Transcript File - Villanova IMT Dubai 2011-2012

Islamic Banking
Future of Banking?
IMT, DUBAI
2 ND J A N , 2 0 1 2
Sachin Bansal
International Overview
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Islamic products and services offered by 300+ Financial Institutions around the world
The size of Islamic Financial Industry has reached US$ 700 Bln. and its growing annually @
15% per annum, including Islamic financial institutions, Conventional banks’, Islamic
window, Islamic capital markets, Takaful assets & Non-banking financial institutions
42 countries have Islamic Banking Institutions
27 Muslim countries including Bahrain, UAE, Saudi Arabia, Malaysia, Brunei and Pakistan
15 non-Muslim countries including USA, UK, Canada, Switzerland, South Africa and
Australia
In Feb 1999, Dow Jones introduced the Dow Jones Islamic Market Index (DJIM) of 600
companies world wide whose business complies with Islamic Shariah laws
At present there are more than 105 Islamic Funds operational through out the world with a
total fund base of over USD 3.50 billion
Leading foreign Banks have opened Islamic Banking windows or subsidiaries such as:
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Standard Chartered Bank
Citibank
HSBC
ABN AMRO
UBS
History of Islamic Banking
 1940s and 50s: development of theory
 1960s: first Islamic banking efforts
 1970s and 80s: more organized commercial banking,
trade finance, syndication, Islamic conglomerates
 1990s: Concentrations of Islamic banks growing in
selected countries, hard asset private equity fund
management
 2000s: Structured sukuk and capital market
development, mega project finance, large commercial
banks, Islamic derivatives
What is Islamic Economics?
In the West, Religion/Ethics/Legal only loosely overlap.
Islamic Sharia’a encompasses all three.
Sharia’a is the body of islamic principles with respect to life’s activities
Islam is a complete way of life which gives guidance for
Aqidah (Faith & Belief)
 Ibadah (Worshipping our creator)
 Akhlaq (Morals, Character & Ethics)
 Mu’amalat (Dealings with Fellow Man)
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Economic Activities fall under the purview of Mu’amalat.
Informal Dealings
 Formal, Contractual/Institutional Islamic Finance
 Banking
 Insurance
 Money Market
 Capital Market
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What is “Islamic Banking”
 Islamic banking is defined as “banking system which is in
consonance with the spirit, ethos and value system of Islam
and governed by the principles laid down by Islamic Shariah”.
 Interest-free banking is a narrow concept denoting a number
of banking instruments or operations which avoid interest.
 Islamic banking, the more general term, is based not only to
avoid interest-based transactions prohibited in Islamic
Shariah but also to avoid unethical and un-social practices.
 In practical sense, Islamic Banking is the transformation of
conventional money lending into transactions based on
tangible assets and real services
Important Concepts in Islamic Economics
Islam encourages
Restrictions in Islam
 Everyone is allowed to trade as
Divine Restrictions:
 Riba(Usury/Interest)
 Uncertainty(Gharar)
 Gambling (Maisir)
 Unlawful Products/Services
 Unlawful Contracts
Govt. Restrictions:
 Islam allows Govt. to
intervene
Moral Considerations:
 Maximum benefit in the life
for hereafter
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they like with the free market
exception of economy
Development of the entire
community & eradication of
concentration of wealth
Partners share the risk of reward
& loss
Money as a medium of exchange
and not as a commodity by itself
Financing must be asset-backed
and not money on money!
But what happened in 2008?
Why did it fare better
Conventional Finance
Islamic Finance
 Interest creates an
 Interest free system
artificial money supply
that forces risk sharing
 Sell money when you
 No profit without risk
have none
 Money advanced is
 Sell assets before they
always backed by real
exist
assets and services
 Push all the risk to the
 Contractual certainty
“ Islamic Banking is interest free Asset Backed banking
borrower
governed by the principles of Islamic Shariah”
Islamic Banking Standards
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Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
Islamic Financial Services Board (IFSB)
International Islamic Financial Market (IIFM)
Islamic Research & Training Institute (IRTI)
OTHER DEVELOPMENT INSTITUTIONS
 Islamic International Rating Agency
 General Council for Islamic Banks & Financial Institutions
 Liquidity Management Centre
Arbitration Centre
 Islamic Indexes (Dow Jones, S&P’s, FTSE/DIFC)
These institutions are playing a key role in setting up and standardizing Shariah ,
Financial and Accounting standards for Islamic Financial Institutions.
Due to these collective efforts Islamic banking is now recognized by IMF, World Bank
and Basel Committee.
Thank you!
Sachin Bansal
[email protected]
050 1512380
Back Up
Structure of Key Islamic Products
 Murabaha refers to contracts in which a financial institution
purchases goods upon the request of a client, who makes deferred
payments that cover costs and agreed-upon profit margin for the
financial institution. It is a is a fixed income loan
 A Musharaka is a partnership between parties in which one or
several parties supply working capital. Notes of participation sold to
investors provide the funding. Musharaka is widely used for joint
venture investments
 An Ijara is a lease purchase contract in which a financial institution
purchases capital equipment or property and leases it to an enterprise.
The financial institution may either rent the equipment or receive a
share of the profits earned through its use
Structure of Key Islamic Products
 Mudaraba : It’s an investment arrangement under which an investor
places funds in a bank or financial institution (Mudareb) that provides
expertise and manages the fund by investing in Sharia compliant
investment in return for a fee, typically based on profit sharing.
Mudaraba is a trust financing principle
 Istina’a or custom manufacturing is a sales contract for custom
manufactured goods which may be used for public and private project
financing.
 Sukuk : They are Islamic bonds. They are medium or long term,
islamically compatible trust certificate backed by certain approved
assets, usufructs or services
 Takaful or Islamic insurance is an arrangement such as a charitable
collection of funds based on the idea of mutual assistance
Islamic or Workaround?
 Tawaruq is the islamic way of obtaining cash when
required. It involves buying something on a deferred credit
and selling the item on to get cash. The cash has then been
obtained without taking out a loan and paying interest.