vision of islamic banking - jan 26-07

8/8/2019 Vision of Islamic Banking - Jan 26-07

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Vision of Islamic Banking


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Presen

Outline

Philosophy of Islamic banking.

Vision

Objectives

Inception of Islamic banking

Current Status of Islamic banking

Way Forward


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Presen

Philosophy

Islam is a complete religion providingcomprehensive code of life

Islam is not confined to some moral

teachings, some rituals or some modes ofworship

It rather contains guidance in every sphere oflife including socio-economic fields

If such guidance and rules are followed by, itis very useful for the welfare and well beingof all human being.


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Presen

Philosophy

Allah (SWT) has ordained in Holy Quran

Allah has permitted trade and prohibitedRiba


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Presen

Vision

Establish Islamic Banking as banking of first

choice to facilitate implementation of an

equitable economic system providing a strongfoundation for establishing a fair and just

society for mankind


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Objectives

1. Equitable Distribution of Wealth

Islam encourages fair and equitabledistribution of wealth. Hence, it does notpromote concentration of wealth in few hands

Riba, Maysir & Gharar cause unfair distributionof wealth

All permissible modes are beneficial for theeconomy, however some of them are morepreferred and encouraged by Islamic Shariasuch as Contracts ofEquities (Uqood ulMusharakat) which facilitate equitable

distribution


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PresenObjectives

Islamic banking, being a part of IslamicEconomic System, should play an active roleto achieve this objective

For this purpose, Islamic banking transactionsshould primarily be based onMusharaka/Mudaraba (Profit & Loss sharingbasis) so that the capital flows from wealthyclass to the poorer

The ratio of equity based transactions to tradebased transactions should increase to achievethe real benefits of Islamic banking


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PresenObjectives

2. Asset Backed Financing

Where Uqood ul Musharakat (Profit & losssharing contracts) are not possible orfeasible, Uqood Ul Mubadalat (Exchangecontracts) such as Murabaha, Ijarah,Diminishing Musharakah, Salam & Istisnaaetc. may be used

These asset backed transaction also cause todecrease the level of inflation from theeconomy, provided they are completelygenuine and Shariah compliant transactions.


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PresenObjectives

3. Fulfilling Customer Needs

Islamic Financial Institutions should evaluatethe extent to which basic requirements of thecommunity have been fulfilled through ShariaCompliant range of products

A wide range of products fulfilling basic needs

of the masses increase peoples confidence inIslamic banking and its true spirit


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PresenObjectives

4. Shariah Compliance

The long term sustenance and survival ofIslamic Financial Institutions demands highlevel of Sharia Compliance and adherence toSharia principles

Products which may technicallybe ShariaCompliant but defeats the true spirit of Islam

or gives way to Heelah must be discouraged

A high reliance on such products raisesskepticism against the commitment andintegrity of industry participants


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Islamic Banking

Inception & today


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1. Cooperative banks in the sub-continent:o Cooperatives in Hyderabad Dakan (1940s)

o Cooperative bank in Karachi (1950s)

2. Pilgrimage fund in Malaysia (1950s) full-fledged bank in1967

3. Saving bank in Mitghamr,

Egypt (

1963)

4. Nasr Social Bank, Egypt (l97l), was created as an interest-free commercial bank

5. Dubai Islamic Bank (1974)

6. Islamic Development Bank (1974)

7. In 80s different initiative were taken in Pakistan, Iran &Sudan. Islamic Mutual funds started to emerges

8. In 90s AAOIFI, Harvard Islamic Finance Forum, DowJones Islamic Index were established

9. In 2000-05, several Islamic Bonds (sukooks) were issued.Key infrastructure institutes established including IFSB,

IRA (Islamic Rating Agency), CIBAFI, ARCIFI.

Inception ofIslamic Banking


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500 + Islamic financial institutions

$ 500 - 600 bn in funds

250+ Shariah compliance mutual funds with $ 300bn funds

207+ International Islamic sukuks issued till 2007 with a73%

Growth in comparison with 2006

133 + Takaful companies operating world wide

Post graduate degrees offered in Islamic banking by majoracademic institutions

Important database system (HIFIP)

Shariah &Accounting Standards for the Industry (AAOIFI)

Recognition by IMF, World Bank and Basel Committee

Sources

CIBAFI, Insurance Daily, www.AMEINFO.com

Islamic Banking - a Success Story


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More then 60 countries have ISLAMIC BANKINGInstitutions

Approx37 Muslim countries including Kuwait, Dubai,

Saudi Arabia, Iran Malaysia Brunei and Pakistan

Approx 23 non-Muslim countries including USA, UK,

Canada, Switzerland, Srilanka, South Africa and

Australia



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Different types of IFI have emerged globally

Islamic Commercial Banks

Islamic Investment Banks

Islamic Units of conventional banks

Islamic Funds

Islamic House Financing Schemes

International Financial Market

International Institutions of Islamic Banking



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Main Groups

DMI

Al Baraka

Al Rajihi Kuwait Finance House

In Pakistan

Meezan Bank Al Baraka

Many foreign banks nowhave Islamic windows.

Citibank

ANZ

ABN AMRO Goldman Sachs

Kleinwort

Benson(German)

Hong Kong Shanghai

bank

Saudi American bank

Saudi British Bank

UBS AG

Islamic Banking - Institutional Evolution


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PresenCurrent Status & Growth

Legal framework in place, licenses availablefor

Islamic commercial bank

Islamic Subsidiary of a conventional bank

Stand alone Islamic branches of aconventional bank

Legal framework hybrid of Bahrain and

Malaysian model

Islamic Banking in Pakistan


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Islamic Banking in Pakistan

Shariah Board established at SBP

Islamic products available to cover 85% ofthe services offered by conventional banks

Liquidity management products beingdeveloped

Shariah audit developed by SBP

Rupee denominated Sukooks has beenissued


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Full Fledged Islamic Banks - 6

Meezan Bank

Al Barakah Islamic Bank

Dubai Islamic Bank

Bank Islami Pakistan

Emirates Global Islamic bank

First Dawood Islamic Bank

Many conventional banks operating Islamic BankingBranches: Bank of Khyber,MCB, Bank Alfalah, Habib Metro

Bank, Bank Al Habib, Standard Chartered Bank, Soneri,

HBL, UBL, Askari, NBP, RBS etc. (12)


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Branch network of IB participants by Dec,08 Rs. 525 +

Asset base of IB Rs.235 bln+

Deposit base of IB Rs.169 bln+

Growth rate in 2006 around 65%

Share of IB in the overall Banking system stands at 4.3%

As of June, 2008


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Key Management Challenges


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Skepticism & Lack of awareness

Lack of trained Human Resource

Solutions for Liquidity Management

Islamic Inter-bank Market

Ensuring Shariah Compliance

New Product Development & Research



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Availability of Takaful

Weak Regulatory/Legal Frame work

Risk Management Frame work



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Way Forward


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PresenWay Forward

In order to meet above mentioned objectives,following steps will be helpful in movingtowards the right direction:

Strict compliance to SSB / SA Guidelines &AA

OIFI Sharia Standards

Use of true modes such as Mudaraba /Musharaka (Profit & Loss Sharing) whichincludes Joint Ventures, Venture Capital,Private Equity etc.

Paying higher return to depositors andcharging lower financing charges ascompared to conventional banks in order toboost public confidence


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PresenWay Forward

Legal / Taxation laws should be modified tofacilitate asset backed transactions and trueimplementation of Sharia guidelines

Banks must carry out regular and organizedaudit activity to ensure proper utilization ofdepositors funds and to avoid faketransactions at customer end.

Depositors money should not be allocated tohigh risk low profit asset classes in order toraise profitability of shareholders


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PresenWay Forward

Fit & Proper criteria for the eligibility tobecome a Sharia Advisor/SSB member mustbe laid down in all jurisdictions

Adequate resources must be allocated tofacilitate Research & Development andeducation of masses


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THANK YOU

vision of islamic banking - jan 26-07

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