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Islamic banking
Islamic banking is banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economic.
Objective of Islamic Banking is to make positive contribution to the fulfillment of socio-economic objectives of the society
Islamic Bank
Islamic Bank is a financial and social
institution which identifies itself with the principles of Shariah, as laid down by Holy Quran and Sunnah, as regards its objective, principles, practices and operations.
I shall watch with keenness the work of your Organization in evolving banking practices compatible with Islamic ideas of social and economic life. We must work our destiny in our own way and present to the world an economic system based on true Islamic concept of equality of manhood and social justice.
Stage-3: In August, 1981, HBFC was allowed to provide finance on rent sharing basis for house building. Students were allowed Qarze-Hasana without interest. Stage-4: In 1983, hire purchase system of financing was introduced. Stage-5: From July 1, 1984 to December 31,1984 all banks in the country were to make finance available also on the basis of Islamic modes of financing in addition to existing interest based system.
Stage-6: From January 1985, all types of finances provided by the bank to the government and their agencies were permissible on Islamic basis only. Stage-7: From April 1985, all types of finances provided by the bank to all clients were to be on Islamic basis only. Stage-8: From July 1985, all deposits were to be on the basis of participation in profit and loss of banks except current account.
The Commission for Transformation of Financial System (CTFS) was constituted in January 2000, in SBP to transform the financial system. Later in FY02 finance minister declared some regulations for the elimination of Riba/Interest from the financial system of Pakistan.
A bank can be established with capital investment by the state or by the individual. The minimum number of shareholders shall be two. The maximum number of shareholders shall be determined by the requirement of business. The net basic capital shall be divided in equal shares and individuals can then purchase an equal number of different number of shares.
The profit or loss shall be distributed in proportion to the value of shares of each partner in banking business. The bank should confine itself to providing capital to entrepreneurs on Shirakah or Modarba basis. To enhance its income the bank can provide various services to the general public or government.
In order to create more capital the bank enter into business with individual or corporations on Shirakah and Modarba basis. The bank shall be authorized to use the joint capital for expenses on buildings, equipment and salaries of staff.
The banks partners shall be free to carry on their individual and private businesses.
All decisions regarding the bank shall be taken in consultation with all its shareholders or representative committee. The financial liability of the banks shareholders shall be unlimited. Every shareholder shall be free to terminate his Shirakah. At the death of a partner, his Shirakah will come to an end.
CONVENTIONAL BANKING
medium of exchange and store of value. Therefore, it can be sold at a price higher than its face value and it can also be rented out.
ISLAMIC BANKING
though it is used as a medium of exchange and store of value. Therefore, it cannot be sold at a price higher than its face value or rented out.
2. Profit on trade of goods or charging on providing service is the basis for earning profit.
3. Interest is charged even in case the organization suffers losses by using banks funds. Therefore, it is not based on profit and loss sharing.
3. Islamic bank operates on the basis of profit and loss sharing. In case, the businessman has suffered losses, the bank will share these losses based on the mode of finance used (Mudarabah, Musharakah). 4. The execution of agreements for the exchange of goods & services is a must, while disbursing funds under Murabaha, Salam & Istisna contracts.
4. While disbursing cash finance, running finance or working capital finance, no agreement for exchange of goods & services is made.
5. Islamic banking tends to create link with the real sectors of the economic system by using trade related activities.
Conventional
Bank
Client
Islamic
1. Customers Deposits
2. Financing
a) Current Accounts (b) Savings Accounts (c) General Investment (d) Special Investment Accounts
(a) Al-Mudharabah; (b) Al-Musharakah; (c) Al-Bai bi Thaman Ajil; (d) Al-Ijara; (e) Al-Bai al Takjiri; (f) Al-Qardul Hasan
Customers Deposits
Current Accounts
The Bank accepts deposits from its customers looking for the safe custody of their funds and absolute convenience in their use in the form of current accounts on the Islamic principle of Al-Wadiah.
Savings Accounts
The Bank accepts deposits from the customers looking for safe custody of their funds and a degree of convenience in their use together with the possibility of some profits in the form of savings account on the Islamic principle of Al- Wadiah. The Bank provides its customers with Savings Pass Books and other usual services connected with Savings Accounts.
Financing
financing under the principle of al-Mudharabah
The Bank may undertake to finance acceptable projects under the principle of al-Mudharabah. In this case, the Bank is the provider of the capital and will provide 100% financing for the relevant project. The initiator of the project is the entrepreneur who will manage the project. The Bank cannot interfere in the management of the project but has the right to undertake the follow-up and supervision tasks.
Other Services
Trade financing including letters of credit and letters of guarantee.
Islamic Export Credit Refinancing Scheme. Remittance and transfer of funds.
Correspondence services Each of them can open an operating account with no interest. Each of the two banks will collect bills, drafts. Cheques of other banks.
Exchange of funds
Islamic banks can accept funds on the basis of MUDARABAH from conventional bank in the form of an investment account with a return. Such return will be same as paid by Islamic bank to their clients.
joint financing.
A large number of the conventional banks have opened interest free windows that can be helpful in promotion of financial cooperation between the interest free and interest based institutions.
Exchange of information:
clients dealing with Islamic banks may also be dealing with commercial bank. There must be exchange of information about such clients by banks.
While the number and operations of Islamic banks are fast expanding, this segment of the market is still small relative to the appetite for Islamic finance. Pakistan is launching a gradual and steady approach to Islamic banking.
Despite rapid expansion in industry, the share of Islamic banking in the total banking system is a modest 3.2%. It only caters for around 23,000 borrowers through around 170 branches relative to the country-wide 5 million borrowers (or 4.8 million excluding microfinance borrowers) tapped through 7,700 branches by conventional banks.
Islamic banks perform a variety of fund-based and non-fund based functions to facilitate their customers.
Islamic banks play a vital role in the economy to promote productive activities that enhance economic growth and prosperity. Islamic banks ensure stable economy;fair distribution of income; reduce injustice; risk sharing,
What we need to do
Aggressive deposit mobilization to augment domestic financial savings of the country Diversification and innovation of financial structures.