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ISLAMIC BANKING AND FINANCE

ASSIGNMENT # 1

INSTRUCTOR : MR. AZEEM PIRANI

MOHAMMAD HASSAN

0811120

BBA 8A

Contents

Mohammad Hassan 0811120

Islamic Banking and Finance Assignment # 1

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Summary of articles:

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Summary of articles:

Article # 1 : Azerbaijan develops Islamic financing

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Published : 25 January 2010

Summary:

Azerbaijan, officially the Republic of Azerbaijan is the largest country in the Caucasus region of Eurasia. It is located at the crossroads of Western Asia and Eastern Europe 1 . Although not many of us have heard of this country, analysts believe that the country may become a regional Islamic financing center in the near future. Azerbaijan has the potential to play a significant role in boosting cooperation in Islamic banking with Persian Gulf and Central Asian countries.

Islamic finance is one of the fastest growing segments of the global financial services industry worldwide 2 . Many countries interest in Islamic finance is associated with various factors, and in Azerbaijan, analysts believe that interest in Islamic finance as a source of investment is very high.

Currently, Azerbaijan’s Islamic finance market is in its introductory stage, although major growth is expected in little time. The International Bank of Azerbaijan will begin its work in March, and plans to present six various Islamic banking products to the market, and this is just the first phase of their plan.

The Islamic Corporation for the Development of the Private Sector (ICD) is also working towards creating the first Islamic insurance company in Azerbaijan.

Ansar Leasing, is one of the major operators in Islamic finance in the country, and the company’s

success has attracted many more banks and companies to enter the Islamic finance market. By developing Islamic financial infrastructure, Azerbaijan may indeed attract massive investments and financing from the Islamic capital market.

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Article # 2 : Challenges to growth of Islamic banking

Published : 26 January 2012

Summary:

More than 310 Islamic financial institutions currently operate in over 75 countries, contributing to a whopping volume of transactions at USD 1.086 trillion. However, despite the global interest and new trends, Islamic banking still faces many challenges. This article identifies two major challenges; variation regarding Shariah, and professional characteristics.

Regarding shariah, there is a wide variation of ‘fatwas’ within each bank. At times, some of

these fatwas contradict from bank to bank, thus creating hurdles in the progress of the sector. This reflects conflicts of interest and competition among not just banks, but also among scholars. Some financial instruments adopted by some Islamic banks are prohibited or regarded as undesirable in other

banks, which can seriously hinder the global compatibility of this sector.

On the professional side, one of the most basic fundamentals of Islamic banking is based on the profit-and-loss sharing principle, however, the interest rate in Islamic banks mirrors interest rates in traditional banks, in that it fluctuates in accordance with the interest rate of the London Interbank Offered Rate (or any Offered rate prevailing in a country). In reality, Islamic banking is part of the global banking system and will remain so due to the integration of the economies of Islamic countries with the global economy. This is because economic globalization does not allow for such a separation between Islamic banks and traditional banks.

The efforts of Islamic banking to go global are crucial for growth, but it also requires finding a solution to the currently existing Shariah and professionalism-related problems.

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Original Articles:

Article # 1

Mohammad Hassan 0811120 Islamic Banking and Finance Assignment # 1 5 Original Articles: Article # 1Trend / Leyla Abdullayeva, Trend Analytic Center Expert Azerbaijan may soon become a regional Islamic financing center and play a significant role in boosting cooperation in Islamic banking with Persian Gulf and Central Asian countries. Islamic financing is one of the fastest growing segments of the global financial services industry worldwide. At the same time, interest in Islamic finance as a source of investment is high in our country. Many countries' interest in Islamic finance is associated with different factors, the foremost of which is the desire to attract liquid resources from the Middle East and Southeast Asia and a certain demand for financial products in accordance with Sharia law by local Muslims. Today, Azerbaijan actively introduces Islamic financing. The independent authority of the International Bank of Azerbaijan (IBA) on Islamic banking will start its work in March, which plans to present six Islamic banking products to the market during the first phase. The Islamic Corporation for the Development of the Private Sector (ICD) is also in talks to create the first Islamic insurance company in Azerbaijan, Takaful, which is popular in Europe, particularly in the UK. European and Central Asian countries are considered experts in Islamic financing. Most of Takaful's customers are non-Muslims in countries where the Islamic insurance market is the most developed in the world. Ansar Leasing, organized on Islamic principles and established by the ICD, has successfully operated in Azerbaijan for three years. During this period, the company has formed a portfolio worth $15 million and the company plans to draw about $6-$7 million from its founder to expand operations. Some Azerbaijani private banks are also starting to expand the range of Islamic financing tools, introducing Ijarah (leasing) and Murabaha. One such bank is TuranBank, which plans to introduce these tools with the financial support of the Islamic Corporation. Another bank, Nikoil, is actively introducing deposit products, which include Wadia yad Daman. Evidently, Azerbaijani banks' interest in Islamic products is growing gradually. The amount of money that enters the market through this channel is very small in Azerbaijan, since many issues related to Islamic financing have not been yet addressed. Therefore, the successful development of Islamic finance on the domestic market will depend on the further improvement of legislation, regulatory prudential norms, and supply and demand. In the near future, it may become a subject of debate. By developing Islamic financial infrastructure, Azerbaijan may indeed attract investments and financing from the Islamic capital market, not only from Arab countries. Alternative financial tools can be provided for Azerbaijani investors in this way. Also, the number of practicing Muslims who cannot and do not want to use traditional financial services is growing in Azerbaijan. Islamic financial tools can become the channel through which their assets can be involved in the economy. " id="pdf-obj-4-12" src="pdf-obj-4-12.jpg">

Azerbaijan develops Islamic financing

25 January 2012, 17:50 (GMT+04:00)

Azerbaijan, Baku, Jan. 25 / Trend /

Leyla Abdullayeva, Trend Analytic Center Expert

Azerbaijan may soon become a regional Islamic financing center and play a significant role in boosting cooperation in Islamic banking with Persian Gulf and Central Asian countries.

Islamic financing is one of the fastest growing segments of the global financial services industry worldwide. At the same time, interest in Islamic finance as a source of investment is high in our country. Many countries' interest in Islamic finance is associated with different factors, the foremost of which is the desire to attract liquid resources from the Middle East and Southeast Asia and a certain demand for financial products in accordance with Sharia law by local Muslims.

Today, Azerbaijan actively introduces Islamic financing. The independent authority of the International Bank of Azerbaijan (IBA) on Islamic banking will start its work in March, which plans to present six Islamic banking products to the market during the first phase.

The Islamic Corporation for the Development of the Private Sector (ICD) is also in talks to create the first Islamic insurance company in Azerbaijan, Takaful, which is popular in Europe, particularly in the UK. European and Central Asian countries are considered experts in Islamic financing. Most of Takaful's customers are non-Muslims in countries where the Islamic insurance market is the most developed in the world.

Ansar Leasing, organized on Islamic principles and established by the ICD, has successfully operated in Azerbaijan for three years. During this period, the company has formed a portfolio worth $15 million and the company plans to draw about $6-$7 million from its founder to expand operations. Some Azerbaijani private banks are also starting to expand the range of Islamic financing tools, introducing Ijarah (leasing) and Murabaha. One such bank is TuranBank, which plans to introduce these tools with the financial support of the Islamic Corporation.

Another bank, Nikoil, is actively introducing deposit products, which include Wadia yad Daman.

Evidently, Azerbaijani banks' interest in Islamic products is growing gradually. The amount of money that enters the market through this channel is very small in Azerbaijan, since many issues related to Islamic financing have not been yet addressed. Therefore, the successful development of Islamic finance on the domestic market will depend on the further improvement of legislation, regulatory prudential norms, and supply and demand. In the near future, it may become a subject of debate.

By developing Islamic financial infrastructure, Azerbaijan may indeed attract investments and financing from the Islamic capital market, not only from Arab countries. Alternative financial tools can be provided for Azerbaijani investors in this way. Also, the number of practicing Muslims who cannot and do not want to use traditional financial services is growing in Azerbaijan. Islamic financial tools can become the channel through which their assets can be involved in the economy.

Article # 2

Article # 2 Mohammad Hassan 0811120 Islamic Banking and Finance Assignment # 1 6 Challenges to

Mohammad Hassan 0811120

Islamic Banking and Finance Assignment # 1

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Challenges to growth of Islamic banking

Although Islamic banking has grown rapidly over the last three decades, the volume of transactions touched $1.086 trillion (Dh3.98 trillion) in 2011

Mohammad Al Asoomi, Special to Gulf News

Published: 00:00 January 26, 2012

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Image Credit: Gulf News Archive

A branch of Dubai Islamic Bank. More than 310 Islamic financial institutions currently operate in more than 75 countries.

Although Islamic banking has grown rapidly over the last three decades, the volume of transactions touched $1.086 trillion (Dh3.98 trillion) in 2011, accounting for only one per cent of the world's total.

This point was made at a seminar organised last week by the Emirates Centre for Strategic Studies and Research in Abu Dhabi in cooperation with the Paris Institute of Geo-Political Studies.

The seminar also highlighted global interest in Islamic banking, motivated by the growing economic importance of Islamic countries and the increasing number of Muslims in places such as Europe. Even China is entering the market, recently approving a licence to set up the first Islamic bank in the country.

More than 310 Islamic financial institutions currently operate in more than 75 countries, and in the GCC the sector continues to flourish. The recent announcement that the world's largest Islamic bank, with a

capital of $100 billion, would be headquartered in Bahrain, will boost this trend.

But despite the global interest and new trends, Islamic banking still faces many challenges. Many of these challenges have complicated Sharia and professional characteristics.

Wide variation

Regarding Sharia, there is a wide variation in fatwas in each Islamic bank. Some of these fatwas contradict each other, thus creating hurdles in the progress of the sector.

This disparity reflects conflicts of interest and competition among Islamic banks on the one hand, and among scholars on the other. Some financial instruments adopted by some Islamic banks are prohibited or treated as undesirable in other lenders, which may hinder their adoption and the mission of the banking business in general.

On the professional side, although one of the most basic fundamentals of Islamic banking is based on the profit-and-loss sharing principle, the interest rate in Islamic banks mirrors interest

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rates in traditional banks, in that it moves up and down in accordance with the interest rate of the London Interbank Offered Rate (Libor) on the London Stock Exchange. This is the average interest rate that leading banks in London charge when lending to other banks.

Even though fatwa departments in Islamic banks are currently considering a substitute for this interest rate mechanism, in reality, Islamic banking is part of the global banking system and will remain so due to the integration of the economies of Islamic countries with the global economy.

This is because economic globalisation does not allow for such a separation between Islamic banks and traditional banks.

The impact of the global financial crisis on Islamic banking stand as evidence of strong association between Islamic banking and global banking, despite the fact that the effects on Islamic banks were less serious than those suffered by traditional banks. Let us not forget that one reason for this is that Islamic finance prohibits overestimating assets without sound financial foundations, and financial derivatives two major causes of the crisis.

The efforts of Islamic banking to go global are important, particularly if they want to achieve the stature of French banks, for example, but it also requires finding a solution to the currently existing Sharia and professionalism-related problems.

Dealing with global fin-ancial markets is different from dealing with local and regional markets, especially given that there are complicated financial instruments and derivatives that are difficult to deal with in terms of Sharia only.

There are also major stock exchanges for commodities, gold and oil that deal with billions of dollars daily, thus putting big burdens on financial institutions because of the size and speed of transactions.

But if these issues can be resolved, it would be possible for Islamic banking to constitute an important part of the world banking system.