/newsite/images/chessfront.jpg&imgrefurl=http://www.merchantsmarketing.com/&h=297&w=276&sz=28&hl=en&start=10&tbnid=cOlLZ5T9IraOxM:&tbnh=116&tbnw=108&prev=/images%3Fq%3Dreaching%2Bnew%2Bmarkets%26gbv%3D2%26svnum%3D10%26hl%3Den


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The road ahead

Accessing New Market Segments

through Islamic products

Nothing is more powerful than

an idea whose time has come

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Islamic Banking in Pakistan:

An Overview

Islamic

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Islamic Banking In Pakistan: An Overview

The Islamic banking market in Pakistan continued to

expand during the last year as well and the assets

growth has registered 59% p.a. growth since 2005 as

stated by Deputy Governor SBP.

Assets = about PKR 370 bn

Deposits = about PKR 280bnFinancing and Investment = about PKR 230 bn

Projected growth for the next 5 years of IslamicBanking is 15% to 20% per annum.

In 2008 the assets of Islamic Banking increased by34% as compared to the assets of overall industry by8.8%. (SBP Bulletin)

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Islamic Banking In Pakistan: An Overview

There are 06 full fledged Islamic Banks and 13

Commercial Banks having Stand alone dedicated

Islamic Banking BranchesAt present there are more than 600 Islamic

Banking Branches in Pakistan.

The six full fledged Islamic Banks are...1.Meezan Bank

2.Dubai Islamic Bank

3.Al-Barakah Islamic Bank

4.BankIslami5.Emirates Global Islamic Bank

6.Dawood Islamic Bank

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Abdur Rasid Mirza, Economic and Financial Analyst

Associated Consulting Engineers ACE (Pvt.) Ltd.

Faculty Member of University of Lahore, School of

Lahore, School of Accountancy and Finance

Research Scholar (Islamic Banking and Finance)

Mobile no. 0300-4210261

Email Address: [email protected]

Email address: [email protected]

Author Introduction

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mailto:[email protected]:[email protected]:[email protected]:[email protected]


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lecture no.02 introduction of islamic banking and finance

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