Transcript 3. Current Banking & Financial System

Current banking and financial system
Essentials of Islamic Banking and Finance
IQRA University Gulshan Campus
IRSHAD AHMAD AIJAZ
[email protected]
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 1
Contents of the lecture
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Current financial and Banking System:
– Economic system;
– Financial Markets;
– Financial intermediation;
– Banking system;
Possibility of Islamization of banking;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 2
Contents
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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
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 3
Introduction
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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';
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 4
Economic systems
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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;
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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;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 5
Sectors of economy
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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);
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 6
Sectors of economy
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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.
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 7
Sectors of economy
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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;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 8
Sectors of economy
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 9
Factors of economy
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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
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and master;
These factors produce 'products and services';
Every factor gets what is due to it;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 10
Economic System
ECONOMY
Factors of production
Land
Labor
Capital
Enterprise
Products
Goods
Product Market
Services
Factor Market
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 11
Economic System
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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
Factor market
Capital
Loan
Labor
Manufactured goods
Services
Cloth
Rental
Food
Health
Shelter
Education
Employment
Equity
Financial Market
Non-financial enterprises
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 12
Financial markets
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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
Tangible Asset:
Its value depends on particular
physical properties
Intangible Asset:
It represent legal claims on some
future benefits.
Building
Loan
Machinery
Share
Land
Bond
Financial
Assets
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 13
Classification of financial markets
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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;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 14
Financial intermediation;
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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;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 15
Financial intermediation
Directly to these activities
Individuals
1.Business
2.Industry
3.Individuals
4.Governments
5.Companies
6.International trade
7.etc. etc
Companies
Trusts
Private Businesses
Funds
supply
Supply of funds through
Financial intermediaries
Organizations
1.Banks
2.Insurance companies;
3.Credit unions;
4.Funds;
5.Investment trust;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 16
Financial intermediary and its types
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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
1.Banks;
2.Saving associations;
3.Loan associations;
4.Credit unions;
5.Credit societies;
Non-depository institution
1.Development banks;
2.State banks;
3.Insurance companies;
4.Investment banks;
5.Brokerage houses;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 17
Role of banks in economy
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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;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 18
Qualities of banking system
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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;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 19
Conventional banking system
STRUCTURE OF CONVENTIONAL BANK
DEPOSITORS
BANK
CUSTOMERS
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 20
Interest based banking
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Receive deposit on interest;
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And give money on interest;
Financial activities of a conventional bank
LEND
LEND
DEPOSITORS
CUSTOMERS
BANK
INTEREST
INTEREST
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 21
Possibility of Islamization of banking system.
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Banks receive money from one side and give to other side;
Any possibility for this in Islam?
See nest slide:
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 22
Possibility of Islamization of banking system.
STRUCTURE OF ISLAMIC BANK
1.Trade;
2.Rental;
3.Participation;
4.Investment agency
Participate in business
•Mudarabah;
•Musharakah
ISLAMIC BANK
DEPOSITORS
Share in profit
CUSTOMERS
1.Profit in trade
2.Rent in rental;
3.Share in profit in
participation;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 23
Problems and issues in existing financial system;
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Interest;
Gambling;
Excessive uncertainty;
Non-Islamic business;
No obedience to Islamic rules of business;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 24
Questions?
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 25