Islamic Banking

Presented By

Shiv Bahadur Deepak Singh Subrat Kumar Mohanty

Subhash Kumar Rounak Seth

Islamic Banking ?

 The first instance of Islamic banking came into the picture in Egypt in 1963. 1963.  The pioneering efforts by Ahmad El Najjar brought this bank into existence, whose key principle was profit sharing (non-interest based philosophy of Shariah). (nonShariah)  The first bank explicitly based on Shariah principles was established by the Organization of Islamic countries (OIC) in 1974, called Islamic Development Bank 1974, (IDB). (IDB).  First private bank coming into existence in Dubai, the global industry had more than 50 such banks in the same country. Most banks were a result of private country. initiatives, whereas the first concrete government initiative was taken by the Iranian government, when in 1985 no bank was permitted to give or take interest. interest.

 The new, wider spectrum of Islamic finance covers not only banking activities but also capital markets, capital formation and other financial instruments and intermediaries.

 The biggest change in terms of adaptability came in 1991 when the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established to advise on Islamic finance standards all over the world. Later, the development of uniform standards was supported by other organizations such as Islamic Financial Services Board (IFSB) in Malaysia in 2002.

The primary objectives of Islamic Economic System are as under.  Equal Distribution of wealth  Social justice These objectives can never be achieved in Interest/Riba based economic systems.

 Islamic banks are present in more than 70 countries in the world .  Total number of Islamic banks in the world are 320+  Total size of Islamic Banking In terms of Assets is $1 trillion.  Its growing with the rate of 15 % year on year.

Trading or Bai Mode

Partnership or Share Mode

Leasing / Ijarah Mode

Trading or Bai Mode:

Bai Murabaha Bai Salam Istisna a

Partnership Mode :

Mudaraba Musharaka

Leasing Ijarah Mode: Hire purchase

Islamic
Banking

Conventional

Banking
Functions and operations are based on fully man made principles

Functions and operations are based on Shariah principles

Islamic
Banking

Conventional

Banking

Partners, investor and traders, buyer or seller relationship

Creditor Debtor Relationship

Aim at maximising profit but subject to Sharia'h restrictions

Aim at maximising profit without any restrictions

Islamic
Banking

Conventional

Banking
Based on money trading. Money is a medium of exchange and not a commodity, its sale and purchase is prohibited in Islam It is almost risk free banking and depositor has no risk of losing its money because interest is guaranteed.

Encourage asset-based assetfinancing and based on commodity trading

No right of profit if there is no risk involved. The profit and loss sharing depositor may lose money in case of loss.

Islamic
Banking

Conventional

Banking

Islamic banks "bear the risk" when involve in any transaction.

Practices are concerned with "elimination of risk"

THE ROLE OF ISLAMIC BANKING IN ECONOMIC DEVELOPMENT IN EMERGING MARKETS  The Debt Burden

Contradictions
 The multilateral banks promote the borrow/invest/export/repay development model  Yet, not one developing country has gone into debt with the IMF and World Bank and subsequently paid it off  The typical response to budget and trade deficits in the developing world is an austerity program-yet the worlds biggest debtor and holder of the biggest trade programdeficit does not follow this advice  They argue that debt finance is acceptable if projects are self-liquidating self-

 The Islamic solution to the problems we face is based on an entirely different philosophy from the profit maximization fixation of the capitalist system  Once when Muslims adhered to the rules of Allah, the world was characterized by peace and justice not riba and a debt burden

The very objective of the Shariah is to promote the welfare of the people which lies in safeguarding their faith, their life, their intellect, their posterity and their property. Whatever ensures the safeguard of these five serves public interest and is desirable.

 Zakat; levy on income and wealth  Sadaqah

Economic Consequences
 Economic well-being and full employment well Optimum rate of growth  Socio-economic justice Socio Equitable distribution of income and wealth

 Equity financing and a profit & loss sharing basis does not change the level of uncertainty but it does relieve the burden of interest from the balance sheet  Risk is allocated more equitably in the Islamic finance system  In the interest based business, the borrower makes most of the gains from a positive outcome but must bear the risk of loss alone  Economist Tobins view is that in an interest-free economy, the rate of return on capital will be higher than in interest based economy as in the PLS or equity capital, investors seek investments with higher return

Effects of Islamic Banking on the Economy

 Better integration of the real and financial sectors of the economy  Better business ethics banks will only entertain economically viable financing requests .  Islamic banks will stay away from financing prohibited activities e.g. producing alcohol etc  There will be greater transparency in their transactions with clients depositors as well as fund-seekers-due to compliance with the avoidance of Gharar fund-seekers(ambiguity)resulting in clear contracts for every transaction. transaction.