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Imane Karich – Consultante BELSIF – Islamic Banking & Investing Seminar 29 October 2008 ISLAMIC VISION of BANKING & INVESTING.

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Presentation on theme: "Imane Karich – Consultante BELSIF – Islamic Banking & Investing Seminar 29 October 2008 ISLAMIC VISION of BANKING & INVESTING."— Presentation transcript:

1 Imane Karich – Consultante BELSIF – Islamic Banking & Investing Seminar 29 October 2008 ISLAMIC VISION of BANKING & INVESTING

2 Table of Content Islamic Finance – Theory & Concepts Description of the main islamic financial instruments 2

3 Islamic Finance – Myths & Realities Islamic Finance IS NOT a RELIGIOUS system; a simple « Interest-Free » system; a discriminatory system restricted to Muslim People Islamic Finance IS: a SYSTEM based on religious ETHICAL principles; an Open system and a real alternative to conventional finance. 3

4 BASIC PRINCIPLES Islamic Finance is part of the Islamic Economic System, part of the Chari’a System Islamic Economy is a Normative system supported by moral and ethical values and guidelines of the Islamic Law; Islamic Finance tends to establish financial equity and preventing injustice in business deals General Basis Rule of the Economic Islamic System: CORAN - Sourate Al Baqarah - Verse 275 – 1st part: « God has allowed Trading…. »  Fundamental principle of trading system: exchange of real goods  Incentive for Participation and Risk Taking:  Principle of Profit & Loss sharing  No transfer of risk with the capital 4

5 And the Exception… In the light of the search of Equity and Justice Verse nd Part: …and has forbidden interest »  Avoid Injustice and unjustified wealth creation; 5

6 Roles of Money and Definition of Riba Difference between Usury & Interest ? > Notion and role of Money: Unity of Measure; Mean of exchange Reserve of Value Conclusion: no difference between « reasonable » interest and usury 6

7 Gharar Fuzziness – Ignorance – Uncertainty in the contractual terms – ex:  Contingency of exchange results,  Absence of the good during the exchange, … ≠ Risk taking inherent to trading; Less strict than the interdiction of Riba. 7

8 Islamic Banking system Same role as the conventional banking system: Financial intermediary between investors and entreprenors To improve the efficiency and the liquidity of financial resources exchange; The main difference is situated in the risk taking owner : is not transfered with the capital but remains with the property right of the financial resources. The Bank becomes a privileged partner in Business transactions. 8

9 Islamic Bank – Basic functioning Islamic Bank Contract Mudharaba (or Wakalah) 9 BANQUEBANQUE MUDHARIBMUDHARIB R A B al M A L Clients Investissors/depositors Clients Entrepreneurs/Debitors Funds mobilisationFunds User

10 Islamic Vision on Investment Investment in the sources of Islam:  Thesaurisation  Zakat  Financial Risk  Speculation 10

11 Thesaurisation:  Authorised sparing: Balance and Equilibrium; With a clear objective;  = wealth accumumation without spending or investment objectives on a medium/long term Zakat:  Progressive seizure of the non used wealth; Islamic Vision on Investment 11

12 Notion of Financial Risk: Pure Risk vs Financial Risk; Commercial Risk vs Speculative Risk; Profit & Loss Risk; Objective Risk; Speculation: Bet on a future event on an aleatory and subjective way; Without rational fundements; Voluntary excessive risk; Islamic Vision on Investment 12

13 Investment Universe Limited investment universe No Alcohol, entertainment, banking, gambling arms… activities + other specific rules applied to mutual funds (see later) 13

14 Description of main Financial Instruments Based on Islamic Commercial Law and on traditional commercial contracts; Different categories of contracts: Participation contracts (PLS based); Musharaka and Mudharab Financing contracts (debt based) Murabaha and Ijara 14

15 MUSHARAKA 15 Project Financing

16 MUDHARABA 16 Project Financing

17 Mortgage Financing MURABAHA 17 Property right Property rights

18 Mortgage Financing IJARA 18 Titre de propriété Contrat de vente Titre de propriété 5

19 Mortgage Financing Musharaka Mutanaqissa 19 Titre de propriété

20 Islamic Investment in Practice When investing, two aspects are important:  The Nature of the instrument/transaction  The Nature of the Issuer Nature of Instrument : islamic view on conventional financial products and derivatives  Bonds > Riba  Derivatives > Gharar Nature of the Issuer : investment universe > screening norms Innovation for developing own financial vehicles  Equity Mutual Funds  Sukuk  Arbun  Wahd 20

21 Islamic Investment in Practice EQUITY Investment: Nature of the instrument : Equity investment is fully acceptable (« Mudharaba ») Nature of the issuer : screening norms Mutual Funds – one of the most successful investment vehicle Apparition of « Islamic Indexes » - DJIM  Definition of Screening Norms 21

22 Islamic Investment in Practice Screening Norms: 1. Business of the Issuer Company (core and secondary activities): 22

23 Islamic Investment in Practice Screening Norms: 2. Financial Structure of the Issuer Company: a) Interest Earnings: 23

24 Islamic Investment in Practice Screening Norms: 2. Financial Structure of the Issuer Company: b) Debt Ratio: 24

25 Islamic Investment in Practice Screening Norms: 2. Financial Structure of the Issuer Company: C) Liquid Assets: 25

26 Islamic Investment in Practice Dow Jones Islamic Market Index – DJIM:  Introduced in 1999  First benchmarks for sharia-compliant portfolio management;  Performance: YTD : -27% Since 5 years : +44%  More info : 26

27 Islamic Investment in Practice Creative engineering – new products:  Success of Sukuk investments;  Alternative for derivatives products : ‘arbun contracts, wahd contracts, … 27

28 Thanks Imane Karich FINALYSE BRUSSELS 28


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