Islamic Banks in the System of National Accounts Omar Hakouz Regional Advisor on National Accounts 10th AEG meeting on national Accounts April 2016, OECD, Paris

Islamic Banks VS Conventional Banks Conventional BanksIslamic Banks Money as a commodity -it can be sold at a price higher than its face value and it can also be rented out. Use money as a medium of exchange- cannot be sold at a price higher than its face value or rented out Time value is the basis for charging interest on capital Profit on trade of goods or fees on providing service is the basis for earning profit No agreement for exchange of goods & services is made Execution of agreements for exchange of goods & services is a must,- disbursing funds under Murabaha, Salam & Istisna contracts The investor is assured of a predetermined rate of interest Promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur) Lending money and getting it back with compounding interest is the fundamental function Participation in partnership business is the fundamental function It can charge additional money on loans No allowed to charge any extra money

Islamic Banks VS Conventional Banks Conventional BanksIslamic Banks Borrowing from the money market is relatively easier Must be based on a Shariah approved underlying transaction Little expertise in project appraisal and evaluations Pay great attention to developing project appraisal and evaluations give greater emphasis on credit- worthiness of the clients Give greater emphasis on the viability of the projects. Relation with Clients is Creditor and debtors Relations with clients as Partners, investors and trader, buyer and seller Has to guarantee all its depositsonly guarantee deposits for deposit account, which is based on the principle of al-wadiah, thus the depositors are guaranteed repayment of their funds, however if the account is based on the mudarabah concept, client have to share in a loss position

Deposits Wadia’a or Amana Liability 0% inerest Fees 0% interest Loans Unrestricted Deposit Islamic Bank Deposit Pool Profits ?? Investment pool Mark up Purchases Investments Profits share Management fees Restricted Deposit Specific investments Musharakah Profits ?? Own fund Specific investment Profits Finance Morabaha Own fund Profits ?? Shares Modharaba M and M How Islamic Banks Operates

First group point of view To

First group point of view Agreed with the recommendations included in the Monetary and Financial Statistics Manual and Compilation Guide.  Islamic banks services is FISIM.  Deposits and loans are similar to conventional banks. They identified several issues that require further research  The input cost of trade arrangments (Murabaha).  How to interpret the management fees paid by depositors (investors) to the bank  Practical issues related to how to deal with this issue from users side.

Second group point of view Disagree with some of the recommendations included in the Monetary and Financial Statistics Manual and Compilation Guide mainly. Deposits  Islamic banks don't really borrow funds from depositors, neither do they lend funds to entrepreneurs. But obtain them in the capacity of a fund manager under fund management contract  I-Banks don't bear all the risk when they lends the funds to a third party as it is the case in Con. Banks.  I-Banks don't assume an ownership over the Funds.  Islamic banks charge the depositors management fees to run and invest their deposits  classify them as shares or units is more appropriate than classifying them as other deposits.

Second group point of view Classification of Islamic Banks  Islamic Banks are prohibited from accepting deposits except, Amanah and Qard-hasan deposit  Raise funds by accepting investment deposits according to Modarabah/Mosharaka which is similar to share rather than deposit.  The depositor will have a share or a unit similar to mutual fund or non-money market fund.  Modarbah contracts provided by Islamic banks are PLS agreement and thus it is similar to stocks (units) and connote be classified as deposits  Islamic banks can be classified as managers of mutual funds or non- money market funds

Second group point of view Classification of Musharakah  Musharakah is a technique of financing used by Islamic banks that could roughly be translated as partnership  The I-bank and the investor are entitled to a share in the profits or Loss resulting from the project in a ratio which is mutually agreed upon.  In many cases the fund is used to finance long term project.  the Fund provided through Musharakah is not a loan but it is a share in the equity

Second group point of view Classification of Murabaha  This classification imply that the all of the profit margin should be classified as interest  Neglect the existence of an economic activity (trade activity)  Islamic banks take into consideration the cost of time (interbank interest) and a markup profit margin  Morabaha doesn’t create FISIM but produce trade margin and generate pure interest (Property income) measured according to the interbank interest.

Second group point of view Practical problems related to MFSMCG recommendations  The first practical problem will be with obtaining the data from the users of the commodities bought by Marabaha contract  The treatment of management fees obtained by the Islamic banks  The experts believes that if the Morabahah is treated as loans then it would be necessary to provide some instructions on how to deal with practical implications resulted from this

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