An Introduction to

Islamic Banking & Takaful

Awareness Road show on Islamic Banking and Takaful
From

Khyber to Karachi

Zubair Mughal
Chief Executive Officer
AlHuda : Centre of Islamic Banking & Economics
Editor in Chief.
Islamic Banking and Finance News , True Banking.

2
 Outline of Presentation

 About Nationwide Awareness Compaign on Islamic Banking &

Takaful
 Introduction to Islamic Banking
 Riba ( Interest )
 Difference between Islamic & Conventional Banking
 Product of Islamic Banking.
 Progress of Islamic Banking in Pakistan & Worldwide
 Takaful
 Shariah Mechanism of Takaful
 Family & General Takaful.
 Islam and Shariah

Islam

Aqidah Shariah Akhlaq

(Faith & Belief) (Practices & Activities) (Morality & Ethics)

IBADAT Muamalat
(Man to God Worship) (Man to Man Activities)

Political Activities Economic Activities Social Activities

Banking & Financial Activities

 Sources of Fiq’h in Islam (Islamic
Finance)
 Quran

 Sunnah

 Ijtehad / Qiyas

 Ijama’e Ummah
Basic Difference between Islamic and Conventional Banking

Money
Bank Conventional Client

Money + Money(interest)

Islamic Banking

Bank Goods & Client

Services

money
Riba in Quran

“... God has permitted trade and forbidden interest...”

(Sura Al-Baqara 2:275)
 Human Financial Needs

Fulfillment of Financial Needs

Own Capital Others’ Capital

Equity Financing Debt Financing

• Musharakah • Murabahah
• Modarabahah • Ijarah
• Other Products •Salam & Istisna etc
 PRODUCT TREE

Islamic Banking Modes

Partnership Based Trade Based Rental Based

Modes Modes Modes

Murabaha
Musharaka (Cost Plus Profit Sale) Ijarah
(Joint Venture Profit Sharing ) Musawama ( Leasing )

Mudaraba (Bargain sale ) Diminishing

( Trustee Profit Sharing) Salam Musharaka
(Commodity Sale)
( Transfer of Ownership)
Istisna
(Sale on Order)
ONUS SHIFTS!!

 Customer
to Halal Restaurant Owner

 Halal Restaurant Owner

to Halal Meat Supplier

 Halal Meat Supplier

to Halal Abattoir / Butcher

 Customer to Islamic Banker

 Islamic Banker
to Shariah Scholars
Industry Progress in Pakistan

Year 2001 2002 2003 2004 - 06 2007- 09

2 3 4 10 18

•Meezan Bank •Meezan Bank (201)

•Al Baraka •Meezan Bank
•Al Baraka •Meezan Bank •Al Baraka (30)
•Meezan Bank
•MCB •Al Baraka •MCB (8)
•Al Baraka
•MCB •Alfalah(48)
•MCB
•Alfalah •SCB (11)
•Alfalah
•Bank AlHabib(4 )
•SCB
•HMB(4)
•Bank AlHabib
•Bank of Khyber(16)
•Habib AG Zur.
•Soneri Bank ( 5)
•Metropolitan
•HBL(1)
•Bank of Khyber
•Bank Islami(102)
•Soneri Bank
•DIB (25)
 6 Full fledge Islamic Banks •EGIBL (55)
• Dawood(32)
 13 Conventional Banks having •NBP(5)
•RBS (3)
SAIBBS •Askari(22)
•UBL (5)
 Total IB Branches = 600 +
 Industry Progress & Mkt. Share
(Rs. in
Bn)
Description Dec-08@ Dec-07 Dec-06 Dec-05 Dec-04 Dec-03

Total Assets 271 235 118 72 44 13

%age of Banking Industry 5.3 % 4.2% 2.9% 2.1% 1.4% 0.5%
Deposits 198 169 83 50 30 8
%age of Banking Industry 5.2 % 4.1% 2.8% 1.9% 1.2% 0.4%
Financing. & Invest. 185 166 72 48 30 10
%age of Banking Industry 4.7% 3.6% 2.4% 1.8% 1.3% 0.5%
Full Fledge Islamic Banks 6* 6 6 2 2 1
Conventional Banks with
Islamic Banking Branches 12* 12 12 9 7 3
No. of Branches 519** 289 150 70 48 17
City - Wise Breakup
City - Wise Breakup
Industry Progress in Pakistan
 Islamic products and services offered by 300+
Financial Institutions around the world

. Germany:4
- Bank Sepah
UAE:
-
13
Dubai Islamic Bank
- Commerz - Abu Dhabi Islamic Bank
Bahrain: 26 Kuwait: 9
United States: 20 Bank - HSBC Amanah
- Bahrain Islamic Bank - Kuwait Finance
- Deutsche Bank
- Al Manzil Financial Services - Al Baraka
UK: 26 House
- American Finance House Switzerland: - ABC Islamic Bank
Qatar: 4
- HSBC Amanah Finance
- Failaka Investments 6
- Al Baraka International
- CitiIslamic Investment Bank - Qatar Islamic Bank
- HSBC - Qatar International Islamic
- Ameen Housing Cooperative Ltd
- Takafol UK Ltd Iran: 8 Pakistan: 21
- The Halal Mutual
India:
3
Investment Company
- J Aron & Co Ltd
Bangladesh:9
Turkey: 7
(Goldman Sachs) -
Faisal Finance
Egypt: 12
- Alwatany Bank of Egypt Institution Malaysia: 49
- Egyptian Saudi Finance - Ihlas Finance House
2 - Pure Islamic Banks
Sudan: 9 Saudi Arabia: 17
(Bank Islam, Bank
- Al Rajhi
Muamalat)
- SAMBA
Rest - conventional banks
- Saudi Hollandi
- Riyadh Bank
Indonesia: 4

Yemen: 5
International Overview

 The size of Islamic Financial Industry has reached US$ 300 Bln. and its
growing annually @ 15% per anum.

 70 countries have Islamic Banking Institutions

 37 Muslim countries including Bahrain, UAE, Saudi Arabia, Malaysia,

Brunei and Pakistan

 34 non-Muslim countries including USA, UK, Canada, Switzerland,

South Africa and Australia
International Overview

Leading foreign Banks have opened Islamic

Banking windows or subsidiaries such as:
• Standard Chartered Bank
• Citibank
• HSBC
• ABN AMRO
• UBS
International Overview

 In Feb 1999, Dow Jones introduced the Dow Jones Islamic

Market Index (DJIM) of 600 companies world wide whose
business complies with Islamic Shariah laws

 At present there are more than 105 Islamic Funds operational

through out the world with a total fund base of over USD 3.50
billion
International Overview

 Governments of Bahrain ,Malaysia and now Pakistan have

issued Islamic Bonds (Sukuk) in order to facilitate Islamic Banks
in managing their liquidity.

 Issuance of these bonds has also paved the way for Shariah
compliant Government borrowings
International Overview

 Institutions like Accounting and Auditing Organization for Islamic

Financial Institutions (AAOIFI) and Islamic Finance Services Board
(IFSB) have been formed.

 These institutions are playing a key role in setting up and standardizing

Shariah , Financial and Accounting standards for Islamic Financial
Institutions.
 Due to these collective efforts Islamic banking is now recognized by
IMF, World Bank and Basel Committee.
Conventional banking Islamic banking

Functions and operations are based Functions and operations are based
on fully man made principles on Sharia’h principles
Investor is assured of pre- Promote risk-sharing between
determined rate of interest provider of capital (investor) and
user of funds (entrepreneurs)
Aim at maximising profit without any Aim at maximising profit but subject
restrictions to Sharia'h restrictions
Creditor-Debtor relationship Partners, investor and traders,
buyer or seller relationship
Based on money trading. Money is Encourage asset-based financing
a medium of exchange and not a and based on commodity trading &
commodity Services
Conventional banking Islamic banking

It is almost risk free banking and No right of profit if there is no risk

depositor has no risk of losing its involved.
money because interest is
guaranteed.
It can charge additional money in Islamic banks have no provision to
case of defaulters charge any extra money from the
defaulters
Do not Deal in Zakat ( Non Muslim Deal in Zakat
Countries )
 TAKAFUL
(Islamic Insurance )
The Shariah Compliant Alternative to Conventional
Insurance
 Meaning of Takaful

 “Takaful” is the Sharia Compliant brand

name for the Islamic alternative to
conventional insurance. Its based on the
principle of Ta’awan or mutual assistance.

 Takaful comes from the Arabic root-word

‘kafala’ — guarantee.
 Meaning of Takaful

 Takaful means mutual protection and joint

guarantee.

 Operationally, takaful refers to participants

mutually contributing to a common fund
with the purpose of having mutual
indemnity in the case of loss.
 Why Insurance ?

Is Some thing wrong with Concept ?

 Risk Aversion
 Assuring others
 Risk sharing
 From the Holly Quran

The need for insurance is shown in the

following verse of The Quran.
“ Those of you who die and leave widows
should bequeath for their widows a year’s
maintenance and residence” (2.240)
 From the Hadiths

By Anas-bin-Malik, One day Prophet

Muhammad(PBUH) notced a bedouin
leaving his Camel without tying it. He
asked the bedouin, “Why don’t you tie
down your camel”? The Bedouin
answered, “ I put my trust in Allah (SWT)”.
The Prophet (PBUH) then said,” Tie your
camel first, then put your trust in
Allah(SWT)” <Tirmidhi>
What wrong with practice ?

The contract between the insurer & insured is

technically wrong from the sharia perspective
because of
 Interest (Riba)

 Gharar (Uncertainty))

 Gambling (Qamar & Maisir)

 Risk Transfer Issue

Basic Elements of Takaful
 Mutuality and cooperation.
 Takaful contract pertains to Tabarru as against Aqd – e-
mu’awadat in case of conventional insurance.
 Payments made with the intention of Tabarru (contribution)
 Eliminates the elements of Gharrar, Maisir and Riba.
 Wakalah/Modarabah basis of operations.
 Joint Guarantee / Indemnity amongst participants – shared
responsibility.
 Constitution of separate “Participants’ Takaful Fund”.
 Constitution of “Shariah Supervisory Board.”
 Investments as per Shariah.
Main drivers of Takaful
 Piety (individual purification)

 Brotherhood (mutual assistance)

 Charity (Tabarru or contribution)

 Mutual Guarantee

 Community well-being as opposed to profit

maximization.
Comparing Takaful to Conventional Insurance
Issue Conventional Takaful
Insurance
Organization Principle Profit for shareholders Mutual Benefit for
Participants
Basis Risk Transfer Risk sharing
Value Proposition Profits maximization Affordability and spiritual
satisfaction
Laws Regulations Sharia plus regulations
Ownership Shareholders are Owners Participants
Management status Managed by Company Management Operator
Form of Contract Contract of Sale Islamic contracts of Wakala or
Mudarbah with Tabar’ru
(contributions)
Investments Interest based Sharia compliant, Riba-free

Surplus Profit of Insurance Company. Distribution to Participants on

pro rata basis.
 Takaful through Time

 Origins in the First Constitution of Madina.

 Serious efforts were made in modern times, in 1970s to

come up with an Islamic alternative to the conventional
insurance.

 The first Takaful company was set up in Sudan in 1979,

almost simultaneously followed by another one set up
in Bahrain.
Takaful through Time… (Cont’d.)

 Poor Insurance penetration in the Muslim countries

(<1% of GDP).

 Average growth rate higher than conventional

insurance companies (around 25%).

 Non–Muslims increasingly opting for Takaful products

for commercial benefits.
 Takaful Operators

The number of Takaful operators worldwide is now

estimated at:

 150+ Takaful companies

 9 Retakaful companies

 In 38 Countries.
General Takaful Types

 General Takaful – offers all kinds of

non-life risk coverage. It is normally
divided into following classes:

 Property Takaful
 Marine Takaful
 Motor Takaful
 Miscellaneous Takaful
Types of Family Takaful
 Term Life Takaful

 Whole Life Takaful

 Endowment Takaful

 Universal Takaful

 Marriage Plan


 Education Plan
 TAKAFUL - TARGET
MARKET
 People who do not insure due to religious reasons.

 People who insure and are insensitive to religious

reasons.

 People who currently do not insure at all.

 Wakala-Waqf Model
Share
Holder

SHARE H O L D E R S’ F U N D (S.H.F.)

Mudarib’s Management
Wakalah Investmen Share of PTF’s Expense of Profit/Loss
Fee t Investment the
Income Income Company
Takaful
Operator

Investment by
the Company

WAQF
Operational Claims &
Cost of Takaful Investment Reserves Surplus
/ ReTakaful Income (Balance)

Participant
P A R T I C I P A N T S’ T A K A F U L F U N D
(P.T.F.)
 About AlHuda
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