Presentation on theme: "Islamic Corporate Head Islamic Banking Services"— Presentation transcript:
1 Islamic Corporate Head Islamic Banking Services An Introduction to Islamic Banking and Finance; Principles, Concepts and PhilosophyAmer Khalil ur RehmanIslamic Corporate HeadIslamic Banking ServicesAskari Bank Limited2nd November, 2009Disclaimer: Views expressed here in a personal capacity
2 Learning ObjectivesIncrease Awareness about Islamic Banking and FinanceIncluding;The Prohibition of Riba in Major ReligionsRiba in the Quran and HadithMain Principles of Islamic EconomicsDifferences between Conventional Vs Islamic BankingBasic Concepts and Philosophy of Islamic Banking;Evolution of Islamic banking;International Institutions dealing with Islamic Banking
4 Why Islamic Banking? What is its Market Potential? Interest, Usury, or Riba is forbidden in all major religions e.g.Judaism (Deutronomy 23:19)Christianity (Thou Shall not lend upon usury..)Islam (Religion of over 1/5th of world population)Foreign Banks,RBS (ABN Amro Bank), Citibank, Deutsche Bank,Hong Kong & Shanghai Banking Corporation, Merrill Lynch,Standard Chartered, Union Bank of Switzerland etc,doing Islamic Banking for profit.. andmarket size potential.. and not (necessarily) for religious reasons..Vision: Singapore Eateries & Fast Food Chains!(Thou shall not lend upon usury…)
5 Judeo Christian Tradition “Thou shalt not lend upon usuryto thy brother,usury of money,usury of anything that is lent upon usury”(Deutronomy 23:19)
6 Judeo Christian Tradition “He that hath not given forth upon usury, neither hath taken any increase, that hath withdrawn his hand from iniquity, hath executed true judgment between man and man, hath walked in my statutes, and hath kept my judgments, to deal truly; he is just He shall surely live, said the Lord GOD” (Ezekiel 18: 8,9)
7 Judeo Christian Tradition “He that by usury and unjust gain increaseth his substance, He shall gather it for him that will pity the poor” (Proverbs 28:8)
8 Judeo Christian Tradition “In thee have they taken gifts to shed blood; thou hast taken usury and increase, and though hast greedily gained of thy neighbours by extortion, and hast forgotten me, said the Lord God.” [Ezekiel 22:12]
10 Islam and Shari’ah A balanced approach is required by Islam Our Focus Source: Institute of Policy StudiesOur FocusA balanced approach is required by Islam
11 Sources of Fiq’h in Islam QuranSunnahIjama’e Ummah (Consensus of the Ulema)Ijtehad / Qiyas(AAOIFI Shariah Standards: through Ijtama’ee-Ijtehad)Accounting & Auditing Organization for Islamic Financial Institutions’Shariah StandardsAccounting Standards,Auditing Standards &Governance Standards
12 According to the Quranic verses.. (summary) Taking interest has been equated with rejecting faith (Al-Imran)God deprives interest of all blessings.. (2:276)Even [Just] Saying: “Trade is like Interest” is forbidden..and would attract punishment on the day of judgment… (2:275)O (Muslim) Believers (Not Non-Muslims!!)if indeed you really are Believers and fear God then give up interest..if not then take notice of war from Allah and his Messenger… (2: )Detailed severe punishments mentioned in Quranfor those who make war upon Allah and his Messenger.. (5:33)(Caution: Role of State not Individuals. Additional context 5:32)
13 Riba in the QuranThird Revelation:“O Believer, take not doubled and redoubled interest [interest on interest], and fear God so that you may prosper.Fear the fire which has been preparedfor those who reject faith, and obey God and the Prophet so that you may receive mercy”(The family of Imran – Sura Al-Imran)
14 Riba in the Quran“God deprives interest of all blessing, but blesses charity; He loves not the ungrateful sinner”(The Cow – Sura Al-Baqara 2:276)
15 Riba in the Quran Fourth Revelation: “Those who benefit from interest shall be raised like those who have been driven to madness by the touch of devil; this is[just] BECAUSE THEY SAY: “Trade is like interest”whileGod has permitted trade and forbidden interest…”(The Cow – Sura Al-Baqara 2:275)..Hence, those who have received the admonition from their Lord and desist, may keep their previous gains, their case being entrusted to God’ but those who revert shall be inhabitants of fire and abide therein forever”
16 Riba in the Quran Fifth Revelation: “O believers, fear Allah, and give up what is still due to your from the interest (usury), IF [indeed] you are true believers[!!!].If you do not do so, then takeNotice of War from Allah and his Messenger.But, if you repent, you can have your principal.Neither should you commit injustice,nor should you be subjected to it.”(The Cow – Sura Al-Baqara 2:278-9)
17 Riba in Quran (Related in context to 2:278) “The only reward of thoseWho make War upon Allah & his Messenger,and strive after corruption in the land, will be that they will beKilledOr, Crucified,Or, have their Hands and Feet on alternate sides Cutoff,Or, will be Expelled out of the land.Such will be their degradation in the world, andin the hereafter, theirs will be an awful doom.(Quran: The Table Spread - Al-Maida Chapter 5: Verse 33-34)Caution: Role of State not Individuals to implement Shariah. See Context 5:32)Save those who repent before ye overpower them.For know that Allah is Forgiving, Merciful.
18 Important Caution: Duty of the State (Not Individuals) to implement Shari’ah Law.. Taking one life is equal to killing mankind..“..Whosoever killeth a human being, other than man-slaughter or corruption in the earth, it shall be as if he killed all mankind,and whoso saveth the life of one,it shall be as if he had saved the life of all mankind...”(Quran: The Table Spread - Al-Maida Chapter 5: Verse 32)(i.e. Individuals need to refrain from Vigilantism!!…)
19 Riba in Hadith “The Prophet cursed the receiver and the payer of interest,the one who records it andthe two witnesses to the transactionand said: “They are all alike (in guilt).”(Sources: Jabir ibn Abdullah, Muslim, Tirmidhi, Musnad Ahmed)
20 “Even when interest is much, it is bound to end up in paltriness.” The Holy Prophet said:“Even when interest is much, it is bound to end up in paltriness.”(Sources: Ibn Mas`ud, Ibn Majah, Musnad Ahmad)
21 Muamalat (civil transactions) should be.. Free from Riba (an increase without ‘iwad or equal counter-value)In Compliance with (objectives of i.e. Maqasid - e - ) ShariahDevoid of Gharar (uncertainty, indeterminacy)Free from Qimar (gambling) and Maysir (games of chance)Free from Ghishsh (fraud) and Khilabah (cheating)Entitlement to profit depends on liability for riskContracts based on free mutual consent“What is not explicitly prohibited is permissible”
22 Shariah and Maqasid-e-Shariah "The very objective of the Shariah is to promote the welfare of the people, which lies in safeguardingtheir faith,their life,their intellect,their posterity andtheir wealth.Whatever ensures the safeguarding of these five serves public interest and is desirable."Al-Ghazali
23 Shariah and Maqasid-e-Shariah "The basis of the Shariah is wisdom and welfare of the people in this world as well as the Hereafter.This welfare lies in complete justice, mercy, well-being and wisdom.Anything that departs from justice to oppression, from mercy to harshness, from welfare to misery and from wisdom to folly, has nothing to do with the Shariah."Ibn al-Qayyim
24 Human Financial Needs Forms of Contracts Instruments Securities Equity (Capital)MarketDebtMarket
25 Islamic Mode Description Bai’ Murabaha Cost Plus Profit Sale Shariah Permissibility SourceQuranSunnahIjma’a(Consensus)Trade Based (Debt Creating) Modes (Low Risk Category)Bai’ MurabahaCost Plus Profit SaleYesBai’ Istisna`aSale on OrderBai’ SalamCommodity SaleSemi-Debt Creating Mode (Medium Risk Category)IjarahLeasingSharing (Non-Debt) Modes (Full Risk Category)MusharakahJoint VentureProfit SharingMudarabahTrustee
26 Conventional vs Islamic Financing money Bank Client money + money (interest)vsIslamic FinancingBasic Difference between Islamic and Conventional Modes of FinanceIslamic BankingGoods & ServicesClientmoney
27 Conventional Vs Islamic Economics Difference in Factors of Production LandLabour(+Entrepreneur)CapitalIslamicLandLabour(incl. Entrepreneur)Capital Conversion..
28 Frequently Asked Questions (Some Common Misconceptions…) Form Vs Substance IssueAre Mudarabah & Musharakah “the ideal modes”?Are Fixed Returns possible in Islamic Banking?Can Returns be the same as Conventional?No! Trade Based modes are the ideal modes![Allah has permitted Trade and Forbidden Riba (2:275)]Yes!Through Fixed Rental Income or Fixed Profit on Sale TransactionsYes!e.g. If Cost of Cow is same!!since US$ / Kilo Haram Meat ≠ US$ / Kilo Halal Meat!!!
29 Frequently Asked Questions (Some Common Misconceptions…) Impact of Inflation and Time Value of MoneyBanking is 600 years old, so how can there be Role for Bank in Islam?Islamic Banks share Profits, would they also share losses?Can Islamic Banks get funds from Conventional Banks? if yes, why?Financial Contracts / Transactions existed over 1400 years agoUnder lying modes / Financial Contracts form the basic building blockYes! BUT!!!! Only if they actually occur, despite diversification;Since Risk Beta of Banks is closer to the Market Risk Beta!!!Prevent Riba!!! Or Speak against Riba? Or just Consider it wrong?
30 Is Benchmarking with Conventional permissible? Confusion due to Mixing of Shariah Issues with Pricing DecisionsTiersConventional BankDepositorBorrowerInterest on DepositsInterestSpreadInterest onBorrowingMarket Rates10%2%12%TiersIslamic BankDepositorFinanceeTier 1.Mudaraba IRab-ul-Mal IMudarib ITier 2.Mudaraba IIRab-ul-Mal IIMudarib II“Return”“Profit Spread”“Financial Costs”Unfairto Depositor XX 4%2%6%to Financee X14%X 16%FairAs per IFSB10%12%US$ / Kilo Haram Meat ≠ US$ / Kilo Halal MeatMarket Based Returns are not just permissible!IFSB prefers / recommends them as they are Fair and Equitable!!
34 Value Addition Offered by Major Islamic Modes.. Islamic FinanceConventional Finance ‘Equivalents’IntermediatedNot intermediatedMurabahaNoneSalamFuture ContractsIstisna`aIjarahLeasingMusharakahShareholdingVenture CapitalMudarabahValue Addition by Major Islamic Modesand their close Conventional EquivalentsICI and Fayzan Manufacturing MudarabahInteresting Solution to the Privatization Dilemma!!