Islamic Banking

Expands From

Gulf To IndiaPRESENTED BY:

SWATI RANKA(41)

NIDHI SHAHI(53)

RAHUL PATEL(37)

KOMAL SHAH(49)

DEEPA YADAV(60)

Introduction of Islamic Banking System of banking or banking activity that is consistent with the principles

of Islamic Laws (Sharia) which is against the collection or

payment of interest commonly called ‘Riba’.

As a genre of financial services, Islamic banking denounces the very idea

of interest rates, and rests on profit-sharing principles

.

Prohibits investing in business of making money out of money, upholding

the belief that wealth is generated through actual trade and investment.that

are considered unlawful or ‘Haraam’.

Continue…..

The book ‘Future of Money’ by Bernard Lietar, he expertly

highlights the intrinsic dangers of ‘interest’.

He illustrates how interest is a direct cause of inflation, wealth

imbalance contributing to the rich getting richer and the poor

getting poorer.

Islamic Banking has a huge market potential in India.

History of Islamic banking

Traced backed 8th Century(Muslim countries)

Modern Islamic Banking 1963(Egypt) by Ahmad EL Najjar.

Islamic Development Bank 1975.

Dubai Islamic Bank 1975.

Continue……

With presence in over 60 countries and a 15% CAGR, it has estimated

designated assets worth $1.3 trillion in more than 400 financial institutions

offering Sharia compliant products

Al Rajhi($28 billion)

Truths of Islamic Banking

• Charging of interest is prohibited in all monetary

transactions.

• Supervised by a board of Islamic scholars and clerics

• Sharia banks do charge interest – they just give it another

name.

Reasons to come to India

Vibrant democracy, good socio economic principles, good business climate

Inclusive growth

Financial inclusion of Muslims

Corporate sector

Counter terrorism

Entrepreneurship

Investment framework

Bankruptcy

Stock market

Porters five

forces model

-

-

Against

the banking approach

two sets of rules: one is based on the ideal objectives of Shari’ah which is applicable in normal conditions

other is based on some relaxations given in abnormal situations

mostly relying on the second set of rules

misunderstanding among majority community has to be addressed; Islamic banking is not just for Muslims.

OVERVIEW (issues to be addressed)

The Shariat prohibits the collection and payment

of interest.

Banks don’t pay interests on deposits; nor do they

charge interest on loans.

used to finance projects on ownership basis.

only current accounts comply

For instance, in case of a housing loan

An Islamic bank, however, cannot invest the

money just anywhere:

the Shariat prohibits investment in businesses

considered haraam, such as those related to

alcohol, pork or pornography.

Problems in implementing

Re-training of staff

Shortage of expertise

Issues with adopting Islamic

Banking – From a regulatory perspective

Except a basic offering like current account,

Al Wadiah (for saving bank account): Section 21

of the Banking Regulation Act.

Mudarabah(for term deposit or investment): Here

again, Section 21 of the BR Act

Mudarabah, Musharakah (for project finance and

SME credit): Sections 5, 6 of the BR Act

Ijarah (for home finance): Section 9 of the BR Act

Istisna (leasing, buyback): Besides the usual curbs

on acquiring immovable property, offering

Issues with adopting Islamic Banking – Constitutional position

two aspects to evaluate:

a) The role of state, if any, in a venture like this

b) The role of such financial institutes and its

possible impact on demography

Scenario (a)

Scenario(b)

Products trends

Musharakah (joint venture):Musharakah is a relationship between two parties or more that contribute capital to a business and divide the net profit and loss pro rata.

Mudarabah (profit sharing): The investor provides capital to the entrepreneur to undertake a business or investment activity. Profits are shared on a pre-agreed ratio, while losses are borne by the investor alone.

Murabahah(cost-plus financing) : where the bank buys the item and sells it to the customer. The sale price includes a profit margin agreed upon by both parties and is repaid on a deferred basis.

Sukuk: Sukuk is an Islamic bond that represents proportionate beneficial ownership in the underlying asset. The issuer provides collateral security over the assets to sukuk holders to secure payment of the sukuk.

Sukuk do not pay interest; rather they generate a return through actual economic transactions in the form of sharing or leasing the underlying assets.

Success with sukuk: According to a Standard & Poor’s report, assets of the top 500 Islamic banks expanded 28.6% to a total $822 billion at the end of 2009, compared with $639 billion at the end of 2008. ―Only recently, the Indonesian government sold more than $850 million worth of sukuk bonds to domestic retail investors,‖ says Samir Nair, partner (business advisory services), at Ernst & Young.

Takaful(islamic insurance):which offers joint risk-sharing in

the event of a loss by one of the participants.

Sareshwala’s list is a unit-linked insurance product,

developed by insurance company Tata-AIG.

Ijara(lease): the Bank makes available to the customer the

use of service of assets / equipments such as plant, office

automation, motor vehicle for a fixed period and price

bai al dayn securities: It refers to the sale of a debt arising from trade and services transaction in the form of a deferred payment sale. The customer sells this debt to the Bank at a discount.

In Malaysia, for example, Bai Al Dayn is the basis for the sale and purchase of Islamic securities, debt certificates, and various products.

In the Middle East, the majority of scholars consider the trading of debt to be similar to the trading of money and therefore ribawi or riba or (interest)-bearing.

conclusion

Islamic banking has a good prospects in india, given the diverse indian canvas and holds good for india from a development point of view.

When America,UK, Germany, France etc. are accepting Islamic Banking why we shlould not enjoy this alternative banking. Even World Bank accepted ethics of Islamic Banking earlier. Now it is the right time for india.

On the other hand, there are provisions for interest-free banking even now. Banks can invest in zero-coupon bonds, short-term treasury bills and corporate bills — all of which are based on implied interest rates, but don’t actually pay interest

Any bank can offer you a portfolio account where your money is invested in non-interest-bearing securities. Individuals can open non-interest bearing current accounts. All of them in a sense comply with doctrine of Islamic Banking.

Those who support the plea for an alternate financing channel to support the Muslim community need to realize that India’s banking is ―inclusive‖ and the reluctance of some Muslims to use banks is a case of self-exclusion, not discrimination.