Presentation on theme: "Introduction to Islamic Banking & Finance"— Presentation transcript:
1 Introduction to Islamic Banking & Finance Abdulazeem Abozaid
2 Basis of IBFIslamic Finance is based on principles that are derived from the Quran and Sunna of the Prophet peace be upon him.The basic principle in Islamic Law is permissibility. Under this principle all commercial and financial transactions are permissible except those that contain prohibited elements.
3 How does Islamic Finance differ from conventional finance ? Islamic Modes of Finance & Investment are committed to all Sharia Prohibited PracticesProhibited PracticesRiba ( Interest )Sale of DebtGhabn (Fraud)Gharar (Uncertainty)Dealing in unlawful properties
4 What is Riba? Literally: Increase. Technically: stipulated increase over the loan which a debtor agrees to pay to his creditor in relation to time.Rationale:Money does not have an intrinsic value. It is a measuring tool, a store of value unit and a medium of exchange, not a commodity that could be bought or soldLending = renting money
5 Sale of Debt Sale of debt occurs in: Discounting commercial papers Dealing in bondsSale of Sukuk, shares or fund units when they do not represent tangible assets, usufructs or services
6 Uncertainty (Gharar)Gharar: Uncertainty/Ambiguity in a contractExamples of Gharar:Selling unknown goods- The contents of a sealed box are sold; presumably, the box contains a collection of goods, without specifying the quantity of each.- Buying an a commodity for unknown price; what’s in one’s wallet/pocket.GamblingThe gambler is ignorant of the result of the gamble; the outcome depends on chance and not efforts.Rationale: Uncertainty is likely to lead to dispute between contracting parties.
7 GHABNDeception that leads the seller to underestimate or the buyer to overestimate the price of the good.It can be divided into two kinds:Slight or minor Ghabn (الغبن اليسير). It is tolerated in contracts.Large, excessive, or major Ghabn (الغبن الفاحش). Not tolerated.Examples:Selling at higher than the market value by means of cheatingBidding a price without intending purchase, just to increase the price payable by the actual purchaser (Najash).Covering defects and selling as defect free.
8 Dealing in Unlawful Properties LiquorIntoxicantsLawful properties but used for unlawful purposes
9 SOME allegations of similarities with conventional finance
10 DIFFERENT PRICING FOR CASH AND CREDIT SALES Price in deferred sale is higher than spot sale.The bank purchases goods on cash and sells them on credit. The forward price depends on the repayment period. The longer is the maturity, the higher the price.Such price difference, being dependent upon repayment time, is it similar to the interest charged on conventional loans?
11 Why price should be higher with spot than deferred payment? In fact, price difference is similar to the difference between the price of the same commodity under present and future delivery.Price difference is due to the degree of urgency of benefiting from the direct use of real commodities.Similarly, prices charged with deferred payment should justifiably be higher than with spot payment. The difference is not Riba.
12 Cont’dThe misconception stems from misunderstanding of the prohibition of RibaModern capitalist theory does not differentiate money and physical commodityBoth are seen as factors of production, money is a form of commodity
13 Cont’d Acquire goods and services. Store some wealth, In Islam, money is differentiated from commoditiesMoney has no intrinsic utility. It cannot be utilized directly .As a means of exchange, money can only be used to:Acquire goods and services.Store some wealth,As a unit of account to measure the monetary value of things.
14 Cont’dCommodities, on the other hand, have intrinsic utility and can be utilized directly.Because money has no intrinsic utility, present money does not command a higher value than future money when money is exchanged for money.Present money cannot therefore be sold for a higher quantity of future money, as both have no value of their own.Conclusion: Sharia acknowledges time value of money in sale contract, not in loan contracts since money cannot be treated as commodity.
15 Classification of Islamic Banking Products: Deposit (Wadi’a) products:Current account; based on LoanSaving account; based on MudarabaTime deposit; based on Mudaraba/wakala (agency in investment)
18 Buy-Back Sale (Einah)Einah refers to selling a commodity on a deferred basis then buying it bank on a spot basis at a lower price.Obviously, it is meant for extending interest-based debt.This legal trick cannot be condoned by Shariah.Some applications:Personal FinancingOverdraft FacilityIPDS: ‘Islamic’ Private Debt Securities
19 SELL FOR IMMEDIATE CASH INCOLLUSIONWITH SUPPLIEREINA SALEEINA SALEINDIVIDUALIMMEDIATELYAFTERPURCHASE GOODS, DEFERRED PAYMENTWANTS CASHSELL FOR IMMEDIATE CASHSAMESUPPLIER1919
20 IPDS: Creation of debt (dayn) via Einah Sell Asset X for $100mInvestor (Financier)IssuerCash payment $100mSell Asset X for $120mDeferred payments $120mSecurities issued against the debt and made negotiable
21 TawarruqTawarruq refers to purchasing a commodity from one party on credit then selling it immediately to another for cash.Tawarruq shares the same objective of Eina as both are meant for obtaining cash.Some applications:Personal & Corporate FinancingOverdraft Facility
22 SELL METAL FOR IMMEDIATE CASH INSTITUTIONAL TAWARRUQ BANKSELL ON MURABAHABUY METALPROMISE TO BUYAGENCY AGREEMENTSELL METAL FOR IMMEDIATE CASHINSTITUTIONAL TAWARRUQالتورق المؤسسيCUSTOMERCOLLUSIONWITH BANKNEEDS CASHLME
23 Sale of Debt (Bay’ al-Dayn) Although sale of debt is prohibited in the Shariah, it has been unlawfully practiced in Islamic finance, like in:‘Islamic’ factoring‘Islamic’ accepted bills‘Islamic’ Debt SecuritiesWith these arrangements, the underlying consideration is the permissibility of the sale of debt, by the creditor, at a discountBased it on the assumption that Debt arising from sale of commodities is different from debt arising from a money loan.
24 The Criterion of the Non-Shari’ah Compliant Transaction When a financing mode is structured in such a way that secures a guaranteed profit to the financier without taking any risks. Or, when the financier acts in reality as a creditor who provides money without being involved in the investment process; i.e. when the substance is interest-bearing debt.This will render the transaction impermissible regardless of its legal form, e.g. sale, lease… .Some banks’ Sharia boards attempt to validate transactions based on their legal forms.
29 FINANCE A SHARE IN PROFITS ISLAMIC BANK A SHARE IN MANAGEMENT EXTINGUISH graduallyEQUITYFINANCE,MUSHARAKADIMINISHINGFUNDUSER
30 - + DO NOT’S DO’S ISLAMIC BANK MONITORING UNRESTRICTED MUDARABA FUNDUSERTRANSPARENCY
31 DEFERRED PAYMENT LUMP-SUM OR INSTALLMENTS BuyerPromise to BuySPOT DELIVERYMurabahah contractSPOT PAYMENTISLAMIC BANKSale ContractSPOT DELIVERYMURABAHASUPPLIER
32 DEFERRED PAYMENT: LUMP-SUM OR INSTALLMENTS SALEDEFERRED PAYMENT: LUMP-SUM OR INSTALLMENTSDEFERRED-PAYMENTSALE CONTRACTBuyerSPOT DELIVERYOWNSCOMMODITIESISLAMIC BANK
33 ISTISNA’ CUSTOMER MANUFACTURER PAYMENTS IN STAGES DELIVERY OF ASSET REQUIRES AN ASSET WITH CERTAIN SPECIFICATIONSPARALLEL ISTISNACOMMISSION TO MANUFACTUREASSET DELIVERYINSTALLMENTSISTISNA’COMMISSION TO MANUFACTUREISTISNA’REQUIRES AN ASSET WITH THE SAME SPECIFICATIONSBANK
34 CUSTOMER BANK IJARAH FINANCING TITLE TRANSFER: FORWARD LEASE Conditional promise to giftor sell at token priceCUSTOMERRENTAL PAYMENTS = USUFRUCT AND PART OF ASSET VALUEASSET PRICEREAL ESTATE OWNERDELIVERY, LEASE STARTSPROMISE TO LEASEUSUFRUCTIJARAHFINANCINGDELIVERYPURCHASEBANK