Introduction to islamic banking

Islamic banking refers to a system of banking or

banking activity that is consistent with the principles
of Islamic law (Sharia) . Sharia prohibits, (Riba, usury)
i.e, interest free business.
Islamic banks are seen to involve themselves as
financial intermediaries and investment oriented
institutions in bringing about wellbeing of the
community, society and the economy in the light of
Shariah

Basic Difference between Islamic and
Conventional Modes of Banking
Conventional
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Bank Client
money
money + money (interest)
Basic Difference between Islamic and
Conventional Modes of Banking
Islamic
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Bank Client Goods &
Services
money
Islamic Banking?
Banking encompassing Islamic injunctions

To avoid:
Riba Earning returns from loans and debts or
Selling debt contracts at discount
Gharar Absolute Risk or Excessive uncertainty in
contracts, Gambling and chance-based games
(Qimar)
General Prohibitions
unethical practices

Shariah Compliance & Prudent Banking
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5
Islamic Banking
Myths & Realities
Islamic Banking IS NOT
a RELIGIOUS system;
a simple Interest-Free system;
a discriminatory system restricted to Muslim People

Islamic Banking IS:
a SYSTEM based on religious ETHICAL principles;
an Open system and a real alternative to conventional
finance.


Islamic Banking The Concept
Concept principles no deception and no riba (interest)
It is not new 7
th
Century
Money is a medium of exchange
Interest can lead to injustice/exploitation in society Zulm
No real 'lending' as all 'lenders' obtain interests
To earn $ for banks, they must obtain an equity / ownership
Requires banks to participate, share risk profit varies
Profit share is distributed instead of interest earned
Leads to more ethical society (Unlike West you must pay interest)
This concept encourages better resource management


Principles of Islamic Banking

Justice, equality and solidarity
Forbidden objects and creatures.
Acquisition of property rights.
Property (wealth) should be used in a rational but fair
Way.
No gain without either effort or liability
Rules of Islamic Banking


Any predetermined payment over and above the actual
amount of principal is prohibited.
The lender must share in the profits or losses arising
out of the enterprise for which the money was lent.
Making money from money is not Islamically
acceptable Gharar (Uncertainty, Risk or Speculation) is
also prohibited.
Investments should only support practices or products
that are not forbidden -or even discouraged- by Islam.
Primary Characteristics of Islamic
Banks

Prohibition of Interest
Low Consumer Lending Profit and Loss Sharing High
Real Sector Investing
To help Muslims, execute their financial dealings in
social values of the Shariah
To Serve all Muslim communities in mobilizing and
utilizing the financial resources.
To serve the Islamic communities strengthening the
economic ability

Main Objective Of Islamic Banking:
Banking Without Riba
The main objective of an Islamic Bank is to prohibit
Muslims from dealing with interest or usury (Riba)
which has been strictly prohibited by Allah, and to
protect them from one of the biggest sins.

Dubai Islamic Bank Statement
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Islamic Banking Principles
The Shariah prohibits the payment of charges for the
renting of money (riba, which in the definition of Islamic
scholars covers any excess in financial dealings, usury or
interest) for specific terms, as well as investing in
businesses that provide goods or services considered
contrary to its principles (Haram, forbidden)
"While a basic tenant of Islamic banking - the outlawing of
riba, a term that encompasses not only the concept of
usury, but also that of interest - has seldom been
recognized as applicable beyond the Islamic world, many
of its guiding principles have. The majority of these
principles are based on simple morality and common
sense, which form the bases of many religions, including
Islam
Basis of Islamic Banking
In order to be Islamic, the banking system has to avoid
interest
Another Islamic principle is that there should be no
reward without risk-bearing. This principle is
applicable to both labour and capital
Theoretical Basis for Islamic
Banking
A popular belief persists that Islamic banking is simply an
interest-free financial structure. But, in fact, Islamic
economics is a complete system of social and economic
justice. It deals with property rights, the incentive system,
the allocation of resources, economic freedom and
decision-making and the proper role of government
Western bankers have said that savings and investments
would soon dry up if interest were not paid. But this is due
to identifying "rate of interest" and "rate of return". The
Qur'an says: "God has permitted trade, but forbidden riba
(interest) (2:275). Therefore it is only the fixed, or
predetermined, return on savings or transactions that is
forbidden, not an uncertain rate of return, such as the
making of profit
Prohitbition of Interest
Riba as interest (differences among Muslims)
Interest in all forms prohibited
All interest-based transactions should be avoided
Interest-based transactions are seen as unjust
risk on the borrower Basic Framework
Prohibition of Riba
Quran Guides on Definition of Riba
Financial Liability:
Qard (Loan) : to give anything in ownership of other by
way of virtue - same or similar amount of that thing
would be paid back on demand or at the settled time.
Dayn (Debt) : Incurred by way of trade or rent or any
other credit transaction - ought to be returned at the
settled time without any profit.
Verse 2: 279 guides that whatever is over and above the
principal of loans or debts is Riba.

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Riba?
All increases in wealth or benefits accruing
to a person without any labour, risk, or
expertise.
One who wishes to earn profit on his
monetary investment must bear the loss or
damage accruing to the business where his
money capital is to be used.
Nature of transaction important.
Trading- Bai- Risk taking, value addition
Leasing Ijarah - Risk taking, value addition
Exchange transaction Monetary transactions
Lending a virtuous act; not a business
Hand to hand exchange of currencies
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Riba - Unanimity
Banu Thaqif of Taif, not to forego interest on
their receivables; Banu Amr ibnal Moghirah
refused to pay interest; Referred to the H
Prophet, the Revalation came:



O you who believe. Fear Allah, and give up the Riba
that remains outstanding if you are (in truth)
believer. (11:278).

Riba - Unanimity (Contd)
If you do not do so, then be sure of being at
war with Allah and his Messenger. But, if you
repent, then you have your principal. (11:279)
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And fear the day when you shall be brought back to
Allah.


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Then shall every soul be paid what it earned
and none shall be dealt with unjustly.
Challenges for Islamic banks

Establishing appropriate risk and liquidity
management techniques
Achieving consistent Shariah supervision
Managing the talent pool
Addressing legal and tax restrictions

REASON AND NEED OF ISLAMIC
BANKING
Islamic banks can give inclusive growth along with
control over inflation.
Equity finance is extended by lower cost of credit. It
provides equitable share of profit.
It provides small amount of loans
Integrity in Islamic Banking
Islamic banks need to give special care to their
integrity and credibility
Islamic banks come in all shapes and forms: banks and
non-banks, large and small, specialized and
diversified, traditional and innovative, national and
multi-national, successful and unsuccessful, prudent
and reckless, strictly regulated and free-wheeling,
Non-sharing Islamic modes such as murabaha, salam,
istisna'a and ijarah also provide a link between
financial transactions and real economic activities,
Innovation and Research

An important area is development of products for meeting
statutory liquidity requirements

The lack of involvement of Islamic finance in government
financing is due to lack of research and development (R&D)
and differences in Shari'ah-compliance criteria between
different countries

R & D should therefore be attended to by Shari'ah experts
under the guidance of the Organization of Islamic
Conferences (OIC) Fiqh Academy (Islamic jurisprudence)
and AAOIFI (Accounting and Auditing Organizations of
Islamic Financial Institutions)
Data of some islamic
banks

Trade Real
estate
SSI Mfg. Agricult
ure
Name
Of the
Bank
32.79 25.67 1.00 39.79 0.53 Jordan
Islamic
Bank
90.34 9.35 - - - Qatar
Islamic
Bank
73.01 - - 26.10 0.83 Islamic
Bank
Banglad
esh
Islamic Banking in practice(1)
International Banks with Islamic Windows:

Citigroup
HSBC
Deutsche Bank
UBS
ABN AMRO
Standard Chartered Bank
Islamic Banking in practice(2)
1. Jordan Islamic Bank (1979)
2. Faisal Islamic Bank, Egypt (1977)
3. Islamic Bank for Western Sudan (1981)
4. Tadamon Islamic Bank, Sudan (1981)
5. Qatar Islamic Bank (1983)
6. Islamic Bank International Denmark (1983)
7. Islamic Bank, Bangladesh (1983)
8. Sudanese Islamic Bank, Sudan (1983)



PRESENT SCENE
Islamic Banks in the Government Sector
Pakistan, Sudan, Iran
Islamic Banks in the Mixed Sector
- Malaysia
Islamic Banks in the Private Sector
Gulf
Non Banking Financial Institutions
Al Ameen [ Bangalore, India]
Islamic Financing by standard Commercial Banks in the Domestic Sector
Saudi British, NCB, Saudi American, Misr Bank
Islamic financing by Commercial banks in the foreign sector.
Islamic Banks established by multinational Banks
Citibank, HSBC Amanah Bank,




Its prospect

Now a days islamic banking principle are used in
different countries throughout the world.
Some are illustrated here:
CONCLUSION
The Islamic banking can be implemented only by
adopting the Islamic principles of social justice and
introducing laws, practices, procedures and
instruments which help in the maintenance and
dispensation of justice, equity and fairness.
( Muazzam Ali directory of islamic Institutions).

Althogh the western media frequently suggest that Islamic
banking in its present form is a recent phenomenon, in
fact, the basic practices and principles date back to the
early part of the seventh century." (Islamic Finance: A
Euromoney Publication, 1997)

Thank You