TRUST ISLAMIC BANKING

Theory & Practice

Shahud Ahmed
EVP & Head of IBD

Foundation Training Course

TBL Training Academy 13/05/13

Why you should know Islamic Banking?

It is the fastest growing sector of the Banking.

It is ethically guided operation.
It complies with the Quran & Sunnah.
It not only gives you a career but also a
direction towards a successful life.

What is Islamic Banking?

It is a value oriented banking.

Who defines the value?

Religion

Islamic banking refers to a system of

banking or banking activities that
is consistent with Sharia (Islamic
law).
- Most important feature of Sharia is it prohibits
Riba, the collection and payment of interest.
interest
- Shariah also prohibits investing in
businesses that are considered unlawful, or
haram.
haram

Part I :

CONCEPTION

1-1 History of Islamic Banking

1-2 Recent Developments & Status of Islamic
Banking
1-3 Major features of Islamic Banking
1-4 Prohibition of Riba in Quranic verses & Hadis
1-5 Interest in Other Religion
1-6 Frequently Asked Questions [FAQ] about
Islamic Banking
1-7 Difference between Conventional & Islamic
banking.
1-8 Problems of Islamic Banking in Bangladesh

1-1

History of Islamic Banking

First IB started in 1963 in Egypt Mit Ghamr Bank.

Eight new banks started in 1967 following the success of
Mit Ghamr bank.
All banks closed for political reasons in 1971.
IDB (Islamic Development Bank) established in 1980.
Since than organized development of Islamic Banking has
started.
Iran, Sudan & Pakistan has completely converted their
banking system to Islamic banking.
In Bangladesh, Islamic banking starts with the IBBL in the
year 1985.

1-2

Recent Developments & Status of Islamic Banking

8 out 10 largest International Banks has already

established their Islamic Banking wing in last 5 yrs.
Islamic Banking is growing @ 20% annually in last
5 years as against 2-3% in conventional banking.
Approximately 30% of global bank deposit is owned
by Muslims of which less than 10% are with Islamic
Banks.
As per BB statistics 30% of deposits & 22% of
assets of the country are in Islamic mode.

1-2 Cont.

Islamic Financial institutions are least

affected from the recent global financial
debacles.
Dow Jones started Islamic Index.
Harvard University has started a separate
school for Islamic Economic studies.

1-2 (Continued)

GCC countries and Indonesia are fastest growing

Islamic banking markets.
IDB resolved to open One Islamic Bank in each
country with Muslim population and IBBL has been
nominated to provide training & technical support.
Bank of England gives 1st license of Islamic
Banking in 2008 to start banking in UK.
60% clients of Islamic banks in Indonesia are nonMuslim Chinese.
Countries like France & Singapore are trying to
become the hub of Islamic Finance & Banking.

1-2 Continued

Islamic banking is still in its infancy with

a history of less than 50 years in
comparison to the conventional banking
with a known history of more than 200
years.

1-3

Essential Features of Islamic Banking .

It is Interest free.
It is a Sharia compliant mode of transaction.
It is trade based.
It forbids any economic activity which is
haram in Islam i.e. it distinguishes transactions
between halal & haram.

Islam

Sharia

Aqidah

Akhlak

(Law)

(Faith)

(Moral & Ethics)

Ibadah

Muamalat

No innovation
Is allowed

Doctrine of
permissibility

Islamic Banking
Sharia Compliant Contracts

Mutual
Consent

Avoidance of
Forbidden
transactions

Lawful
Objective.

1 - 6.6

What is Riba ?

Every loan that draws interest is Riba ~ Al Hadith (Ali

ibn Talib)
The word Riba means excess, increase or addition,
which interpreted according to Sharia terminology,
implies any excess compensation without due
consideration (and sharia do not include time value of
money as consideration).
This definition of Riba is derived from the Quran and is
unanimously accepted by all Islamic Scholars.

1-4

Prohibition of Riba in Quranic verses & Hadis

The divine part of modern Islamic finance, though crucial, is very

small. In the Quran, any prohibition comes in stages. The
prohibition of Riba is no difference. The prohibition of riba is
mentioned in four different revelations in the holy Quran;
The 1st revelation emphasizes that interest deprives (wealth
of) Gods blessing. (Surah al-Rum) 30:39
The 2nd revelation condemns it. (Surah al Nisa, Verses 4: 160-161)
The 3rd revelation enjoins Muslims to stay clear of interest
for sake of their own welfare. (Surah Al Imran, Verse 3: 130-2 ) &
The 4th revelation establishes clearly the prohibition of
interest. (Surah 2, verses 275 through 280)

1-4

Sayings of the Prophet, pbuh, about Riba ;

~ The Messenger of Allah said, A Dirham of Riba, one

knowingly eats, is more grave than thirty-six adulteries
Ahmad, Mishqat.
~ The Prophet, pbuh, said, Four (persons) very truly Allah
will not make them enter Heaven and the Eater of Riba..
Al Hakim.
~ Riba has seventy segments, the least serious being
equivalent to a man committing adultery with his own mother
Abu Hurayrah (RA).

1-5

Interest in Other Religion

The practice of usury can be traced back

approximately four thousand years (Jain,
1929), and during its subsequent history it has
been repeatedly condemned & prohibited.
Among its most visible and vocal critics have
been the religious institutions of Hinduism,
Buddhism, Judaism, Christianity and Islam.

1-6

Frequently Asked Question [FAQ]

1-6.1 Are all Islamic banking transactions under Profit &

Loss sharing scheme?

No, basically Islamic banks follow 2 types of

operation both of which are approved in Sharia;
a) Profit/Loss sharing method (Musharaka &
Muadaraba)

&
b) Sale (Profit mark-up) or Rental method (Ijara,
Murabaha,Bi-muajjol)

1-6.2

How profit can be pre-fixed ?

* In case of Rental.
* In case if Sale
* In case of fixing sharing Ratio

1-6.3 In a PLS (Profit & Loss sharing) system, how

Islamic banks always gives profit?

Bank invests the fund in different sectors.

Transfer the profit/loss to PLS account &
worked out net position.
Distributes the net position amongst the
depositor & the Bank at pre-agreed ratio.
As all the banks are making profit, the question of loss sharing doesnt
arises till today. Only exception is Oriental Bank Ltd.

1-6.4

How Islamic banks charge fixed rate of profit in deposit &

investment ?

Theoretically and ethically Islamic banks cannot give fixed profit

on deposits what they declare initially is a provisional rate,
which is subsequently corrected after approval of accounts by
concern authority.
In case of investments, the vary nature of finance determines
the rate of profit. For example, in Musharaka mode of finance
there is no scope of charging any fixed profit, again in a bi-salam
or Murabaha mode, the rate of return or sale price is already
agreed or determined by the parties.
You cannot sign a sale agreement without defining the price of the goods in
advance or we can not rent a premise without fixing the rent in advance. The
Prophet, pbuh, very clearly sets the guidelines for a valid contract to avoid
any ambiguity and western Law of Contract is formed by following the Islamic
contract law.

1-6.5

Islam prohibits usury not present day interest ?

This statement is most widely used by the proponents to justify the interest. I
hope, following quotations will give the answer;

O, believers, fear Allah, and give up what is still due to you

from the interest, if you are true believers ~ Sura Baqara;278
Quran do not distinguishes interest & usury.

. If you repent, you can have your principal..~ Sura

Baqara;279 here also asked to forgo all interest but only principal.

Sell gold in exchange of equivalent gold, sell silver in

exchange of equivalent silver, . But if a person transacts in
excess, it will be riba. Al Hadith, Bukhari.
He, who does not abandon Mukhabara, will be caught in a
war against Allah & His Prophet. Abu Hurairah (R).
Mukhabara is a system of crop sharing between landlord & the
cultivator at a pre-agreed quantity irrespective of production. Prophet,
pbuh, had called it a form of Riba and rendered illegal.

Now, the other theory that in usury, borrower uses the loan
for personal use and not in productive purposes (and
reverse in case of commercial loans) hence prohibited by
Islam.
But, we see Mukhabara is a commercial loan used for
productive purpose yet the Prophet, pbuh, declared is
illegal.
The fact is, the Prophet, pbuh, in all his instructions
mentioned, Riba and never differentiated or specifies any
particular type of Riba.
Interest of conventional Banks is Riba & Haram for believers
this is the resolution of International Fiqh Conference
1956, 3rd OIC International Fiqh Conference 1976 & 2003,
Rabeta International Fiqh Conference 1984.

1.6.7 Commercial interest did not exists in the days of

Prophet,pbuh.

This is not true. In the Islamic & pre-Islamic history of Arabia, we

find that interest bearing loans were given for commercial and
profitable purpose. We quote below 3 examples;
The tribe of Umro bin Aamir and tribe Mughaira, the two very
wealthy tribe of that time were involved in interest bearing
transaction between them these 2 wealthy tribes loan
transactions were for purely commercial lending.
Hazrat Usman (R) was one of the wealthiest businessmen of
pre-Islamic period and he also used to lent money on interest
to the traders.
Sydna Abbas bin Abdul Mutalib and Sydna Khalid bin Waleed
had company with joint capital, whose prime business was to
lend money on interest to traders.

under same roof is it possible ?

If a practicing Muslim can survive in this society even in the

western society, why not an Islamic Bank can not operate with the
conventional banking?

Complete segregation of Fund.

Completely separate book-keeping & Operation
process.
No mingling of fund ensured by todays centralized
computer
environment.
Its not the question of physical management of funds
rather
its the application of sharia principles while managing
it.

Process of business is important - not the venue.

Head Office
Islamic
Investment

Profit
35%

Branch
Deposit
Islamic

Muda
raba

Branch
Deposit
Conv.

Alwadia

Profit
65%

Loan
Conventional.

Deposit
Conventnl

1- 6.9

What is the role of Sharia council ?

The role & status of Sharia council are as follows;

Approval of any scheme, products or issue placed by the
management, on account of Sharia, for introduction in the
market.
Approval of the operational & accounting process in light of
Sharia.
Advises management about status of sharia compliance in
the bank.
Sharia council does not have any executive power.
The sharia council directly reports to the Managing Director
and if requires to the Executive Committee of the Board.

What are the differences of

Islamic
banking with
Conventional banking?

1-6.10

Business objective-wise there is no difference

between an Islamic bank & a conventional bank
both are profit oriented, they invest in profitable
ventures to ensure return on their investment.

The differences lies are in the operational ethics,

procedure & approach, e.g. an Islamic banker
must think about the Sharia permissibility of the
project or business before making any
investment while a conventional banker does
not have any obligation in this regard.

1-6.10 Cont.

Total profit earned by the Islamic bank is shared

between the bank and depositors at pre-agreed ratio

while in a conventional bank depositors get fixed
interest irrespective of banks earning.
Islamic Banking is trade based while Conventional
banking is lending based.
In addition to the compliance of regulatory issues
Islamic Banking must also ensure compliance of
Sharia guidelines.
In addition to the accounting profit, Islamic
Banking gives you the opportunity to earn Devine
profit in blessings of Almighty Allah, subnt.

1 -6.11 What

is the profit sharing ratio in TIB

TBL follows the profit sharing ratio @

80% distributed amongst the depositors as per
weightage.
20% retain by the Bank as service charge, and

1.7 Difference between Islamic & Conventional

Banking
Islamic Banking

Conventional Banking

It is Sharia Compliant

Not Sharia Compliant.

Trade Based transaction

Lending Based transaction

Interest free banking

Interest based banking

Value based banking

Value neutral banking

Short history of 40 years

More than 200 years

1-8 Problems of Islamic Banking Practices

Hurdles

National & International legal frame work and

Scio-economic situation is not Sharia friendly.
Present day economic structure & business
practices contradicts with the value of Islamic
economy.
Our mindset in present day of consumerism.

Religion ~ The Ultimate Guide

Islam is not a new religion; it is the same truth that

God revealed through all His Prophets.
All religions are the same in essence, for example,
to Noah, Abraham, Mosses, or Jesus, or to the holy
Prophet of Islam.
In core issues all religion gives the same verdict.
>There is One & only Creator.
All will face the Day of Resurrection & Judgment.
Warning on Greed & about Deeds.
Avoidance of Interest.

Benefits of Islamic Banking & Islamic Economic Principles

Islamic economic system aims at social justice

without limiting individual enterprises.
Islam imposes responsibilities on individual as
well as on entities unlike value neutral capitalist or
socialistic system.
Islam recognizes the right of capital as well as
labor but doesnt give any extra weighatge to any
ones favor.

If you are a believer then remember

Only we are answerable to Allah, subt, for

our deeds & responsibilities in the Day of
Resurrection Our Institution is not
answerable.

May Allah bless us all with His mercy

Thank you.