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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, in which there is no fixed rate of return. Islamic banking is the banking system which is run in accordance with the Islamic laws and the Shari a` board; that guides the institutions. This Shari a` board authorizes the products that whether these are Shari a` compliant or not. Islamic banking is the banking that is guided by Islamic law ( Shari a`) principles and guided by Islamic economics.

Introduction of Islamic Banking


In particular, Islamic law prohibits Interest, the collection and payment of interest, also commonly called Riba in Islamic discourse. Islamic banking also finds its roots in Islamic finance and all type of transactions are interest free and of risk sharing.

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

Every loan that derives a benefit (to the creditor) is riba.


This Hadith is reported by Hazrat Ali Radi-AllahuAnhu
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What Hadith says about Riba?


From Hazrat Abu Hurayrah (RA): The Prophet, peace be on him, said:

"Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother." (Ibn Majah)

Islamic Banking: The Common Perception & the Future Prospects by : A. J. Karimi

Introduction of Islamic Banking


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 and it is supported but there exist dual

banking structure in the Muslim countries.


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Introduction of Islamic Banking


Mostly the banks of conventional

system 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.

Comparison between Conventional Banks and Islmaic Banks


Conventional Banks
Time value is the basis for charging interest on capital

Islamic Banks
Profit on trade of goods for charging on providing service is the basis for earning profit Islamic bank operates on the basis of profit and loss sharing

Interest is charged even in case the organization suffers losses by using banks fund

While disbursing cash finance, running finance or working capital, no agreement for exchange of goods & services is made.

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

Conventional banks use money as a commodity which leads to inflation

Islamic banking tends to create link with the real sector of the economic system by using trade related activities.

Comparison between Conventional Banks and Islmaic Banks


Conventional banks
The investor is assured of a pre determined rate of interest Lending money and getting it back with compounding interest is the fundamental functions of the conventional banks

Islamic Banks
In contract it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur) Compounding calculation is strictly prohibited under Islamic banking system

It can charge additional money incase of defaulters


Conventional banks invest their deposit in interest based modes The status of a conventional bank, in relations to its clients, is that of creditors and debtors. A conventional bank has to guarantee of all its deposits.

The Islamic banks have no provision to charge any extra money from the defaulters.
Islamic banking only deals in Halal products and services, all transactions must be in SHARIAH COMPLIANCE The status of Islamic bank in relation to its clients is that of Partners, Investors, and Trader, Buyer and Seller. Islamic banks cannot guarantee of all its deposits.

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 Market Index (DJIM) of 600 companies worldwide whose business complies with Islamic
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Shariah laws.

Alhuda Conf. 8-9 June 2010

Global Scenario

Global Scenario.

According to The Bankers 2009 survey, the volume of the Shariah Compliant Assets of the top 500 Islamic Financial Institutions grew by 28.6% rising to US$822bn from $639 in 2008 at a time when the top 1000 World Banks assets slumped to 6.8% from 21.6% from the previous year.
Islamic Banking: The Common Perception & the Future Prospects by : A. J. Karimi

The Shariah Compliant Assets are projected to grow to US$1.60 trillion by 2012.
Sukuk (Islamic Bond) Issuance expected to hit US$200 Billion by 2010 The opportunities to tap the surplus funds of oil rich Muslim nations is strong as many non Muslim countries are trying to tap it including, Japan, UK, Singapore, France, Hong Kong US, Germany, Australia, Thailand, etc.

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Global Scenario.

Governments

of

Bahrain,

Malaysia and now Pakistan have issued Islamic Bonds (Sukuk) in order to facilitate
Islamic Banking: The Common Perception & the Future Prospects by : A. J. Karimi

Islamic Banks in managing


their liquidity.

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Global Scenario.

Major business schools such as Oxford,

and Harvard Durham has started post


graduate programs in Islamic Finance

Islamic Banking: The Common Perception & the Future Prospects by : A. J. Karimi

Harvard University has developed a major database by the name of Harvard Islamic Financial Information Program (HIFIP) for Islamic Banking.

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Focus Areas

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Accessing New Market segments through Islamic products


Islamic Banking: The Common Perception & the Future Prospects by : A. J. Karimi

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The road ahead

Nothing is more powerful than an idea whose time has come

Islamic Banking: The Common Perception & the Future Prospects by : A. J. Karimi

Alhuda Conf. 8-9 June 2010


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Accessing New Market Segments through Islamic products

Islamic Banking: The Common Perception & the Future Prospects by : A. J. Karimi

Islamic Banking in Pakistan: An Overview

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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 280bn Financing and Investment = about PKR 230 bn Projected growth for the next 5 years of Islamic Banking is 15% to 20% per annum. In 2008 the assets of Islamic Banking increased by 34% as compared to the assets of overall industry by 8.8%. (SBP Bulletin)

Islamic Banking: The Common Perception & the Future Prospects by : A. J. Karimi

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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 Branches At present there are more than 600 Islamic Banking Branches in Pakistan.
Islamic Banking: The Common Perception & the Future Prospects by : A. J. Karimi

The six full fledged Islamic Banks are...


1.Meezan Bank 2.Dubai Islamic Bank 3.Al-Barakah Islamic Bank 4.BankIslami 5.Emirates Global Islamic Bank 6.Dawood Islamic Bank

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Author Introduction
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: yourarm1972@hotmail.com Email address: yourarm@yahoo.com

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