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By: Dr. Elias Abu AL-Haija
one thought that's every thing has a recession including # Islamic Finance but it is not! see what happened in # Islamic Finance during 2011:
1.Egypt announces its interest of establishing Islamic Banking and Takaful. 2.Gulf Borrowers show interest in tapping Malaysian Sukuk market 3.Yemen government shows interest in launching Islamic Sukuk. 4.Indonesian Government issues sukuk backed by infrastructure. 5.Qatar Central Bank issues rules for Conventional Bank to shut down Islamic Units. 6.India: Kerala’s High Court allows 1st Islamic Bank to be established.
7. Maldives 1st Islamic Bank launched. 8. Worlds First Halal Index Launched. 9. Oman opens door for Islamic Finance and announces potential regulations to be launched. 10. 11. 12. 14. Nigeria releases Islamic Banking Policies. Bangladesh Central Bank Islamic money market in the offering. Shari’a compliant profit benchmark launched by Reuters. Sri Lanka’s first Shari’a Compliant Commercial Bank launched.
Continuous increase of the Islamic banks’ assets: 826 US$ billions in 2010 - 1,130 US$ billions in 2012 (Ernst & Young, 2011) with growth rate of 21% in 2011 (Oakley, 2011). In many countries the banking system is becoming dual with the simultaneous presence of conventional and Islamic banks (IBs’ assets: 14% in the MENA region, 26% in GCC 17.3% in Malaysia.)
Increasing interest of researchers in comparing the behavior and performance of the two types of banks in general and during the recent financial crisis.
Shamshad Akhtar Ex-Vice-president of the World Bank for MENA in his speech during the “Symposium on Islamic Finance in Roma: Developments in MENA region”, Bank Italia, Rome, Italy, November, 11th, 2009.
“…Although IBs have illustrated a degree of resilience and stability, they have been impacted by the crisis because of their higher exposure to real estate and their limited reliance on risk sharing or equity based transactions…”
I. II. III. IV.
Foundation of Islamic financing. Financial intermediation in Islamic banking. Islamic Transaction & Instruments. Development characteristics of Islamic financing. Islamic Banking as an Alternative Approach.
What is Islamic Financing?
The basic principles of Islamic financing are derived from the axioms of justice and harmony with reality on one hand and human nature on the other.
The guiding principle in Islamic Financing The principles of justice are essential in all forms of Islamic financing. The Principles of justice and fairness requires that the actual result or profit of such cooperation should be fairly distributed between the two parties and nothing else.
Islamic banking provides means of payment in the form of producers’ principal in projects on the basis of sharing the actual, real-life outcome of a production process.
In profit sharing, when an Islamic bank provides means of payment to the producers:
It is not throwing the risk burden on one party.
Both parties share in actual outcome or net profit/ loss of productive project.
There is no guarantee return to the provider of money regardless of whether the project makes or loses money.
Is incapable of growing or increasing because it is purely conceptual: it is a relationship between a person and another person.
How can a debt grow?
How it can increase? Except by:
arbitration, artificialities, and pure contrivance.
losses should be carried in proportion to financing advanced.
If a financier wants to have a claim on a part of the return of the project, She/ he must also carry a proportional share of the risks and burdens of the same.
Fairness and Justice require:
Financial intermediation means taking funds from people who have more than they need and providing those funds to persons who need them for their economic transactions and activities.
This is done in conventional banks on the basis of loan contracts.
Islamic banks are also Financial
It makes their financial intermediation on several
contracts that do not include lending and
borrowing because interest is prohibited in Islamic
In the function of financial intermediation, Islamic Banks contracts leave the initiative of investment and use of funds to the entrepreneurs and other users of fund.
The decision making of getting goods that are purchased for sale or lease and of establishing projects is left to the user of funds, and the Islamic Bank acts upon orders from the users of funds.
Islamic banks use three major categories of financing instruments or modes:
1. 2. 3.
Sharing Modes Sale-Based Modes Leasing Modes
( None of them has any interest component)
Under the principle of sharing, IBs provide financing to projects on the expectation of a share in the return. If a project loses, all capital providers and financing contributors lose together and proportionately.
Full Partnership Financing. Non-Voting Partnership Financing.
Sharing modes are only possible for productive enterprises that involve reallife businesses that increase quantity or improve quality or enhance usability of real goods and services. By doing this, such businesses generate a return that can distributed between entrepreneur and the financier.
Sale-based modes are those that involve actual, physical exchange of commodities or provision of services from one to another where by financing is measured only by the real sale of commodities and can only be provided to the extent of the real value of goods exchanged.
Islamic Banks buy goods and supply them to users: producers and/or consumers against future repayment.
The simplest is where the bank sells real goods, equipment and machinery to their users at an agreed-upon marked-up price. Construction/manufacturing contract. Deferred delivery contract.
Sale-based modes can end up in one lump sum deferred payment or in installments spread over a certain period of time.
Leasing modes can have a variety of forms:
(As practiced in leasing companies and in many conventional banks)
Ø Ø Ø
Fixed or Variable rents. Declining or Fixed ownership. Operational or Financial.
With different conditions regarding the status of leased assets at the end of the lease period.
Islamic modes by virtue of their very nature, are Incompatible and unsuitable for:
Debt rescheduling & Debt swap.
Financing of speculative cash balances.
And for other purely monetary / financial activities that make up a substantial part of current activities of conventional banks.
Islamic financing is purely a real life, real-goods/services financing.
Islamic banking is the integration of ethical and moral values with Islamic finance so that banking complements economic development.
By adopting Islamic moral/ethical criteria in Islamic Banking financing through not extend their help to activities that are Harmful to society….
Many Islamic banks establish social funds especially designed for relieving the economic hardship of the poor and needy. For instance, many Islamic banks have established a practice of providing goodly (interest –free) loans to their clientele in cases of dire need, overdrafts or unexpected circumstances.
The third developmental characteristic of Islamic banks is found in the nature of their relationship with depositors.
One might wonder whether Islamic banking and finance is an alternative approach to conventional banking or may be the most modern generation of banking ?
The answer is:
Banking business is more than a possible means to satisfy the needs of society according to the prevailing conditions and circumstances.
Islamic banking is a system that mobilizes savings on the basis of profit/loss sharing that considered to be fairer and more conducive to investment and development.
The most popular 20 big Islamic banks around the world have a growth of 16% within the previous three years & S.A is the biggest market for Islamic Assets.
Sukuk/ Islamic Bonds
( Thomson Reuters Survey Nov.2012)
Global Demand for Sukuk is expected to reach $421 billion by 2016 from $240 billion in 2012.
Rank 1 2 3 4 8 12 20 23
Country Iran Saudi A Malaysia UAE Turkey Egypt Algeria Tunisia
Shari’ah compliant Assets $US billion
% of bank assets shari’ah compliant
315 138 103 86 22 7 1 0.8
315 225 358 201 520 144 90 36
100.0 61.3 28.8 42.7 4.3 4.9 1.1 2.2
Islamic Bank Faisal IB of Egypt Al Baraka Bank, Egypt Al Baraka Bank, Algeria Banque Al Wava Mauritania Al Baraka Bank, Tunisia
Rank 43 81 116 118 163
Assets, $US million 5,087 2,135 1,015 992 418
Assets, $US million 46,380 28,899 6,856 12,922 4,719
National Bank of Egypt Banque Misr Crédit Populaire d’ Algérie Banque Mauritanienne pourle Commerce International Banque International Arabede Tunisie
First: Limited development of retail banking generally.
Dr. Elias Abu AL-Haija
E-mail: email@example.com Mobile+ 971 5 2841846