HIGHER COLLEGES OF TECHNOLOGY Al Ain Women's College

Islamic Banking
Goal 5

"Abu Dhabi Islamic Bank"

FSRV 220 2005-2006

Presented for: Mrs Lama Makarem

Prepared by: Al Yazia Salem Obaid Ali Al Kaabi

Section: BU02 ID Number: H00011431 Date: Sunday, 16 April 2006

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Table of contents General introduction...................................................................................................................3 Specific introduction..................................................................................................................4 Products offered by the bank......................................................................................................4 Difference between Islamic bank (Abu Dhabi Islamic Bank) and conventional bank..............7 I prefer to invest my money in Islamic bank, WHY?................................................................9 Future of Islamic banking..........................................................................................................9 Summary and conclusion.........................................................................................................10 References................................................................................................................................11 Books....................................................................................................................................11 E-Books................................................................................................................................11 Websites...............................................................................................................................11 Appendices...............................................................................................................................12 Appendix 1:..........................................................................................................................12

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Islamic Banking

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General introduction Islamic Banking and financing have gained ground both nationally in Muslim countries and internationally in the finance world. Islamic banking system is different from any other systems by making rules based in Quran and Sunna called Shari'a. Islamic Financial institutions are based on Islamic objectives and operations and it has special principles that are related to Islam. "In the last number of years, Islamic banking and finance has gown as a distinctive field of business and of study throughout the Islamic and non Islamic world." <IslamicBanking,"Banks",http://www.sbp.org.pk/departments/ibd/Lecture_8_Related_Readi ng_2.pdf>. In the early 1960's, the first Islamic Banks were established in Malysia and Egypt. In Malysia 1968 in the form of the Pilgrims Fund. Plus, in Egypt the first saving bank based in Islamic rules established in 1963 <Dew, Philip. Doing Business with United Arab Emirates. N.p.: Kong Page, 2000.>. Moreover, in the UAE the very first Islamic Bank was Dubai Islamic Bank in 1973<About Dubai Islamic Bank, http://www.alislami.co.ae/en/index.htm>

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Islamic Banking Specific introduction

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In the following report I am going to write about Abu Dhabi Islamic Bank in particular as an example of Islamic banks in the UAE. Abu Dhabi Islamic Bank was established on 20 May 1997. Plus, according to <Abu Dhabi Islamic Bank Information, www.adsm.ae/StreamerWeb/bstreamer.jsp>this bank joined the stock exchange market in Abu Dhabi on the 15th of November 2000. According to <Abu Dhabi Islamic Bank Information, www.adsm.ae/StreamerWeb/bstreamer.jsp>, number of customers were increasing every year. The status shows that in 2001 number of customers were about 20,000. But in 2003 number of customers was increasing by 23.4 %<Dew, Philip. Doing Business with United Arab Emirates. N.p.: Kong Page, 2000.>. More non Muslims were jointed in that time because they find this system is suitable to their investment and their actual life. This increase come because of their corporative values which they mentioned that "we are focused on 100% customer satisfactions by delivering quality services where and when the customer needs these services"<Mission, Objectives and Values, http://www.adib.ae/Main_E/index.asp>. They also are trying to give their employees a special treatment by motivating and rewarding them to be number one bank in having qualification staff. "Ensure that each employee's goal and objectives are aligned with those of the bank." <Mission, Objectives and Values, http://www.adib.ae/Main_E/index.asp>

Products offered by the bank Abu Dhabi Islamic Bank has introduced the most modern Islamic banking services to reach customers' satisfaction in the UAE and beyond. Plus, all these services are based on Islamic principles. The Islamic financial services industry is consist of an increasingly various range of institutions, including commercial, personally, corporative and investment banks, mutual insurance and investment companies. In the following products that offers by Abu Dhabi Al Yazia Al Kaabi 4 BU02

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Islamic Bank you will figure out how is that products applied to Islam laws. <Islamic Banks Services, http://www.sib.ae/eng/sib_aboutus.asp>

1. Current Account: The Current Account in ADIB offers a various facilities and easy access to your account at anytime. Because it is related to Islamic laws, there is no interest. There is new service now called "Al Barg Telephone Baking". Through this service the customer will have the ability to access information about your account in any part of the world and at anytime. This service is very handy and easy to use.

2.

Electronic Account:

Through out this account you can easily access to your money at anytime via Auto Bank card. It designed to save time and there is no minimum deposit.

3.

Saving Account:

This account is offering a flexible saving option giving you easy access to the customer's funds while they earn a profit instead of earning interest as if it is in conventional bank. According to <Saving Account ,http://www.adib.ae/Main_E/index.asp> "Abu Dhabi Islamic Bank is the 1st Islamic Bank where profits on your investments are assessed on monthly basis and credited to your savings account on quarterly basis January, April, July and October. In order to have all these services you should have at least AED 500 in your account. As for earning profits your need to maintain a minimum balance of AED 3,000.

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Islamic Banking 4. Islamic Covered Card:

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This is new card that ADIB offers. It is an Islamic card that meets all sharia's rules and regulations. Moreover, it gives its holders the freedom of usage convenience and security in order to have flexibility in payment. In order to have a free Islmaic Visa Coverted Card financing up to 30 salaries, 96 months repayment plan with law monthly installment.

5.

Al Khair:

This product aims at enabling customers to settle their financial liabilities and transferring their salary to ADIB with, first, No installment for the 1st 3 months. Second, no profits charged up to December 2005 6. Murabaha

This service is the same as taking interest in the conventional bank but the main difference is that "Murabaha" is legal in Islam. The way it work that "the Bank buys the property from the seller and immediately re-sells it to the customer with a mark-up, repayable in installments over a period of time"<Murabaha, http://www.adib.ae/Main_E/index.asp>. In this case the customer is the owner. Bank registers a legal charge as security for its advance.

7.

Ijara

This particular service works when "the Bank buys the property from the seller at the cost price and leases it to the customer for pre agreed term"<Ijara, http://www.adib.ae/Main_E/index.asp>. In this service the customer should fill a contract that he agrees to buy the property from the bank in this particular price. As for the Bank, it should agree to transfer the property to the customer after receiving the agreed payments.

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Islamic Banking 8. Istisna`a

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This is a contract between the customer who requires a building or any other asset to be constructed, and the Bank. The Bank will ask him to give full specification of the project and approximated completion time required. "The Bank will undertake cost and project time estimates independently and after agreement with the relevant parties, will commence construction."<Istisna'a, http://www.adib.ae/Main_E/index.asp>. In this contract the only thing that the customer should do is just pay to the Bank a down payment. The Bank will have the opportunity to choose the contractor to work in the project. This contract are related to Islam Laws.

9.

Tamleek

Tamleek is a product that structured with accordance with Sharia'a laws. "This product designed to provide long term property financing to UAE nationals for real estate acquisition (residential & investment) in United Arab Emirates with a maximum financing tenor of 15 years."<Tamleek, http://www.adib.ae/Main_E/index.asp>. This will have easy monthly repayments.

Difference between Islamic bank (Abu Dhabi Islamic Bank) and conventional bank There are several differences between Abu Dhabi Islamic Bank and any other conventional bank. The first difference is the business framework. Islamic banking system is based on Shari'a laws, whereas, in conventional bank it is not based on religions laws but just only secular banking laws. A further difference is Balance between moral and material requirement. In Islamic banks "the requirement to finance physical assets which banks usually take ownership of before resale reduces over extensive of

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credit"<http://www.adib.ae/Main_E/index.asp>. But in the conventional banking system, "the extensive use of credit and debt financing can lead to financing problems"<http://www.adib.ae/Main_E/index.asp>. Equity financing with risk to capital is the third difference. In Islamic banking system, "it is available. Enable several parties, including the Islamic Bank to provide equity capital to a project or venture. Loses are shared on the basis of equity participation while profits are shared on a pre-agreed ratio. Management of the enterprise can be in one of several forms depending on whether the financing is through Mudarabah, Musharaka, etc"<http://www.adib.ae/Main_E/index.asp>. On the other hand, Conventional banking system "Not generally available through commercial banks, but through venture capital companies and investment banks which typically take equity stakes and management control of an enterprise for providing start-up finance"<http://www.adib.ae/Main_E/index.asp>. The forth difference is Prohibition of Gharar. In Islamic bank system "Transactions deemed Gharar are prohibited. Gharar denotes varying degrees of deception pertaining to the price and quality of goods received by a party at the expense of the other. Derivatives trading e.g. options are considered as having elements of Gharar" while in conventional banking system "Trading and dealing in derivatives of various forms is allowed". The fifth and the last difference is Profit and Loss Sharing. In Islamic Bank system "All transactions are based on this principle. Returns are variable, dependent on bank performance and not guaranteed. But the risks are managed to ensure better returns than deposit accounts. Consumers can participate in the profit upside i.e. in a more equitable way than receiving a predetermined return". Whereas in conventional banking system "this principle is not applied. Returns to depositors are irrespective of bank performance and profitability. The customer as depositor is like a lender and does not share in the success of the enterprise beyond receiving a fixed rate of predetermined interest.

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Unlike the Islamic system the depositor cannot theoretically gain subject to improved bank performance."<http://www.adib.ae/Main_E/index.asp> (See appendix 1)

I prefer to invest my money in Islamic bank, WHY? o The charge of interest is considered an injustice. In Islamic bank interest is a result of Islamic transactions. o All the transactions are based on Islamic rules.

Future of Islamic banking Over the last 20 years Islamic banks were growing phenomenally. According to <Islamic BanksFuture,http://www.misyseagleye.com/Solution_Highlights/Islamic_Banking/index.htm l>"The provision of banking services adhering to Sharia'a rules has grown to such an extent that many conventional banks". Additionally, future of Islamic banks will increase about 24% that it is these days. "Assets of Islamic banks rose by an average of 24 per cent a year over the last decade and are at least expected to maintain this growth in the next few years."< Islamic banking blazing through Middle East, http://www.gulfnews.com/articles/06/03/06/10023460.html>. According to Gulf News "There are an estimated 300 Islamic banks and financial institutions worldwide holding $300 billion in assets that are predicted to grow to $1 trillion by 2013". Over 32 Islamic banks are expected to establish in the following 5 years all over the world. We are expected to have a sharply jump in spread out Islamic Banking system in the following years.

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Islamic Banking Summary and conclusion

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In conclusion, Islamic Banking system is really the ethical system I have ever seen. This system can be fully appreciated only in the context of Islam's teaching. Plus, it is compliant to Islamic laws that related to Quran and Sunna.

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Islamic Banking

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References Books <Iqbal, Zubair, and Abbas Mirakhor. Islamic Banking. Washington, D.C.: International Monetary Fund, 1987.> E-Books <Dew, Philip. Doing Business with United Arab Emirates. N.p.: Kong Page, 2000.> Websites <Islamic Banking. "Banks". 11 Apr. 2006 <http://www.sbp.org.pk/departments/ibd/Lecture_8_Related_Reading_2.pdf>. <About Dubai Islamic Bank, http://www.alislami.co.ae/en/index.htm> <Abu Dhabi Islamic Bank Information, www.adsm.ae/StreamerWeb/bstreamer.jsp> <Mission, Objectives and Values, http://www.adib.ae/Main_E/index.asp> <Islamic Banks Services, http://www.sib.ae/eng/sib_aboutus.asp> <Saving Account ,http://www.adib.ae/Main_E/index.asp> <Murabaha, http://www.adib.ae/Main_E/index.asp>. <Ijara, http://www.adib.ae/Main_E/index.asp> <Istisna'a, http://www.adib.ae/Main_E/index.asp> <Tamleek, http://www.adib.ae/Main_E/index.asp> <Islamic Banks Future, http://www.misyseagleye.com/Solution_Highlights/Islamic_Banking/index.html> <Islamic banking blazing through Middle East, http://www.gulfnews.com/articles/06/03/06/10023460.html>

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Islamic Banking

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Appendices Appendix 1:
Characteristics Business Framework Islamic Banking System Conventional Banking System (Interest based system)

Based on Shari'a laws - Shari'a scholars Not based on religious laws or guidelines - only ensure adherence to Islamic laws and provide secular banking laws guidance.

Balance The requirement to finance physical assets Excessive use of credit and debt financing can lead between moral which banks usually take ownership of before to financial problems. and material resale reduces over extension of credit. requirement

Equity financing with risk to capital

Available. Enables several parties, including Not generally available through commercial banks, the Islamic Bank to provide equity capital to a but through venture capital companies and project or venture. Losses are shared on the investment banks which typically take equity stakes basis of equity participation while profits are and management control of an enterprise for shared on a pre-agreed ratio. Management of providing start-up finance. the enterprise can be in one of several forms depending on whether the financing is through Mudarabah, Musharaka, etc.

Prohibition of Gharar

Transactions deemed Gharar are prohibited. Trading and dealing in derivatives of various forms is Gharar denotes varying degrees of deception allowed. pertaining to the price and quality of goods received by a party at the expense of the other. Derivatives trading e.g. options are considered as having elements of Gharar.

Profit and Loss All transactions are based on this principle. Sharing Returns are variable, dependent on bank performance and not guaranteed. But the risks are managed to ensure better returns than deposit accounts.

This principle is not applied. Returns to depositors are irrespective of bank performance and profitability. The customer as depositor is like a lender and does not share in the success of the enterprise beyond receiving a fixed rate of predetermined interest.

Consumers can participate in the profit upside i.e. in a more equitable way than receiving a Unlike the Islamic system the depositor cannot predetermined return. theoretically gain subject to improved bank performance.

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