Presentation on theme: "WHAT IS PARTICIPATORY BANKING?"— Presentation transcript:
1 WHAT IS PARTICIPATORY BANKING? Concept, Instruments and IssuesAUSAF AHMADInternational Conference on Participatory BankingNew DelhiSept 01, 2007
2 In the name of Allah, the most Beneficent, the Most Merciful.
3 This presentation includes: What is Participatory banking?Basic function: Financial IntermediationAn Introduction to Participatory financing techniques.Observations on some common misconceptions.
4 Clarification on Nomenclature Participatory Banking is known by several names:Interest free banking (Iran)PLS Banking (Pakistan)Islamic Banking (Gulf)Special Finance Houses (Turkey)All expressions are used interchangeably.
5 COMMON PARAMETERS BETWEEN PARTICIPATORY AND COMMERCIAL BANKS Same purpose: Financial intermediation.Same Objective: ProfitSuccessful Operation of Participatory banks has shown that financial intermediation is possible even without interest.
11 Social and Moral Norms Gharar Should not indulge in Riba Should not involve inShould not indulge in fraudulent behaviorShould not coerceShould assure fairness to all parties.No coercion.No financing of socially undesirable goods such as alcohol, drugs, pornography.Should not resort to morally reprehensible practices such as cheating, bribing, fraudulent practices.
12 The View on Bank Interest No distinction is made between usury and interest.No distinction is made between consumption loans and productive loans.No distinction between constant and variable interest rates.No distinction is made between individual and institutional rate of interest.
13 AVOIDANCE OF GHARAR Definition of Gharar Uncertainty / Ambiguity Ambiguity of Quantity [Gharar fil Miqdar]Ambiguity of Attributes [Gharar fis sifah] such asAmbiguity in time or place of deliveryAmbiguity in price etc.
14 DEBT FINANCE Vs. PARTICIPATORY FINANCE Participatory finance, in comparison, to debt finance is:More justMore equitableMore efficientMore growth oriented.
15 PRESENT SCENE Participatory Banks in the Government Sector Pakistan, Sudan, IranParticipatory Banks in the Mixed Sector- MalaysiaParticipatory Banks in the Private SectorGulfNon Banking Financial InstitutionsAl Ameen [ Bangalore, India]Participatory Financing by standard Commercial Banks in the Domestic SectorSaudi British, NCB, Saudi American, Misr BankParticipatory financing by Commercial banks in the foreign sector.Islamic Banks established by multinational BanksCitibank, HSBC Amanah Bank,
16 A TYPICAL BALANCE SHEET Uses of FundsMurabahaMusharakahMudarabahIjarahQard HasanSources of FundsCurrent AccountSaving AccountsInvestment AccSpecial Invest. Acc
17 Business Practices in Sources of Funds Current AccountsSaving AccountsInvestment AccountsGeneral Investment accountsLimited Period Investment accountsSpecified Investment accounts
18 Current Deposits [sources of funds] Very Similar to standard commercial banksNo return paid back to depositorsChecking facilitiesAre Current deposits a loan to the bank from depositors ?Are Current deposits a trust by depositors to banks ?Use of Current deposits by the banks on their own risk.
19 Saving Deposits [Sources of Funds] Saving deposits without authorization to investSaving deposits with authorization to investReturn to depositors who provide authorization to invest.Saving deposits as a part of trust accounts.Saving deposit as Notice account
20 Investment Deposits [Sources of Funds] Islamic Banking counterpart of Fixed Deposits.Withdrawal allowed only in special casesInvestment deposits as Mudarabah Accounts.Depositor: Rabbal Mal; Bank: AamilShare profit on agreed basis, bear full loss.Investment poolDistribution of profits on pro rata basis.
21 Special Investment Deposits [Sources of Funds] Concept of WakalahThe bank acts as a wakeel. Implement\s the instruction of the Mawakkil.Special purpose investment, Specify, purpose, sector, industry, or even project.The bank gets a fee for the services rendered.Full profit or loss goes to the depositor. The bank will share in loss only in case of proven neglect.
22 USES OF FUNDS MUDARABAH MUSHARAKAH MURABAHAH IJARAH (Leasing) IJARAH WA IQTINA (Lease Purchase)MUSHARAKAH MUTANAQISAHLOAN ON SERVICE CHARGEINTEREST FREE LOANS.
24 TYPES OF CONTRCTSContracts of Sale / Lease are Muawadat. Gharar is not allowed in such contracts.Mudarabah and Musharakah are contracts of Partnerships. Some amount of gharar may be tolerated in such contracts.Sadaqat and Hadaya are Tabarruat. No objection to Gharar in these type of contracts.
25 Financing TechniquesThese techniques were devised in the classical period for the commodity tradeTheir application to financial sector is an innovation of the modern era.The application of these techniques requires new documentation which was not required in the early period.
26 MURABAHAH [USES OF FUNDS] - I The word MURABAHA is derived from the word Ribh, meaning profit in Arabic.Sale with a profit.Cost-plus financing.Examples of Murabahah.Two contracts: A contact of intent to conduct a Murabaha Sale and another contact to buy the good ordered in previous contract.Promise is not a legal binding. It introduces an element of risk in the transaction.The element of risk justifies the profit in Murabaha sale : Fiqhi principle : Al Kharaj bi Daman.
27 MURABAHAH [USES OF FUNDS] - II Applications of Muraqbaha:In domestic tradeIn foreign tradeIn financing consumer durablesIn financing real estaesABUSES OF MURABAHAMURABAH AND BAY EINA.
28 MURABAHAH [USES OF FUNDS] - II Applications of Muraqbaha:In domestic tradeIn foreign tradeIn financing consumer durablesIn financing real estaesABUSES OF MURABAHAMURABAH AND BAY EINA.
29 MUSHARAKAH [USES OF FUNDS] Musharakah is from the word Sharikah.More than one partners: Partnership in capital proportion and project supervision.A partner may waive his right of supervision or delegate it to another partner.Arrangements: Sharing of Profit and loss in accordance with capital proportion agreed proportion.Variant: Share of profit in agreed proportion, share of loss in capital proportion.Applications of Musharakah:i. in Import tradeIi. In Agriculture
30 MUDARABAH [USES OF FUNDS] Mudarabah existing from pre-Islamic times.Permitted on the Cannon of Necessicity.Profit and loss sharing is a wrong translation.Arrangement: Profit is shared on an agreed basis, loss is borne by the Rabbal Mal.Bank: Rabbal Mal, Entrepreneur : AamilDouble tier Mudarabah.Requirements for a successful Mudarabah
31 Other Financing Techniques Loans on Service ChargeQard Hasan [interest free loans]Service Charge is to be equal to actual administrative expenditureQard Hasan is limited to social purposes only.
32 IJARAH [USES OF FUNDS]Ijarah is emerging as a popular technique of financing amongst the Islamic banksElements of a lease contact: Lessor, Lessee, instrument and period of lease,The asset remains in the ownership of the lessor. Maintenance is the responsibility of the owner.Ijarah muntahi bit tamlik
33 Other Financing Techniques Diminishing MusharakahLoan of Service Charges. Only administrative expenses can be charged.Interest free loans are provided as a social service
34 Latest Trends in Participatory Financial Markets Derivatives and secondary marketEvolution of Financial Instruments and Financial PapersSecuritizationMusharakah bondsIjarah bonds
35 SOME MISCONCEPTIONS PARTICIPATORY BANKING IS RELIGION BASED. PARTICIPATORY BANKING IS FOR A SPECIFIC COMMUNITYPARICIPATORY BANKING REPLOACES INTEREST RATE WITH PROFIT AND THAT IS ALL.