30 Nov 2004 Islamic Banking at Systemic Level 1

Islamic Banking at Systemic Level:

Issues and Approaches

Prof. Dr. Sayyid TahirIIIE, International Isl. Univ., Islamabad

IRTI DLP Lecture 9

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Agenda

I. Financing private and public sector needs

II. Transformations Called for in:1. International Trade2. Regulation & Control of Isl.

Banks and Monetary Policy3. Legal & taxation framework

III. Islamic banks versus conventional banks

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1. Financing Private Sector Needs

• Consumer Financing

• Working Capital Financing

• Industry’s Expansion Needs

• Resource Mobilization through Salam Certificates

• Agricultural Financing

• Real Estate Financing [MF, IJF or DMF]

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2. Financing Public Sector Needs

• Murabahah with Divisible and Tradable Securities

• Project Financing through Ijarah

• Istisna’-cum-Murabahah Financing

• Redeemable Musharakah

• Resource Mobilization through Selective Musharakah

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General Formula

• Mute Investments - MF, IJF• Financing for value- - MF, SF

added activities IJF, MUF

Note:

Combinations of the above to suit a given instance also possible.

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3. Special Issues in Foreign Trade Financing

• Intermediary role of the banks

• Trade Financing

1. Trade-based: Exports (MF)Imports (SF)

2. Partnership-based: MUF or MOF

• Some special considerations

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4. Regulation and Control of Islamic Banks

• Prudential regulations

• Liquidity and reserve requirements

• Provision of liquidity to Islamic banks

• Checks over the role of Islamic banks

• Checks on misuse of Islamic Banking

• Shari’ah Audit

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5. Monetary Policy

• Nature of the Islamic financial system:

1. Closer integration between thereal and the financial sectors

2. Primacy of the private initiative

• Need for and Room for Monetary Policy Measures

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6. Transformations in the Legal Domain

• Renewed emphasis on rights of the creditors (against the debtors)

• Review of laws affecting role function of Islamic banks

• Taxation reforms

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7. Challenges from Conventional Banks

• Critical dependence on distinctive nature of Islamic banking

• Competitive financial products

30 Nov 2004 Islamic Banking at Systemic Level, IIIE Islamabad

11

Thank you.

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Consumer Financing

• MF – small financing for a short period

• IJF – sizeable financing for longer duration

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Working Capital Financing

• MF – for a single input(sugarcane)

• SF – working capital for the season

• MUF – (pure) musharakah for season

• MUF + IJF – musharakah blended withijarah for the season

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Industry’s Expansion Needs

• MR, SF, IJF or DMF

for purchase of machinery and

equipment

• DMF or ISF+MF for additions to plant

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Resource Mobilization through Salam Certificates

• Presumption

• Tradable salam certificates

• The Shari’ah restrictions

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Agricultural Financing

• MF or IJF financing for inputsneeded by the financing

sector

• SF financing with settlement interms of produce

• MUF financing for miscellaneouscases