an overview of ib sep 11

7/30/2019 An Overview of Ib Sep 11

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INSTITUTE OF BUSINESS FINANCE

AND INDUSTRY

Islamic Finance

An introduction


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AND INDUSTRY

Conventional system

Consumer credit no more confined to poor

No more meeting of excegenciesCreation of money

Financing of govt. budget deficit

Borrowing to repay old debts

Roll overs in business finances


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AND INDUSTRY

Islamic system

PLS or trading

Actual assetsEconomic impact--- development oriented system

Better risk sharing system

Legal frame work

Pakistans experience


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AND INDUSTRY

Pakistans experience

Prior 1980

1980s1990s

Relaunch in 2000s

Present status


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AND INDUSTRY

Islamic Banking

An Overview


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AND INDUSTRY

ISLAMIC BANKING

Emerging as a viable alternative to conventionalbanking

Strong demand

Huge funds

New institutions Need time to developMany questions: Are they really Islamic, can theysustain?

Comparison of the two systems


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AND INDUSTRY

CONVENTIONAL BANKING -----FI

Mobilizing Funds (deposits) on the basis ofcreditor/ debtor relationship and providing capital toentrepreneurs by way of creditor/ debtor relationship

These modes can be:

Loans and advances of various maturities

Not in accordance with shariah


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AND INDUSTRY

CONVENTIONAL BANKING

Risk of default on the asset side and liability side

Risk mitigation measures for bothPrudential regulations and other policy guidelines

No divine restrictions regarding economic performance.Supervision by the central bank for mitigating risk aswell as channeling credits into desired sectors and to

fulfill economic objectives. Integration with monetary

and fiscal policies.


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AND INDUSTRY

ISLAMIC BANKING-- MAIN FEATURES

The Islamic Financial Institutions

have to keep in mind the Quranic

injunction that all capital belongs to

God and is to be used for the good of

societyMan as His Vicergent is bound to

obey His commandments in entire

life including business and

economics


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AND INDUSTRY

ISLAMIC BANKING--UNDERLYING THEMEProhibition of interest in all transactions.

Legitimate and halal profits

Capital should be directed into halal channels

Hoarding is not permissible in any form

Not to create monopoly on the societys resources.Basic need to get rid of the debt ridden society

Investments to contribute in the development ofnational resources and serve whole community.


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AND INDUSTRY

ISLAMIC BANKING -THE GUIDING PRINCIPLES

No Interest.

Transformation of the debtor-creditor relationship intosome kind of partnership. Profit /loss sharing

Application of Islamic principles in trade and finance.Trading of assets.

All transactions in accordance with Islamic law.

Prohibition of Gharar


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AND INDUSTRY

ISLAMIC BANKING --FI

Mobilizing Funds on the basis of modaraba /Musharika and providing capital to entrepreneurs by

way of different modes in accordance with shariah

These modes can be :

Investment modes

Trade related modes

Qarz-e-Hasan


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AND INDUSTRY

INSTRUMENTS FOR MOBILISING FUNDS

Current accounts/ Trust accountsSavings accounts/ Investment accounts

Term Deposits / COIIs, MCs

Short term transactions b/w banks/ (in futurefor IBs)

Shareholders


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AND INDUSTRY

INSTRUMENTS FOR UTILISING FUNDS

Musharaka (Investment mode)Mudaraba do

Murabaha ( Trade mode )

ljara do

Salarn do

Istisna do


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AND INDUSTRY

ISLAMIC BANKING

Risk of default on the asset side and liability side

Risk mitigation measures for bothPrudential regulations and other policy guidelines

Supervision by the central bank for mitigating risk aswell as channeling credits into desired sectors and tofulfill economics objectives. Integration with monetary

and fiscal policies.

Divine restrictions regarding economic performance.


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Typical Balance Sheet of a CFI

Assets

Loans and advances

Lease Financing

Investments in Shares

Bonds, PTCs, etc.

FAs.

Liabilities& Equity

Deposits-Current,

Saving, Term etc

Share Capital

Reserves


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Typical Balance Sheet of an IFI

Assets

Modaraba Financing

Murabaha Financing

Musharaka Financing

Lease Financing

Investments in Shares

Bonds, PTCs, etc..

Equity & Liabilities

COIIs, MC etc

Share Capital

Reserves


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Typical balance sheet of a business enterprise

ASSETS Rs. inMillion

Land / Building 200

Plant & M/Cs 450

Inventions 150

A/CsReceivable

50

850

Financed

Through

Rs. inMillion

Share Capital 200

Long term loan * 450

Short term

loan**

Lease Fin. ***

100

25

Current Liab. 125

850


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Typical balance sheet of a business enterprise

ASSETS Rs. inMillion

Land / Building 200

Plant & M/Cs 450

Inventions 150

A/CsReceivable

50

850

Financed

Through

Rs. inMillion

Share Capital 200

Murabha /DM 450

Short term

murabaha/mush.

Ijarah

100

25

Current Liab. 125

850


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AND INDUSTRY

Supporting Legal Framework

Taxation System

Education ,Training , Organized Research

Govt. Support

Paradigm ShiftChange management issue

Supervision and regulation

Market practices: portfolio structure

MAIN ISSUES


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AND INDUSTRY

PLS vs. FI

Why and why not PLS

Why and why not FI

Practical solution

Actual practiceWhat should be the strategy

MAIN ISSUES


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AND INDUSTRY

THREE MAJOR ACHIEVEMENTS

Financing the Halal business only

Assetbacked financing

Better risk Management as compared

to conventional banks is possible


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AND INDUSTRY

Conclusion

Pakistans financial institutions could take a large share

of muslims savings, if they took the initiative of

developing asset and liability products on Islamically

accepted lines.

It has been conservatively estimated that currently

about US$ 100 billion are available with muslims

wanting to invest in Shariah Compliant instruments.


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AND INDUSTRY

Conclusion

Islamic banking provides a viable alternative tointerest-based banking

Parallel banking systems for another decade or so.

Can be perused without waiting for the wholeeconomy to transform.

Its own separate identity is its strength.

Supply must follow Demand

an overview of ib sep 11

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